10 Fundamentally Strong Smallcap Stocks to Watch Out in 2023

A common question investors often ask is when is a good time to invest in the smallcap space?

Or the question would be how they should go about screening smallcap stocks.

In 2022, the Indian benchmark index BSE Sensex gained 3% while the smallcap index lost 3%. Since the Covid crash, total gains in the smallcap index stand at 207% vs 130% in Sensex.

So, will 2023 mirror 2022?

Considering a vast majority of the 4,000 stocks listed as smallcaps don't make money (profits), valuing them using the price to earnings (PE) ratio doesn't help.

Enter the smallcap to Sensex ratio.

At present, this ratio stands at 0.48 times. This is against a long term median of 0.44x, and against the previous peaks ranging from 0.54x to 0.76x in the last two decades. This alone implies that there is still room for smallcaps to shoot up before investors turn fearful.

Investing in smallcaps can be very rewarding. The potential for outsized returns makes them an appealing investment avenue.

A great way to navigate the smallcap pool is to look for fundamentally strong stocks, that can stand the test of time.

With this in mind, let's look at 10 fundamentally strong smallcap stocks which could do well in 2023.

#1 Swaraj Engines

First on our list is Swaraj Engines, a captive unit of Mahindra and Mahindra.

Swaraj Engines is a diesel engine manufacturer for Mahindra and Mahindra which holds a 34% stake in the company.

Swaraj Engines Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	15.50%	12.28%	-11.38%	26.59%	15.34%
Operating Profit Margin (%)	17.79%	16.57%	14.40%	14.50%	14.38%
Net Profit Margin (%)	10.14%	9.29%	9.04%	9.30%	9.54%
Return on Equity(%)	31.35%	35.42%	30.06%	35.93%	37.40%

Source: Equitymaster

Despite the heightened level of client concentration, the company's revenue has grown at a CAGR of 8.7% and profits by 9.7% over the past five years. This nominal growth hasn't affected the company's value over the long term.

Swaraj Engines has delivered a stellar return on equity (RoE), averaging around 34% in the past five years.

Apart from this, the company has a phenomenal track record of rewarding its shareholders. The 5-year average dividend yield stands at 3.6%. The company has no debt on its book.

These attractive returns, combined with an immaculate balance sheet, make it a fundamentally strong company worth a look.

A good harvest of rabi crop, initial forecast of consecutive normal monsoon and adequate availability of financing is likely to help Swaraj Engines sustain the tractor demand momentum.

Further, the government's continued thrust to enhance farmers' income through various initiatives will boost the demand. In this backdrop, engine business is likely to move in tandem with industry.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Transport Corporation Of India

Next on our list is Transport Corporation of India (TCI).

The company's stock price has doubled in the last five years. However, it has fallen by over 14% since the beginning of 2023. It is now trading at a P/E ratio of 15.3 times, a 12% discount to its 5-year average of 17.4 times.

TCI is the country's premier organized freight services provider with a pan-India presence. The company offers Integrated Logistics & Supply Chain Solutions catering primarily to the healthcare, auto, chemicals and retail industries.

This integrated offering allows it to offer last-mile connectivity, setting it apart from other players. And the company's performance in the past few years is a true testament to that.

Transport Corporation Of India Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	20.90%	17.30%	-1.30%	3.30%	15.90%
Operating Profit Margin (%)	9.80%	9.80%	9.60%	10.20%	13.20%
Net Profit Margin (%)	4.30%	4.40%	4.30%	4.60%	8.10%
Return on Equity(%)	14.40%	14.60%	12.40%	12.00%	20.50%

Source: Equitymaster

While sales have grown at a CAGR of 10.9%, net profits have grown by 32.1%. This has led to strong return ratios with a 5-Yr average RoE of 14.8%. The company enjoys a pristine balance sheet with 0.36 times debt to equity.

India's logistics sector is expected to grow from a US$ 410 bn market in 2022 to US$ 566 bn by 2027, implying a CAGR of 6%. This growth will be fuelled by policy reforms, increased outsourcing and increasing trends in online shopping & digital transactions.

