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Best Small Cap Stocks to Buy now in India

Author Amir Ansari | Posted June 28, 2021

Best Small Cap Stocks to Buy now in India
Best Small Cap Stocks to Buy now in India

In this article, we will cover

– What are Small-cap stocks?
– Best Small-Cap Stocks to Buy now in India
– List of Best Small-Cap Stocks to Buy now in India 2020
– What should an investor look at while picking stocks in this collection of Small-cap stocks?
Small-Cap Stock Model Portfolio
– Detailed profile, pros, and cons of stocks in the model Small-cap portfolio:
– Key risks associated with Small-cap companies
– video on how you can select the Best Small-Cap Stocks
– A detailed table with various parameters for Best Small-Cap Stocks to buy

In this article, you shall get a complete list of best small-cap stocks to buy today. this list is compiled by our research experts. Before we get to the list of best small caps to buy today listed on NSE and BSE lets understand a bit about small-cap stocks.

What are Small-cap stocks?

Small-cap is a term that consists of companies which are neither large-cap nor mid-caps. Smallcaps fall below the market capitalization of approximately Rs.5,000 Cr. This classification can change with a change in a company’s market valuation. Market capitalization refers to the market value of a company’s outstanding number of shares available.

However, the classification is also subject to a company’s rank in the benchmark indices such as Sensex and Nifty. For instance, the companies which are listed from 251st – 500th in the Nifty Index are generally considered small-cap companies. Nifty also has a benchmark small-cap index in India called the Nifty Smallcap 50 which hosts the top 50 most traded small-cap securities in the market.

Best Small-Cap Stocks to Buy now in India

One should know that every large or mid-cap company was once a small-cap company and the one who grows their business and sustains its profits can only graduate and step up the ladder from small to mid-cap/large cap company. Most of the small-cap companies have low revenues and small number of employees as compared to bigger companies.

However, these companies have high potential for growth and at the same time they also carry higher risk. Mostly Aggressive and higher risk tolerant investors are attracted towards small-cap companies in the hope of earning high returns.

List of Best Small-Cap Stocks to Buy now in India 2021

Sr. No Company Name BSE Scrip Code NSE Symbol Rating CMP as of 15th June 2021 Industry
1 Indian Energy Exchange 540750 IEX 5 375.3 Power Generation/Distribution
2 NESCO Ltd. 505355 NESCO 1 573.6 Services
3 Thyrocare Technologies Ltd 539871 THYROCARE 3 1249.9 Healthcare Services
4 Delta Corp Ltd 532848 DELTACORP 0.5 183.1 Services
5 VST Industries 509966 VSTIND 5 3464.1 Consumer Goods
6 Sobha Ltd 532784 SOBHA 0.5 514.8 Construction
7 Bajaj Consumer Care 533229 BAJAJCON 4.5 294.3 FMCG
8 Heidelberg Cement 500292 HEIDELBERG 1 248.6 Cement
9 Mishra Dhatu Nigam Ltd. 541195 MIDHANI 1 212.8 Metals
10 JK Paper Ltd 532162 JKPAPER 0.5 178 Paper
11 CARE Ratings 534804 CARERATING 2 670.2 Financial Services
12 Justdial Ltd. 535648 JUSTDIAL 2 1010.7 IT
13 Sterlite Technologies Ltd 532374 STRTECH 0.5 265.8 Telecommunication
14 Affle India Ltd 542752 AFFLE 5 5158.5 Telecommunication
15 INOX Leisure Ltd 532706 INOXLEISUR 0.5 315.0 Media & Entertainment
16 Dhanuka Agritech Ltd. 507717 DHANUKA 4 979.8 Fertilizers & Pesticides
17 Gulfoil Lubricant Ltd 538567 GULFOILLUB 2 696.0 Oil & Gas
18 Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC) 500670 GNFC 0.5 372.4 Chemicals
19 TCNS Clothing Ltd 541700 TCNSBRANDS 0.5 552.4 Textiles
20 KEI Industries 517569 KEI 0.5 716.9 Industrial Manufacturing

 

What should an investor look at while picking stocks in this collection of Small-cap stocks?

