Top 5 Undervalued Smallcap Stocks to Watch Out for in FY25

The BSE Smallcap Index is on a roll.

The index is up 7% in 2024 against a 3% rise in the Sensex.

The small-cap segment has demonstrated potential for growth, with some stocks in the index more than doubling in value since the previous budget.

As many as 400 small-cap stocks gave double-digit returns of up to 52% in the week ended 5 April 2024.

The rally in these stocks indicate the unprecedented faith of retail investors even though market regulator has voiced concerns over potential price manipulations in the SME segment and the building froth in the smallcap space.

While the smallcap universe is showing no signs of fatigue, money managers are growing cautious about returns in FY25. Most money managers see returns moderating in FY25, compared to FY24.

However, within this segment of the market, there are still undervalued opportunities with potential for significant growth.

Here are five such stocks that display promising potential for growth and value appreciation in the upcoming year.

#1 Maharashtra Seamless

First on our list is Maharashtra Seamless, the flagship company of the well-diversified DP Jindal Group.

The stock is trading at price to earnings (PE) ratio of 11x. This is 8% lower than its 5 year-average of 12x.

The company manufactures an extensive range of seamless pipes, primarily used in oil exploration boilers and pipelines. Apart from pipes, the company has diversified into renewable power generation.

It enjoys a 55% market share in the seamless pipes segment serving a wide variety of industries from agriculture and chemicals to engineering and oil and gas.

On a CAGR (compound annual growth rate) basis, Maharashtra Seamless has generated revenue and net profit growth of 16.7% and 44.2%, respectively in the past five years (2019-23).

Despite a stellar performance, the PE ratio indicates that the stock has room for growth. The company's strong belief in future growth, backed by a robust order book, instils confidence.

Besides, the outlook of the seamless segment is bright. The global seamless pipes market should grow well, driven by a resurgence in exploration & production activity in the oil & gas sector.

Another key driver is the growing demand from the sugar and chemical industries.

Apart from this, the government initiatives to boost the oil and gas sector will also help expand demand growth. The government of India has also announced specific policies for pipe manufacturers and the Make in India and Aatmanirbhar Bharat policy.

The company is currently in the process of amalgamating its fully owned subsidiary, USTPL. Absorbing this will drive up the independent business capacity by more than 40%. Moreover, it will result in cost optimization for both entities and is likely to create synergies going forward.

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

#2 Satia Industries

Second, on our list is Satia Industries.

The stock's current PE stands at 5.5x, which is 40% lower than its long-term average of 9.3x, making it undervalued.

Satia Industries is one of the leading wood and agro-based paper manufacturers in India, with a fully integrated manufacturing setup. The company supplies paper directly to various state boards, accounting for over 40% of the business. It enjoys a 10-12% market share in the state orders.

The state orders are tender driven, funded by the government and generate higher margins, in comparison to the paper sold in the open markets.

The business has been reporting stronger numbers and is likely to grow at a strong pace. In recent years, the company's business has expanded significantly.

Between 2019-23, the sales have grown at a CAGR of 26.7% in the past four years, while net profit has grown by 21.6% during the same time.

With a strong lineage in the business, the company is well-poised to benefit from the country's literacy mission. It also has a dominant foothold in the market.

Despite the challenging demand environment, the company has strong orders in hand for March 2024 quarter. It holds leverage through its orders from the state textbook board, which serves as a buffer against these impacts.

A robust order book underpins its revenue projections for the next quarter.

With respect to capex, the company has successfully completed the wood pulping modernisation capex. Although the facility has commenced operations, the management anticipates realising its full advantages in FY25.

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

#3 GE Shipping

Third, on our list is GE Shipping.

The stock is another undervalued gem, available at a PE of 5.7x. This is below its 5-year average of 6.35x.

The company is a major player in the Indian shipping and oil drilling services industry.

It offers a wide range of services, including the transportation of crude oil, petroleum products, gas, and dry bulk commodities in its shipping division, as well as carrying out offshore exploration and production (E&P) activities through its 100% subsidiary Greatship (India) Limited.

The company also has a global presence through its subsidiaries across the world.

GE Shipping's revenue has risen at a CAGR of 16% in the last three years on the back of a n increase in demand while the company's net profit has grown at a CAGR of 205%.

