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  • Jul 27, 2022 - 5 Debt Free Penny Stocks with Good Profitability to Watch Out for in 2022

5 Debt Free Penny Stocks with Good Profitability to Watch Out for in 2022

Jul 27, 2022

5 Debt Free Penny Stocks with Good Profitability to Watch Out for in 2022

Editor's note: 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 interest rates are rising, and many businesses are still struggling due to the pandemic-led disruption.

As the easy money era comes to an end and central banks across the globe raise interest rates, the liquidity driven penny stocks may witness a serious correction if things take a turn for the worse.

That is why, during uncertainty, your job is to sit on the penny stocks which are debt free, which have a decent track record of generating profits, and the ones which pay regular dividends.

Who knows, they might as well turn out to be the multibagger penny stocks for 2023.

Earlier this year in March 2022, we wrote to you about the five debt free penny stocks which have good profitability.

Debt Free and Profitable Penny Stocks

Company CMP (Rs) Marketcap (Rs bn) Latest Net Profit (Rs m)
Singer India 44.5 2.4 76.8
Railtel Corporation 94.6 30.4 2,089.50
Jamna Auto Industries 123.9 49.4 1,408.10
Ador Fontech 74.2 2.6 213.9
Rubfila International 77.8 4.2 446.5
Source: Equitymaster

This list is still extremely relevant today. All these companies are profitable and have zero debt on their books with the exception of Jamna Auto Industries, which took on some debt in financial year 2021-22.

Even as the company has added some debt, it is manageable with the debt-to-equity ratio under a respectable 0.5x.

Continue reading to know more about these debt free penny stocks.

5 Debt Free Penny Stocks with Good Profitability

Penny stocks are selling like hotcakes these days. Whether you are a first-time investor or a seasoned trader, everyone wants a piece of the pie.

For those new to the game, there's no general definition for penny stocks. Generally, equity shares that trade for less than Rs 100 per unit are called penny stocks.

The craze really stems from the fact that investors can buy large chunks of these stocks at low prices.

Second, there is tremendous growth potential. Basically, high returns in the short term.

Moreover, penny stocks contribute towards the diversification of your portfolio.

Sure, there's risk involved, just like any market-linked financial product. But if carefully chosen, the rewards far outweigh the risks.

So, if you have a high-risk appetite, here's a list of top 5 zero debt penny stocks for 2022 with good profitability.

#1 Singer India Ltd.

Singer India (SIL) is 59% owned by RHBV, an erstwhile wholly owned step-down subsidiary of Singer Asia. Retail Holdings NV, Curacao (RHNV) owns indirect equity of 54.1% and is the ultimate parent entity here.

SIL is one of the most recognised and iconic domestic appliances brands in the region. Operating in India since 1977, it continues to reflect a strong brand presence and is seen rapidly diversifying in the home appliances space with an asset-light business model.

Even though the parent company reduced its stake in December 2020, the business profile of SIL remained unaffected.

Despite the diversification in the product portfolio of SIL, the business derives the bulk of its revenue from the sewing machine business. The segment contributed 64% to the total revenue in financial year 2021 against 63% in fiscal year 2020 and 70% in 2019.

With a manufacturing facility in Jammu, the company continues to assemble sewing machines and home appliances in India supported by outsourcing back-to-back warranty with vendors to service major defects.

This has helped the company maintain a healthy Return on Capital Employed [ROCE] of 21.2% over the past 3 years. In financial year 2021, the ROCE was more than 17%, while the profit margin was just 3 - 5% over the four fiscals through 2021.

The asset-light model has kept the company's capital structure healthy. It reduced debt significantly by Rs 173.6 m. In fact, current financials show the company has achieved a zero debt to equity ratio.

So, if you are considering investing in debt free penny stocks, Singer India with gross sales of Rs 4.1 bn and profit growth of 30.7% in the past year, should be on your watchlist in 2022.

To know more, check out Singer India's factsheet and its latest quarterly results.

Update: For the financial year 2021-22, Singer India has posted a net profit of Rs 77 m, which is lower than last year's figure of Rs 106.2 m.

The company has zero debt on its books.

#2 Railtel Corporation of India Ltd.

Due to the recent correction, Railtel Corp is now considered a penny stock, which trades below Rs 100.

Incorporated in 2000 for providing telecom-related services to the Indian Railways, Railtel Corporation of India - is a Mini Ratna (Category-I) PSU that operates across two major segments - telecom and projects.

With majority ownership by the government of India under the Ministry of Railways, the company comes with a strong parentage. Railtel has the capability to execute any connectivity-related projects for the Railways.

Railtel has consistently increased its footprint in the space by providing telecom infrastructure and other related services to several public-sector enterprises and private players.