Financial Strength: 

This is one of the common criteria which Investors should look at before Investing in any company. Generally small-cap companies do not have as much sales as large-cap or mid-cap companies but if the company’s balance sheet is stable with decent cash flows and low debt, these companies can relatively survive and do better against their peers. So, No matter what the size of the business is, it is important to invest in financially stable companies combined with high potential to grow in the future.

Top-Line & Bottom-Line Growth:

It is also important to check the past performance of small cap companies. These companies should have a decent track record in atleast last 5 years. For instance check the company’s last 5 years Sales and Profit CAGR growth and compare the same with its peers. This will give you an idea as to how that particular company has performed compared to its peers. A company which grows its sales and profits consistently eventually provides better returns to investors. 

Market size & Positioning:

Generally, small cap companies are single product or single service line companies. It is important to know the overall market size of the business a company is operating in, and also the presence of that company in that particular market. This will give you a broad outlook on the positioning of the company in the market size of its business. A niche positioning in the market or some entry barriers created can make a significant difference to the company’s valuations.

Management Quality & Commentary:

In every company its Management plays a crucial role in deciding the company’s future. Before Investing in a small-cap company it is better to scrutinize its management history and any possible lapses done by them in the past. As we see, a lot of small companies and even some bigger companies fall prey to poor corporate governance and inflation of financial statements. Also avoid those companies which are facing legal/regulatory battles. Small cap companies tend to get overwhelmed by such regulatory challenges and it is best to avoid such cases.

Detailed profile, pros, and cons of stocks in the model Small-cap portfolio:

Thyrocare Technologies

Thyrocare offers a wide range of biochemistry based and preventive healthcare tests. Its offerings include more than 600 tests and 130 profiles of tests, which help to detect several disorders. The company offers radiology tests, which involves imaging procedures such as X-rays, ultrasounds, CT scans, MRIs and highly specialised PET-CT scans. Thyrocare has grown tremendously and has managed to become one of the leading pan-India diagnostic chains. The management’s credible reputation, extensive experience, and business acumen has helped drive the growth and operating performance of the company. The company uses a very innovative strategy of reducing prices of its best-selling ‘Aarogyam’ packages.

In this it targets price sensitive customers which further increases in the number of samples processed per day due to its low-cost strategy. This makes the company the lowest-cost diagnostic operator in the industry. The samples processed each day have increased from 31,772 in FY 2016 to 51,384 in FY 2019. As of FY20, the company is processing around 60,000 samples per day. These increasing volumes are supported by its focus on the B2B segment, entrance into untapped areas via door-to-door services, well-established brand – ‘Aarogyam’, venture into different areas of diagnosis such as tuberculosis test, non-invasive prenatal test, blood-based cancer screening, etc.  On the back of such good volumes, the company has grown its 5 year sales at a CAGR of 16% and its profits have grown at a CAGR rate of 16% in the last 5 years. It has also maintained healthy EBITDA margins of close to 35% and PAT margins between 25-30% as of FY21. On the risks front, the company faces stiff competition as India’s diagnostics industry is fragmented in nature with standalone centres account for 45% – 50% of the market and organised players have 15% – 20% share. COVID-19 has been a big boost for the company as the testing volumes saw a huge spike during the pandemic but as the COVID-19 cases continued to fall and the access of vaccines in India continuous to expand this could be a key risk for the company going forward. Apart from this any drastic changes in the technology or any failure to keep pace with advancing technologies and to introduce new technologies could have a material adverse effect on the business, financial condition and results.