As a consequence, the company expects a revenue and profit growth of 10%-15% and plans to invest around Rs 1.2 bn in the business.

To know more about the company, check out its financial factsheet and latest financial results.

#3 Rajratan Global Wire

Third on our list is Rajratan Global Wire.

The company is a leading player (50% market share) in the tyre bead wire manufacturing industry in India. It supplies all the top tyre manufacturers in the country.

The company is the second largest player in Asia (excluding China) and the only tyre bead manufacturer in Thailand.

A bead wire accounts for a measly 3% of the tyre cost but is key to the safety, strength, and durability of tyres.

Rajratan Global Wire Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	0.24%	22.41%	41.51%	-2.67%	13.87%
Operating Profit Margin (%)	10.94%	10.94%	14.38%	17.10%	20.52%
Net Profit Margin (%)	4.90%	5.40%	6.87%	9.69%	13.89%
Return on Equity(%)	16.87%	21.44%	21.49%	26.84%	43.82%

Source: Equitymaster

The leadership status has allowed it to multiply the business in the past five years. While sales are up three times, the profits are up seven times in the same period. These profits have trickled down to the return on equity (RoE), which has ballooned from 15% in the financial year 2018 to 36% in 2022.

The debt to equity has remained low at 0.3 times in the past five years.

The company has a capacity of 72,000 tonner per annum (TPA) in India and 60,000 TPA in Thailand. At present, they are also setting up a greenfield unit in Chennai with a capacity of 60,000 TPA which should be operational in 2023.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Hawkins Cookers

Fourth on our list is Hawkins Cookers.

A leading player in pressure cookers, the company boasts a market share of 25% in the country with over 60 valid patents and design registrations.

The pressure cooker segment is the biggest category for the company, accounting for nearly three-fourths of the business, and the rest is cookware and accessories.

The company has been one of the fastest-growing players in the cookware segment, with sales and profits nearly doubling in the past five years.

Hawkins Cookers Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-5.68%	9.13%	16.56%	3.05%	14.58%
Operating Profit Margin (%)	14.48%	13.75%	15.81%	15.23%	13.03%
Net Profit Margin (%)	8.64%	8.25%	10.71%	10.39%	8.70%
Return on Equity(%)	44.97%	47.47%	56.13%	50.83%	42.93%

Source: Equitymaster

This phenomenal growth comes with a negligible debt on the books and a well-capitalised balance sheet.

The RoE has remained robust, with a 5-Yr average of 48.5%. The 5-Yr dividend yield stands at 1.9%. These aspects of the business, along with the leadership status, make it a fundamentally strong company.

While the growth in demand will be driven by new product launches in the coming year, the profitability will rise on the back of improved margins from the easing raw material prices.

To know more about the company, check out its financial factsheet and latest financial results.

#5 Fiem Industries

Fifth on our list is Fiem Industries.

Fiem Industries is one of the leading manufacturers of automotive lighting, signalling equipment and rear-view mirrors in the country. These include headlamps, tail lamps, blinker lamps, fog lamps, warning triangles, interior lamps and beacon lights catering to the four-wheeler and the two-wheeler segment.

The company caters largely to two-wheelers (96% of the total revenues in the financial year 2022). 90% of the revenues come from the OEM business and the balance comes from replacement and exports.

Fiem Industries is one of the first few companies in India to introduce LED lights in two-wheelers. As LED bulbs consume less energy, they form a critical component in the EV space. Therefore this segment of the business places the company on the fast track to growth.

Fiem Industries Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	22.05%	16.54%	-4.71%	-11.39%	28.63%
Operating Profit Margin (%)	11.68%	10.90%	11.48%	11.19%	12.48%
Net Profit Margin (%)	4.13%	3.91%	5.70%	3.82%	6.04%
Return on Equity(%)	12.24%	12.23%	15.70%	8.57%	15.73%

Source: Equitymaster

The business has been doing well, reporting a sales and profit CAGR of 9.1% and 23.5% in the last five years. This growth has allowed the company to remain debt free in the past two years and propelled the return on equity from 11.7% in the financial year 2018 to 14.8% in 2022.