In the last 5 years, Railtel has shown good revenue growth of 30.9%. It has maintained average operating margins of 28.7%.

This is largely because Railtel has Right of Way (RoW) exclusivity that allows it to lay fibre to facilitate telecom services along tracks.

With its fibre network of approximately 60,000 km, the company continues to receive large orders from the Indian Railways. Its gross sales were Rs 13.37 bn and PAT was Rs 1.40 bn in financial year 2021.

The company has been consistently paying dividends in the last 3 years with an average dividend payout of 13%.

In the absence of external debt and availability of healthy free cash balances, Railtel boasts of strong financial flexibility and robust liquidity.

In the recently announced 'Fortune India Next 500 list of Year 2022, Railtel jumped 67 positions to rank 124th among the top 500 midsized corporations in India.

Therefore, if you are looking to diversify your portfolio into the telecom infrastructure space, then Railtel Corporation of India - is a strong contender for zero debt penny stocks for 2022.

To know more, check out Railtel Corp's financial factsheet.

Update: For the financial year 2021-22, Railtel Corp has posted a net profit of Rs 2,089 m, which is much higher than last year's figure of Rs 1,424 m.

The company has zero debt on its books.

Recently, the miniratna company declared a final dividend of Rs 0.65 per share for financial year 2021-22. This is in addition to the interim dividend of Rs 1.75 already paid.

At the current price, it trades at a price to book value multiple of 2.

#3 Jamna Auto Industries Ltd.

Even though the Indian commercial vehicle industry has been under stress for some time, experts predict the segment will hit high double-digit growth in financial year 2022.

The much-awaited scrappage policy and the potential to reduce pollution, cost of imports of oil and raw materials are expected to drive sale volumes.

This brings us to Jamna Auto Industries, the third on our list of debt free penny stocks.

Jamna Auto Industries is a market leader with over six decades of experience in the domestic M&HCV OEM segment. Its gross sales were Rs 10.5 bn in fiscal 2021.

With a dominant share of its business coming from behemoths like Tata Motors and Ashok Leyland, the company has been able to maintain a strong balance sheet despite turbulent times in the recent past.

A trusted name in commercial vehicles' suspension manufacturing, Jamna Auto offers a full range of suspension solutions. As part of their diversification policy, the company established a strong after-market supply a complete range of spare parts. This helped its sales to gradually improve from 9% in fiscal year 2011 to 29% in fiscal 2020.

Commensurate with its expansion strategy, Jamna Auto Industries set up an in-house research & development facility. This assisted the company to spearhead its presence in new generation products lines.

With a sustained scale-up committed to long term business growth, Jamna Auto reported a PAT of Rs 767.2 m in fiscal 2021.

It actively worked towards minimising debt and is a zero-debt company today.

The company's favourable cost structure provided financial resilience that led to a declaration of an equity dividend of 75%. This amounts to a dividend yield of 0.8% at the current price.

For fiscal 2022, the company has already paid out a dividend of Rs 0.5 per share.

Update: Jamna Auto is no longer categorized as a penny stock as its share price has moved up since we wrote to you.

Financial year 2021-22 turned out to be pretty good for Jamna Auto as the company's net profit almost doubled to Rs 1,408 m as compared to Rs 730 m last year.

No wonder the company's shares are skyrocketing even in 2022 at a time when even fundamentally strong penny stocks and the fastest growing companies are battered down.

The company has added debt on its book this year, but the debt is manageable.

Recently, the company declared a dividend of Rs 1 per share in addition to interim dividend of Rs 0.5 per share announced last year.

Jamna Auto is India's largest and the world's third largest CV spring manufacturer.

#4 Ador Fontech Ltd.

Back-to-back lockdowns due to the Covid-19 crisis resulted in considerable disruptions in the construction industry. But the global welding electrodes market is on the cusp of a strong revival.

Backed by growing demand, the market is projected to exhibit a CAGR of 4.3% and is estimated to reach US$ 27.22 bn by 2027.

Some of the key factors propelling the progression are the introduction of cutting-edge technologies in welding automation along with the development of tailormade and innovative designs that can be applied across several core industries.

Indian manufacturers extensively use welding to join metals and alloys. This puts Ador Fontech, one of India's leading repair welding companies as a strong contender in the list of most sought-after penny stocks for 2022.

Established in 1974 and spearheaded by a seasoned management team, Ador Fontech is a company that placed a lot of emphasis on maintaining its debt free status despite the pandemic.

This was made possible as the company put a lot of importance on collections from debtors right from the inception of the Covid-19 crisis. This translated into making timely payments to creditors and helping Ador to manage its working capital efficiently.

With financial prudence, the company could maintain a positive profit trajectory at 12.2%.