The company's prospects seem bright for the near future.

It recently signed a contract to buy a medium range (MR) product tanker of about 51,486 deadweight tonnage (dwt) on 28 March 2023. The 2013 built vessel is expected to join the company's fleet by the June 2024 quarter.

Additionally, the company had contracted to buy a MR product tanker in February 2024, which is also due for delivery during the same quarter. Post delivery, the company will have 44 vessels aggregating 3.46 m dwt.

It also received approval from its board to establish a ship leasing unit within the International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City (GIFT City).

Ship leasing has emerged as a preferred alternative to outright purchase for companies seeking flexibility and cost-efficiency in managing their fleets.

By venturing into ship leasing, the company aims to tap into this growing market demand while capitalizing on the favourable regulatory environment and tax benefits provided within IFSC.

To know more, check out GE Shipping financial factsheet and its latest quarterly results.

#4 Best Agrolife

Fourth on our list is Best Agrolife, a pesticides and agrochemicals company.

The stock is available at more than a 50% discount. It is trading at a PE ratio of 9.35x. Its 3-year average stands at 19.7x.

Formerly known as Sahyog Multibase, the company is a leading agrochemicals manufacturer in India and among the top 15 agrochemicals companies in the country.

It's one of the fastest growing manufacturers of technicals, formulations, intermediates, and public health products.

Best Agrolife has seen its revenue grow at a CAGR of 63% in the last five years on account of an increase in demand along with better product-mix leading in better sales realisation. The company's net profit has grown at a CAGR of 157% during the same period.

Despite industry headwinds, Best Agrolife expects 25-30% growth with a 20% EBITDA margin for FY24. The company expects significant revenue growth from its new products.

The company has launched Tricolor, a patented product for crop disease, which is expected to be a significant contributor to growth in the next two years.

It has also achieved groundbreaking innovation with its subsidiary Seedling India, obtaining patents for revolutionary inventions in rice cultivation.

Besides this, the company has acquired a stake in Kashmir Chemical to expand its manufacturing capacity and meet growing market demand.

It is focused on expanding its international business and exploring opportunities in Southeast Asia, South America, Africa, and the Middle East.

To know more, check out Best Agrolife financial factsheet and its latest quarterly results.

#5 Kaveri Seed Company

Last on our list is Kaveri Seed Company.

Shares of the company are available at a PE ratio of 12.2x, which is 32% lower than the 10-year average of 17.9x

The company specialises in hybrid seeds in key Indian crops. It commands about 10% market share in the Indian market. It's one of the top three seed companies in India.

It's the second largest producer of hybrid cotton seeds in India, one of the top three in maize, and among the top five in the key non-cotton crops such as rice.

The company's market share stands at 8-9% in maize, 10-11% in hybrid rice, and 10-12% in selection rice. It plans to recover market share in cotton and pearl millet. It also plans to focus on R&D for main crops contributing to 80-85% of sales.

Kaveri Seed Company's revenue has grown at a CAGR of 5% in the last five years while net profit has grown at a muted rate.

However, going forward, the management expects export revenue to cross Rs 1 bn in the next three to four years. It expects revenue to reach Rs 20 bn from the current base by FY30, with 30% from exports and 70% from domestic business.

Non-cotton volumes are expected to contribute around 70% while cotton around 30%.

With respect to margins, it expects operating margins to be between 27% to 28%. with cotton margins at 15% to 18% and non-cotton at 35% to 40%.

To know more, check out Kaveri Seed Company financial factsheet and its latest quarterly results.

Conclusion

Undervalued stocks often fly under the radar of mainstream investors, presenting valuable opportunities for those who pay attention.

The performance of the BSE Smallcap Index in 2024 further supports the notion that small-cap stocks have the potential for substantial growth. As witnessed by the index's positive trends and significant appreciation of certain stocks, the small-cap segment continues to offer value.

Investors should keep in mind that the market can be volatile and unpredictable. Therefore, it is crucial to stay informed and regularly monitor the performance of these stocks to make informed decisions and capitalize on potential growth opportunities.

By keeping a watchful eye on undervalued small-cap stocks and conducting proper due diligence, investors may uncover hidden gems and position themselves for success in the dynamic world of stock investments in 2024.

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...