Bajaj Consumer Care

Bajaj Consumer Care Ltd is a part of the Shishir Bajaj Group, one of India’s leading producers of hair oil. It is the third-largest producer of hair oils in the country and leader in the light hair oil (LHO) category with a volume market share of 7.2% and value market share of upto 9.8% as of Feb-21. The company’s flagship brand Bajaj Almond Drops Hair Oil (ADHO) is the leader in the LHO category, and it commands one of the highest per unit prices in the industry and accounts for 90% of total revenue. With the Nomarks acquisition in 2013, Bajaj forayed into the anti-marks category. On a company level, the brand has shown an impressive growth of 14% on an annual basis. The market share of the brand in the anti-marks category segment is at 8.6%. Its distribution network has been its major strength as it implemented latest technologies to improve efficiencies in its sales force and networks. Its products are distributed through a network of more than 4.1 million retail outlets in the country. The company has been engaging with their customers to improve its crucial portfolios to maintain its market share. Back in 2019, it re-launched its flagship hair oil product Bajaj Almond Drops Oil to catch the attraction of the new age population due to which the value market share in the total hair oil segment touched an all-time high of 11.1% in Feb’21 (all-time high). The penetration of Bajaj Almond Drops has gone up from 20% to 21% as of Feb’20 with a rise of 1% in penetration within one year (FY20). It also launched new age products like ‘Bajaj Cool Almond Drops’ in a cooling hair oil segment. To improve the company’s product strategies it has also appointed a reputed consultant Bain & Company to help them to grow its hair oil brands faster. On the financial front Bajaj Consumer Care being a small-cap FMCG company, has registered a tepid 3.6% CAGR growth in its Top-Line over the past 3 years and a Profit CAGR growth of 1.6% over the past 3 years due to flat/inconsistent sales and over-dependency on Hair oil category. Despite this it has managed to maintain an average Return on Equity and Return on Capital Employed of 39% and 48% respectively over the last 5 years this shows the consistency of returns given by this company. Additionally, Bajaj Consumer is a Debt free company and its currently trading at a valuation of 19.8x as against Industry valuation of 74.2x making it an attractive bet. Lack of diversification apart from the Hair Oil category could be a major risk for the company going forward.

CARE Ratings Ltd

Credit Analysis & Research Ltd (CARE) is the second largest rating company in India in terms of rating turnover which caters 30% of the rating market share. Rating business accounts for around 97% of the total revenue of the company as of now. CARE has rated cumulatively a large volume of debt of around Rs.141.10 lakh Cr as of March 31, 2020 and has completed 81,874 rating assignments since its inception. CARE has also entered into collaboration with four credit rating agencies from emerging markets like in Brazil, Portugal, Malaysia, and South Africa each to provide ratings in those countries, and set up ARC ratings in those countries. CARE also provides research services and it has been expanding its product portfolio to include newer services. This company is exploring opportunities to provide risk management solutions and has acquired a 75.1% stake in Kalypto, a firm providing risk management software solutions in Nigeria. In FY20, in a rather challenging environment, CARE’s focus was on building the client base and widening the coverage of debt rated in the market. Since inception, the company has completed a total of 81,874 rating assignments till March 31, 2020. On a cumulative basis, the amount of debt rated instruments increased to Rs. 141.10 lakh crore as of March 31, 2020. Also, Majority of the office spaces are owned by the company and this is the major advantage of CARE which adds to its profit margin as the company does not need external funding for the same. On the financial front, CARE has been maintaining a healthy Return on Equity of 26% from the last 5 years (Average) and a healthy Return on Capital Employed of 37% in the last 5 years (Average). Moreover, It is also a net debt free company. CARE has also been clocking average Operating Profit Margins of 55% in the last 5 years which is way higher than the industry leader who enjoys just 27% and this margin of Care ratings is expected to sustain due to rising focus on low margin SME business. On the negative front CARE rating’s revenues are very much concentrated on its rating business which accounts for 97% of its consolidated revenues as compared to CRISIL and ICRA which are more diversified in terms of their revenue profiles. Also every rating business has a risk of default by any of their clients, as this would impact the credibility of the rating agency and affect their brand faith in the market.