The stock offers a dividend yield of 3.1%. The PAT of Rs 127.1 m came from its strong foothold in the products, services and solutions that caters to the repair segment i.e. life enhancement of industrial components.

At the back of a strong balance sheet, Ador Fontech recorded gross sales of Rs 1.5 bn in financial year 2021 with an efficient cash conversion cycle of 37.1 days. Even though revenues fell 0.9% over the past 3 years, the company could maintain a healthy liquidity position with a current ratio of 4.03.

Ador Fontech is poised for long term growth with the company actively investing in updating and upgrading its welding techniques and materials. This is an additional revenue stream for the company.

This is a penny stock that should be on your 2022 investment watchlist.

To know more, check out Ador Fontech's latest quarterly results and its financial factsheet.

Update: For financial year 2021-22, Ador Fontech more than doubled its profits. It reported a net profit of Rs 214 m as compared to last year's Rs 100.4 m.

The company remains a zero debt company.

Ador Fontech is one of the companies which have announced big dividends this year. Earlier this month, it reported a final dividend of Rs 3 per share and a special dividend of Rs 1 per share.

The company is currently under the merger process with its group company Ador Welding, which is expected to complete in March 2023.

The merger will create a stronger enterprise and create value for shareholders, according to the management.

To know more, check out Ador Fontech's 2021-22 annual report analysis.

#5 Rubfila International Ltd.

Operating since 1994, Rubfila International is promoted by Rubpro Sdn Bhd, Malaysia and Kerala State Industrial Development Corporation. The company is reputed to be the largest rubber thread manufacturer in the country.

Rubfila International declared a turnover of Rs 2.7 bn, the highest ever in the history of the company in financial year 2021. This was a 25.2% jump from 2020.

The export business saw a 75% spike. The reported earnings per share (EPS) of 6.5 for financial year 2021 saw an 83.5% increase compared to 2020.

The company's annual revenue growth of 23.9% outperformed its 3 year CAGR of 14%.

A PAT of Rs 1,404.1 m translated into a profit growth of 101%. The stock's dividend yield is 1.4%.

Rubfila has been on a steady growth path and has worked towards expanding its capacity over the last 8 years.

In line with its expansion strategy the company recently announced the commencement of commercial production of a new line at its unit at Madathukulam in Tamil Nadu on 8 March 2022. This triggered a stock price gain of 2% on the same day.

The numbers bear evidence that the demand for latex products have been on the rise both domestically and worldwide. This is enough to secure a place for Rubfila International as a debt free penny stock to watch out for in 2022.

Update: For financial year 2021-22, Rubfila International reported a net profit of Rs 447 m as compared to last year's Rs 334 m.

Rubfila remains a zero debt company.

The Way Forward

With over 1,000 penny stocks competing for your attention, how do you separate the men from the boys?

Individual research is a given. But it must be paired with a solid framework for shortlisting penny stocks.

Check out the balance sheet, look at the debt to equity ratio and see if the company has a track record of consistent dividend payouts for the last 5 years.

Also take a look at their book value and promoter holding. High book value penny stocks are often tracked by value investors and penny stocks with high promoter holding gives shareholders more confidence.

Penny stocks can be a great instrument to begin your investment journey. You do not need a large amount of capital to invest. You can start small and yet make a substantial profit.

Consider penny stocks as the long term stocks to buy and hold on to them for a longer duration.

But remember. Even debt free penny stocks are highly volatile. You should only play the game if you can tackle high risk. Everything depends on the right selection that can potentially deliver long term returns.

Be prepared to stick it out.

To know more, check out the below video by Co-head of Research at Equitymaster, Rahul Shah where he zeroes in on the right penny stocks to watch out for in 2022.

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FAQs on Penny Stocks

1) What are debt free stocks?

If a company does not have any debt on its balance sheet, it is said to be a debt-free stock.

Investors have a liking for debt free stocks as they have the ability to tide over higher interest rate environments.

Check out Equitymaster's Indian stock screener to find out more about debt free stocks.

2) Where can we find a list of debt free penny stocks?

You can find a list of debt free penny stocks using Equitymaster's Indian stock screener.

Debt free penny stocks usually have relatively strong cash flows and come with low risk unlike companies with high debt, which are high risk.

3) How long should I hold penny stocks?

Penny stocks are popular for delivering multibagger returns over a short period of time. However, they are more popular because their share price comes crashing down much quicker.

Penny stocks can be your best bet in the market if you're looking to create life changing wealth. But the process takes time.

Over a 10-year period, the share price of Balkrishna Industries went up 30 times. In 2011, it was a penny stock trading at around Rs 90. In 2021, the stock hit Rs 2,700.

So if you're a long term investor, be prepared to hold the stock for more than 5 or 10 years. From a short term perspective, fundamentally strong stocks can deliver market beating returns in 2-3 years.

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