4 Debt Free Penny Stocks that Deserve Your Attention

Penny stocks are the talk of the town these days.

They have become the favourite category for many retail individuals, especially first-time investors. These investors flock towards penny stocks with the hope of making big money in them.

Investors typically prefer to buy into these stocks hoping that over time the stock price will appreciate and it will become the next Infosys or Bajaj Finance.

But just because the risk-reward ratio seems extremely high here, it doesn't mean that penny stocks will make an investor rich.

Penny stocks with stable and strong balance sheets - with low or zero debt and decent dividend payout - can fare much better against their peers, both in positive and adverse times.

Such companies deserve to be a part of the stock watchlist.

Debt plays an important role in the present performance and future growth of any company. The company's debt level should be looked at even more carefully in case of a penny stock.

It's really important to know the extent of leverage, especially in these challenging times, when many businesses are still struggling due to the pandemic-led disruption.

Companies with low or zero debt and no interest burden stand a better chance at surviving than those with high debt.

Let's take a look at four debt free penny stocks in India, which show solid growth.

#1 Gujarat Piparav Port

First penny stock on our list is marine port services company Gujarat Piparav Port.

Gujarat Pipavav Port is India's first private sector port located on the south west coast of Gujarat near Bhavnagar. The port is strategically placed to on International Maritime Trade route which connects India with US, Europe, Africa, Middle East on one side and far east on the other side.

Thanks to the recent correction, the company has qualified under the penny stock category (stocks trading under Rs 100).

Market experts are banking on this indirect logistics play as India's export-import volume continues to grow annually. Gujarat Pipavav, with its strategic location, seems best placed to leverage the accelerating export-import trend.

The company continues to secure new services for connecting ports and build a solid network. A month ago, it secured weekly service connecting Jebel Ali Port to Sohar, Nhava Sheva, Pipavav and Mundra Port. With this, it deepened its presence in Gulf markets.

On the financials front, Gujarat Piparav has reported decent sales and consistent profit over the years.

Financial Snapshot

(Rs m, Consolidated)	FY17	FY18	FY19	FY20	FY21
Net Sales	6,831	6,489	7,020	7,354	7,335
Sales Growth (%)	4%	-5%	8%	5%	-0.3%
Net Profit	2,822	2,210	2,367	3,194	2,220
Profit Margin (%)	41%	34%	34%	43%	30%

Data Source: Ace Equity

The company's promoter, APM Terminals, is among the world's largest port and terminal operators, operating and managing over 75 port facilities in 40 countries, and has inland services operations at over 100 locations in more than 50 countries.

Gujarat Piparav's healthy dividend payouts (with dividend yields of over 5%) should make your decision even more easier.

Gujarat Piparav Dividend Payout History

Year End	Dividend (%)	Dividend Per Share (Rs)
Mar-16	19	1.9
Mar-17	38	3.8
Mar-18	34	3.4
Mar-19	35	3.5
Mar-20	56	5.6
Mar-21	45	4.5

Data Source: Ace Equity

While this is compelling, one should note that a substantial dividend payout over and above the profit generated, may deplete its cash position. As it has debt funded capex plans, a lower dividend can be announced for fiscal 2022.

To know more, check out Gujarat Piparav Port's financial factsheet and its latest quarterly results.

#2 Shree Digvijay Cement

Next on our list, we have Shree Digvijay Cement, primarily engaged in the business of manufacture and sale of cement.

The company primarily sells its cement in the state of Gujarat through a network of 1,000+ channel partners and dealers.

For the most recent quarter, the company reported weak set of number which have taken a toll on its stock price.

Revenues grew by a mere 5.6% YoY, and declined by 1.5% if compared sequentially to Rs 1,516 m, mainly due to rise in realization/tonne.

The muted revenues resulted in the company posting net profit of Rs 72.7 m which is around half of Rs 133.9 m it reported in September 2021.

According to the company's chairman, once the busy season for the cement industry starts, the margins will see an improvement but the challenge in terms of high energy prices would remain.

After reporting losses in fiscal 2017, the company has reported back to back profits for the past four years. Have a look at the company's financials.

Financial Snapshot

(Rs m, Standalone)	FY17	FY18	FY19	FY20	FY21
Net Sales	3,149	4,133	4,365	4,698	5,028
Sales Growth (%)	-34%	31%	6%	8%	7.0%
Operating Profit	198	542	312	1,032	1,114
Net Profit	(90)	134	21	564	540
Profit Margin (%)	-3%	3%	0%	12%	11%

Data Source: Ace Equity

Coming to dividends...

The company does not have a solid track record of paying dividends but it is making up of the lost time. It started declaring dividends from fiscal 2020.

In 2020, the dividend amounted to Rs 1.5 per share which grew to Rs 2.5 per share in fiscal 2021. It has already paid an interim dividend of Rs 1.5 per share for fiscal 2022 with final dividend yet to be approved.

The company has secured additional limestone mines, which can examine feasibility of expansion of operations through expansion of its capacity.