Heidelberg Cement

Heidelberg India Cement Ltd (HCIL), earlier known as Mysore Cement Ltd, was set up by the SK Birla Group in 1958. HCIL is a subsidiary of Cementrum BV (a company incorporated under the laws of The Netherlands, which is 100% controlled by Heidelberg Cement AG). After taking over the controlling stake from Birlas in July 2006, The Heidelberg group’s capabilities and global experience in the cement business played out as a turnaround story for them. Heidelberg Cement expanded its global footprint and added to its R&D capabilities. In the significantly expanded Heidelberg Cement Group, around 58,000 employees work at more than 3,000 production sites in around 60 countries on five continents. In 2009, the Company undertook a brownfield capacity expansion in Central India to increase its cement manufacturing capacity from 2.1 million tonnes per annum to 6.26 million tonnes per annum by FY21. The company’s capacity utilization in FY21 stood at 72% which was at par with established cement companies (down from 91% in FY19 due to Impact of COVID-19). Going ahead, the Government of India’s focus on construction of roads (83000 km to be built over the next five years), Robust CAPEX plans announced in Budget 2021, affordable housing and increased rural demand bodes well for the cement demand going forward. On the financial front the company has reported a top-line CAGR growth of 4% in the last three years. It’s Bottom-line has grown at a CAGR of 33% in the last 3 years on the back of cost efficient techniques. It has reported an EBITDA per tonne of Rs.1,129 in FY21 and an efficient cash conversion cycle of -27 days which is among the best in small cap cement companies in FY21. Apart from this the company has a good dividend track record and has consistently declared dividends for the last 5 years. In FY21 its Dividend yield was at 3%. On the negative side, most of the company’s products belong to the premium categories and significant rise in fuel and raw material cost could impact the company’s margins going forward.

VST Industries

The Vazir Sultan Tobacco Company Limited was incorporated on 10th November, 1930. The name of the Company was subsequently changed to VST Industries Limited on 30th April, 1983. The Company has its Registered Office and Manufacturing facility at Hyderabad. VST Industries is the second largest player in Indian Cigarette industry by sales. ITC has a market share of 84% while VST Ind. and Godfrey Phillips account for 16% each as per FY20. 

Balance is made up by imports, unorganised sector & some other smaller players. VST has positioned itself as the lowest cost filter cigarette provider with market presence in India as well as outside India. VST has collaborated with British American Tobacco which holds 32.16% stake in the company. The major brands include Charminar, Charminar Special Filter, Charms Mini Kings, Charms Virgina Filter, XL Filter, Vijay, Shaan etc. The company’s products are targeted at the lower income segment where it has dominance. The major chunk of revenue (80%) comes from the sale of cigarettes while unmanufactured tobacco contributes to (20%) of total revenue. The company’s subsidiary namely Hallmark Tobacco Company has amalgamated with another wholly owned subsidiary, VST Distribution, Storage & Leasing Company.

It’s Profits have grown consistently with a 5% CAGR in the last 5 years, VST is generating more than Rs.250 Cr of free cash flows every year. Further, it had a consistent dividend payout of 60-70% in 2009-19 (Currently it is at 57%). The company’s sales have grown at a CAGR rate of 6% in the last 3 years. Additionally it has grown its Return on Equity and Return on Capital Employed at an average growth rate of 37% and 56% respectively in the last 5 years. VST also remains a net-debt free company which makes it a more attractive bet. On the negative front all the cigarette making companies are prone to hike in excise duty and other taxes and any dramatic changes in taxes on tobacco related products could impact VST’s bottom-line growth. Also a major concern for cigarette makers has been the Illegal cigarette market which has grown consistently in the country and accounts for 1/4th of the overall Indian cigarette market.

Indian Energy Exchange

IEX Ltd is the one of the first and largest energy exchanges in India which provided a nationwide automated trading platform for physical delivery of electricity, Renewable Energy Certificates and Energy Saving Certificates. This exchange platform enables competent price discovery and increases the availability and transparency of the power market in India while also enhances the speed and efficiency of trade execution. More than 6,600 participants are registered on IEX from 29 states and 5 UTs. Over 4,800 registered participants were eligible to trade electricity contracts and over 4,400 registered participants were eligible for trading Renewable energy certificates (REC) contracts.