The two wheeler EV segment is a big opportunity, which is growing exponentially. Fiem has the first mover advantage and working with all major EV OEMs in India gives it a leg up.

The company expects to grow their business at the same pace, while expanding in three and four wheeler segment.

To know more about the company, check out its financial factsheet and latest financial results.

#6 Goldiam International

Next on this list is Goldiam International.

Goldiam International is a leading exporter of diamond jewellery, with the US accounting for over 96% of the business. The company supplies natural diamond jewellery and lab-grown diamonds (LGD) to leading global retailers, departmental stores and wholesalers.

Goldiam International enjoys a good position in the overall Us jewellery sales and has ventured into LGD to benefit from the growing gems and jewellery market in the country.

LGDs account for only 3% of overall jewellery sales in the US, but are expected to grow to 10% by 2030. This new segment not only carries strong growth potential but also generates higher margins (45-50% operating margins).

Goldiam International Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-6.37%	2.19%	40.50%	-16.70%	6.87%
Operating Profit Margin (%)	11.30%	15.87%	17.19%	20.70%	21.74%
Net Profit Margin (%)	6.34%	10.44%	12.42%	16.53%	15.41%
Return on Equity(%)	5.89%	12.59%	11.41%	15.34%	21.52%

Source: Equitymaster

The business has been doing well in the past five years. While sales have doubled, the profits are up five times in the same period. This has boosted the return on equity, up four times in the past five years. The company has achieved this feat without any borrowings.

Going forward, the company plans to incur a capex of Rs 100 million (m) for enhancing its in-house Lab-Grown Diamonds capacity. The added capacity is poised to complement Goldiam's jewellery manufacturing, thereby boosting higher margins for financial year 2023.

To know more about the company, check out its financial factsheet and latest financial results.

#7 Satia Industries

Next on this list is Satia Industries.

The company is one of the leading wood and agro-based paper manufacturers in India, with a fully integrated manufacturing setup.

Satia Industries supplies paper directly to various state boards, accounting for over 40% of the business.

The state orders are tender driven, funded by the government and generate higher margins, in comparison to the paper sold in the open markets. They enjoy a 10-12% market share in the state orders and are well-poised to benefit from the country's literacy mission.

Satia Industries Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	17.94%	13.34%	9.88%	-27.94%	54.37%
Operating Profit Margin (%)	20.10%	19.69%	19.83%	20.39%	19.65%
Net Profit Margin (%)	1.59%	2.02%	2.09%	1.12%	2.26%
Return on Equity(%)	36.06%	33.11%	26.13%	11.79%	20.33%

Source: Equitymaster

In recent years, the business has expanded significantly. While sales have registered a 5-Yr CAGR of 11.7%, the net profits have grown by 9.6%. The company has negligible debt on its books, and the 5-Yr average RoE stands at 19.8%.

The management expects further growth in volumes in 2024 and expects to produce additional paper from the new capacity in place. Apart from this, it is also confident that the operating margins will expand at healthy pace, boosting the overall profitability.

To know more about the company, check out its financial factsheet and latest financial results.

#8 Accelya Solutions India

Next on this list is Accelya Solutions India.

The company offers technological solutions to the travel and transport industry globally. They cater to the airline sector and boast a large base of over 75 airline carriers globally.

From a regional perspective, the operations are widespread, catering to almost every continent including the Asia Pacific (accounting for 36% of revenues), the US (32%), the Middle East & Africa (18%) and Europe (14%).

The company offers a variety of solutions, but its business growth drivers remain revenue accounting and revenue assurance. They aim to replace the legacy in-house systems of several airlines with their new edge software.