Stock of the company currently trades at Rs 61, roughly down 20% in a month.

To know more, check out Shree Digvijay Cement's financial factsheet.

#3 Fiberweb India

Established in 1985, Fiberweb India manufactures and exports non-woven fabrics.

It is primarily engaged in the business of manufacturing of spun bond and melt-blown non-woven fabrics from polypropylene.

Fiberweb India's products are mainly exported to the US, Europe and UK. Furthermore, the company's customers primarily consist of US-based Fortune 500 companies. In the domestic market, its customers include Johnson & Johnson and Unicharm India.

In fiscal 2021, the company increased its manufacturing capacity by 1,500 mpta with melt bond technology, and it now proposes to further expand its manufacturing capacity by 9,000 mtpa with a new technology i.e. flat bond. Subsequently, the total plant capacity shall increase to 17,000 mtpa from the existing 8,000 mtpa.

All this has been done with the company remaining almost debt free.

Fiberweb India Debt to Equity Over the Years

(Rs m, Consolidated)	FY17	FY18	FY19	FY20	FY21
Total Debt	0	0	0	61.2	0
Debt to Equity (x)	0	0	0	0.04	0
Free Cash Flow	39.9	-337.6	31.8	4.7	65.6

Data Source: Ace Equity

Last year, Fiberweb India became debt free as it paid off its working capital loans.

However, it plans to avail long-term loans for purpose of undertaking capex for setting up this new capacity over fiscal 2022-24. 75% of the capex will be funded through term loans and the balance through internal accruals and promoters' contribution.

In the short term, this may reflect in the company's books as debt but the capex is likely to help augment the scale of operations.

Fiberweb India shares are up 45% in the year gone by but down over 17% in the past month, in-line with the market selloff.

To know more, check out Fiberweb India's financial factsheet and latest quarterly results.

#4 Star Cement

Star Cement, erstwhile cement manufacturing company, began its operations in 2005. It manufactures cement clinker and cement.

The group is one of the largest cement manufacturers and is an established brand in North East India with a market share of close to 23% in fiscal 2021.

2021 was tough for most cement companies as manufacturing and engineering came to a half mid-year. This led to Star Cement reporting lower operating income and a contraction in volumes. Also, elevated raw material costs added to the worries.

The company saw a significant drop in cement demand in November.

Despite all this, Star Cement's financial profile remained strong and debt under control.

Financial Snapshot

(Rs m, Consolidated)	FY17	FY18	FY19	FY20	FY21
Net Sales	15,278	16,145	18,310	18,431	17,199
Sales Growth (%)	-11%	6%	13%	1%	-7%
Operating Profit	4,108	5,257	4,546	4,238	3,608
Net Profit	1,947	3,307	2,988	2,856	1,871
Profit Margin (%)	13%	20%	16%	15%	11%
Total Debt	8,007	4,324	738	134	153
Debt to Equity (x)	0.7	0.29	0.04	0.01	0.01

Data Source: Ace Equity

With the end of monsoon, the demand is expected to be good for the overall cement sector.

Coming to the most recent results, Star Cement posted turnaround results in the December quarter and reported a profit of Rs 438 m compared to Rs 1 m for the same period last year.

Between fiscal 2022-24, the company has big capex plans towards setting up of WHRS capacity and clinker expansion for which internal accruals would be done. So the company will maintain its debt free status going forward too.

Going forward, the prospects seem good given the government's thrust on affordable housing and infrastructure segments.

The stock is currently under pressure owing to the broad-based selloff across sectors. Star Cement currently trades at Rs 90, close to its 52-week low of Rs 88.5.

To know more, check out Star Cement's financial factsheet.

Snapshot of debt-free stocks in India from Equitymaster's stock screener

Though we have discussed only 4 stocks, the list doesn't end here.

The following image shows a list of companies with low or zero debt obtained using Equitymaster's powerful stock screener.

Please note these parameters can be changed according to your selection criteria. So, you can choose from smallcaps, midcaps and penny stocks.

This will help you in identifying and eliminating stocks that are not meeting your requirements and give emphasis on those stocks that are well inside the metrics.

What is the right penny stocks strategy?

Since all investing comes with risk, diversifying your portfolio with penny stocks is a good strategy.

But here's the crux.

There are around 1,000 penny stocks that are vying your attention. And if you don't know how to say no to more than 90% of them, you will end up with a lot of junk.

Penny stocks can do extremely well when other stocks don't. But here's the thing...penny stocks can take a U-turn at a faster rate, trapping retail shareholders, when things turn bad. (Read our article on popular stocks turned penny stocks).

That is why you need a strong framework. A framework for shortlisting the stocks which have a decent balance sheet, low or zero debt and a track record for paying consistent dividend.

This framework will not only zero in on the right penny stock at the right price but also help you avoid big losers.

Last month, Co-head of Research at Equitymaster Rahul Shah recorded a video on which penny stocks you should consider in 2022.

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...