 The Power exchanges provide a nationwide automated trading platform for mainly physical delivery of electricity and renewable energy certificates (RECs). Exchanges began operations with two products, namely Day Ahead Market (DAM; electricity sector’s equivalent of spot price) and Term Ahead Market (TAM), catering to the shorter-end of the market up to 11 days. Recently, they launched a new product: Real Time Market (RTM), which addresses last-mile system imbalances. With a 95% market share, IEX has a monopoly in the power exchange market and has clocked a 32% volume CAGR since inception (FY09-20). Post-CERC approval, exchanges were launched for trading in the short-term power market in 2008 with a duopoly market structure.

Despite a 20% decline in power demand during April and May 2020 (lockdown period), IEX registered electricity volume growth of 19%. This was supported by lower spot prices resulting in higher participation, mainly from Discoms. IEX has also launched its own Gas Exchange (India’s first) as Gas is similar to electricity in terms of logistics and complexity in trade, this launch has further deepened the prospects of growth for the company. IEX consistently reported more than 80% EBITDA margin and more than 60% PAT margins over the last three years. Over the last 5 years the company delivered a sales growth of 13% and profit growth of 16%. It also reported a healthy average growth in Return on Equity and Return on Capital Employed of 49% and 70% over the past 5 years. So overall, if you see the company is very efficient in terms of its financials and future growth prospects. On the negative front IEX faces risk in terms of any adverse regulatory changes and increasing competition intensity from existing new platforms.

Affle India Ltd

Affle is India’sleading digital advertising platform provider which provides a highly efficient end to end platform for their customers. Affle India generates most of its consolidated revenue (90% of total revenue) by CPCU model (Cost per converted user model). In the CPCU model Affle charges its client only when the user or target customer performs action very close to the transaction. CPCU models not only help to save client’s money but also allow them to identify further needs of their clients and give a focused offering. Affle has developed strong algorithms and leverages big data analytics to understand the client’s behavior in an accurate manner (through ML & AI). It has developed a Data Management Platform (DMP) having a large data set with more than 250 bn data points, more than 21,000 Mn connected devices and 35.1 mn converted users. So shopkeepers get ample data points to target customers precisely. The company’s management is expecting E- commerce shoppers to increase by 20.7% CAGR upto the year 2025 compared to those shoppers in 2017. Thus it sees an increase in the shoppers by leaps where the company compares its numbers for the period 2017 to 2025. Affle has also developed a strong mFaaS platform to rectify any frauds and avoid any exploits from the fraud transaction. This also provides a cushion for their customers for larger and repetitive transactions. This CPCU model delivers a strong return on investment (ROI) for customers and ensures better customer retention. Affle has seen 80-100% of customer recurrence in the past two years, while six of its top-10 clients have been associated with the company for more than three years. On the financial front the company has consistently improved its top and bottom-Line over the past years with a robust CAGR sales growth of 46% in the last three years and a profit CAGR of a whopping 69% between the same years. Also, it reported a consistent growth in its Return on Equity and Return on Capital Employed of 36% and 52% respectively during the last 3 years. On the negative front Affle India has high client concentration, more than 65% of its revenues comes from top 10 clients. So loss of 1 or 2 clients can have a significant impact on the revenues of the company. Apart from this any new change in technology, entry of big players and competition in its product’s pricing could impact growth and profits of the company.

Key risks associated with Small-cap companies:

Value Traps: Value trap is when a company is consistently operating in lower profits with very limited cash flows and cannot break through the phase while investors wait for them to turn profitable one day. Small-cap companies, especially the low ranking ones, are more prone to being value traps and might go defunct if the trend continues for a longer period.

Stay away from small caps facing Regulatory charges: Small-cap companies are more prone to going bankrupt especially when they are facing any legal or regulatory issues. So it is advisable to investors to stay away from those companies which are facing any legal issues.Also company’s debt is an important factor, you should stay away from high debt companies as they are more prone to bankruptcy than any other stocks. It is advisable to invest in very low or zero debt companies to avoid this risk.

Market cycle: A small-cap company’s exceptional performance can be a result of a high up-cycle. A small-cap company grows at an exponential phase in this up-cycle/financial bubble. Let’s understand this with an example. During the 90s almost all IT stock were booming and most of the returns were given by small IT companies because there was a consensus that IT sector will do well in coming decade so every IT stock was booming but the Dot-com bubble burst in the year 1999 and those small cap stocks were the first to get beaten down the most. So, It’s important to find the market cycle for a particular business before Investing in them. 