Accelya Solutions Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	10.60%	-0.46%	14.53%	-5.64%	-27.77%
Operating Profit Margin (%)	39.67%	40.43%	37.96%	31.94%	37.33%
Net Profit Margin (%)	23.31%	24.57%	21.07%	14.53%	20.68%
Return on Equity(%)	49.47%	56.41%	39.25%	17.46%	30.40%

Source: Equitymaster

Accelya Solutions India's business was significantly affected by the pandemic. However, it has picked up since the end of 2021. While the business has still not regained its pre-Covid glory, the company is confident of growth in the coming years.

With a debt-free balance sheet and strong return ratios in tow, the company is all set to regain its strength and expand its business in the near term.

As the airline industry continues to grow robustly, effective financial management continues to be at the heart of the airline business. Accelya is well poised to drive technology transformation within the airline industry that is looking forward to embracing new ways of retailing & distribution.

To know more about the company, check out its financial factsheet and latest financial results.

#9 PSP Projects

Ninth on this list is PSP Projects.

It is a construction company offering a diversified range of construction and allied services across industrial, institutional, government, government residential and residential projects.

The company is geographically diversified, with a presence across six states, including Gujarat, Rajasthan, Karnataka, Uttar Pradesh, Maharashtra and New Delhi.

Growth opportunities from the government and private clients, in tandem with its expansion into different states and improved eligibility of higher-ticket size projects, have led to such strong growth in recent years and is likely to continue.

PSP Projects Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-5.77%	68.12%	39.30%	41.96%	-17.45%
Operating Profit Margin (%)	16.00%	15.96%	14.11%	12.06%	15.83%
Net Profit Margin (%)	8.57%	8.30%	8.42%	6.63%	9.40%
Return on Equity(%)	32.70%	26.57%	31.14%	16.84%	27.19%

Source: Equitymaster

The business has expanded significantly. The revenues and net profit have doubled in the past five years. And the company has achieved this feat with negligible debt. The 5-Yr average RoE stands at 24%.

The company expects to grow at this pace with a healthy outstanding orderbook in tow. The current orderbook stands at Rs 64 bn and order inflow in the financial year 2023 to Rs 3.3 bn, surpassing our order inflow guidance of Rs 2.5 bn.

To know more about the company, check out its financial factsheet and latest financial results.

#10 MPS Ltd

The last company on this list is MPS.

MPS is a leading global provider of platforms, content, and learning solutions for the digital world. It is a publishing services company with over four decades of experience with major publishers across the world.

The company earns more than half its revenues from its North American clients (58%) and a majority of the balance from European clients (33%), with the top 10 clients contributing to 47% of the business.

With the help of automation, the company has been boosting its profitability, gradually reducing its headcount, its largest cost head.

MPS Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-5.52%	33.25%	-9.36%	23.05%	7.07%
Operating Profit Margin (%)	41.21%	32.72%	29.83%	27.61%	31.21%
Net Profit Margin (%)	1.63%	1.75%	1.36%	1.32%	1.95%
Return on Equity(%)	18.32%	17.09%	14.28%	15.66%	23.29%

Source: Equitymaster

The robust profitability comes from the strong operating leverage available in the business and is likely to continue going forward.

The sales and net profits have grown at a 5-Yr CAGR of 8.5% and 4.3% respectively. This has expanded the RoE to 23.5% in the financial year 2022 from 16.8% in 2018 and helped the company maintain a healthy balance sheet with negligible debt.

The company has been expanding its business inorganically and will continue to do so. About 60% of the incremental revenue will come inorganically and 40% will come organically. The growth will primarily be in the existing verticals of the business.

To know more about the company, check out its financial factsheet and latest financial results.

In conclusion

Small businesses are far more agile and have additional room to grow in comparison to their larger peers. So if such companies grab great opportunities, the business can expand faster than you can imagine.

But even after this, your job is not done. You need to look for fundamentally strong companies available at great prices (value).

Valuation also plays a big role. It provides prospective buyers with an idea of how much they should pay for an asset or company and for prospective sellers, how much they should sell for.

But no matter how great the prospects of robust returns are, you must consider your risk-bearing capacity and investment horizon before making any investments. That is what successful investing is all about.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...