Here’s a quick video from our team on how you can select the Best Small-Cap Stocks:

Small-Cap Stock Model Portfolio:

In order to get an exposure to best small-cap stocks, you need a total of Rs.25,430.9 for the below curated portfolio as of 15th June, 2021.

Company Name

Weightage CMP as on 15th June Quantity Total
Thyrocare Technologies 7% 1249.9 3 3749.7
Bajaj Consumer Care 6% 294.3 10 2943
CARE Ratings 4% 670.2 3 2010.6
Heidelberg Cement 5% 248 10 2480
VST Industries 7% 3,464.10 1 3464.1

A detailed table with various parameters for Best Small-Cap Stocks to buy:

Sr. NoCompany NameBSE Scrip CodeNSE SymbolRatingCMP as of 15th June 2021IndustryMarket Capitalization (Cr)P/E Ratio (x)Price to Sales (x)Dividend Yield (%)Debt/Equity RatioCurrent RatioReturn on Equity (%)Return on Capital Employed (%)Operating Profit Margin (%)3 Years Sales CAGR3 Years Net Profit CAGRInventory Turnover Ratio
1Indian Energy Exchange540750IEX5375.3Power Generation/Distribution11,22752.635.40.701.8546.75781.811.220.50
2NESCO Ltd.505355NESCO1573.6Services4,01623.513.90.501.7121263.8-3.2-1.22.1
3Thyrocare Technologies Ltd539871THYROCARE31249.9Healthcare Services6,85961.513.40.801.4527.135.734.611.667.8
4Delta Corp Ltd532848DELTACORP0.5183.1Services4,81211.70.804.7-1-0.23.1-120.2
5VST Industries509966VSTIND53464.1Consumer Goods5,34617.24.83.302.43648374201.6
6Sobha Ltd532784SOBHA0.5514.8Construction4,761501.91.41.31.212.121.431.61920.50
7Bajaj Consumer Care533229BAJAJCON4.5294.3FMCG4,36719.94.73.40131.237263.61.66.2
8Heidelberg Cement500292HEIDELBERG1248.6Cement5,63517.92.730.11.122.42623.93.9335.6
9Mishra Dhatu Nigam Ltd.541195MIDHANI1212.8Metals3,89929.65.81.20.22.217.620.428.60.3
10JK Paper Ltd532162JKPAPER0.5178Paper2,97112.41.12.311.49.710.820.4-1.1-1.73.7
11CARE Ratings534804CARERATING2670.2Financial Services2,09723.48.52.701016.321.739-9.2-180
12Justdial Ltd.535648JUSTDIAL21010.7IT6,658319.900.10.31719.523-4.823.80
13Sterlite Technologies Ltd532374STRTECH0.5265.8Telecommunication10,29237.42.11.41.311412.816.715-6.44.4
14Affle India Ltd542752AFFLE55158.5Telecommunication13,65310126.400.31.345.939.225.145.669.20
15INOX Leisure Ltd532706INOXLEISUR0.5315Media & Entertainment3,878370.34.40.4-53.2-5.647-570.7
16Dhanuka Agritech Ltd.507717DHANUKA4979.8Fertilizers & Pesticides4,58421.83.31.203.1283819.41318.73.2
17Gulfoil Lubricant Ltd538567GULFOILLUB2696Oil & Gas3,49217.42.120.22.12426167.48.12.5
18Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC)500670GNFC0.5372.4Chemicals5,7908.31.11.303.612.315.819.6-4.2-4.13.5
19TCNS Clothing Ltd541700TCNSBRANDS0.5552.4Textiles3,3915.400.63.110.812.6-3.917.9621.4
20KEI Industries517569KEI0.5716.9Industrial Manufacturing6,22722.81.50.30.2216.621.5116.523.63.6


Watch detailed video on small-cap stocks to buy today in India

Our Collection of Best Stocks to Buy

Other links you may find useful: https://www.samco.in/knowledge-center/article-categories/stocks-to-buy/

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