5 Most Expensive Small-cap Stocks. Should You Sell?

The stock market has performed exceptionally well in the last two years. As a result the valuations of some companies have run up.

Despite the market correction, the individual valuations of some companies are still high.

Stocks trading at high valuations are usually considered expensive than the ones that are not.

Here's a list of small-cap stocks that are expensive when compared to their peers.

#1 GMM Pfaudler

First on our list is GMM Pfaudler, a market leader in glass-lined equipment in India.

The company's shares are trading at a P/E ratio of 97.3x.

GMM Pfaudler is in the business of supplying engineering equipment for critical processes. Its product portfolio includes corrosion resistant glass-lined equipment, fluoropolymers, engineered column systems, drying equipment, and heavy engineering equipment.

The company has been concentrating on reducing the cyclicality of its business by diversifying into mixing systems and filtration equipment.

It has a global presence with fourteen state-of-the-art manufacturing facilities across four continents. Of these, three are in India.

In the last three years, the company's revenue has grown at a healthy compound annual growth rate (CAGR) of 26.1%, led by growing demand. Its net profit has also grown by 7.8% during the same period.

GMM Pfaudler has always remained debt-free. However, in the last year, the debt increased as the company decided to fund its acquisitions through term loans.

As of September 2021 quarter, the debt to equity ratio stood at 1.17x.

Moreover, the promoter holding has decreased by over 20% in the last three years indicating a probable red flag.

To know more about the company, check out GMM Pfaudler's factsheet and its latest quarterly results.

#2 Indigo Paints

Next on our list is Indigo Paints, the fourth largest decorative paint company in India.

The company's shares are currently trading at a P/E of 107.

Indigo Paints is engaged in the business of manufacturing and distribution of decorative paint in India.

It has a pan India presence with a diversified product portfolio of decorative paints, including enamels, emulsions, wood coatings, primers, and putties.

The company has three manufacturing facilities in India with a capacity of 110,000 kilolitres per annum (KLPA) for liquid paints and 138,000 for putties and powder paints.

The company also has a wide distribution network of 13,200 active distributors with a significant presence in semi-urban and rural markets.

In the last three years, the company's revenue has grown at a CAGR of 10.6% driven by value and volume growth across categories. Net profit has also grown by a CAGR of 38.1% during the same time, driven by cost optimisation measures coupled with revenue growth.

Indigo Paints is a debt-free company, making it a desirable option for investors. However, the company hasn't paid any dividends.

With already a strong presence in the semi-urban and rural market, Indigo Paints is set to benefit from the growing demand in smaller towns and rural areas.

Moreover, with the real estate industry picking up pace, the company is in a sweet spot.

To know more about the company, check out Indigo Paints factsheet and its latest quarterly results.

#3 Fine Organic Industries

Third on our list is Fine Organics, the largest manufacturer of oleo chemical-based additives in India.

The shares of this company are currently trading at a P/E of 77.8x.

Fine Organics is present across the value chain from manufacturing to distribution and exporting.

The company has a portfolio of more than 400 products that find use in multiple industries, including plastic, cosmetic, coating, and food industries.

Fine Organics has a diversified and reputed customer base, including Coca-Cola, Berger Paints, Asian Paints, Britannia, and Parle.

In the last three years, the company's revenue grew only by a CAGR of 2%, mainly due to the economic slowdown. The net profit declined slightly due to higher expenses, but the company managed to keep its net margins positive.

In the financial year 2021, the company's debt to equity ratio stood at 0.1x.

Fine Organics has been consistently paying dividends. Its three-year average dividend payout and dividend yield are 18.7% and 0.5%, respectively.

Going forward, the company is set to benefit from the shift from synthetic chemicals to oleochemicals.

Though the shares look overvalued, the fundamentals of Fine Organics look strong indicating good growth prospects.

To know more about the company, check out Fine Organics factsheet and its latest quarterly results.

#4 Rossari BioTech

India's largest manufacturer of textile speciality chemicals, Rossari BioTech, is next on our list.

The shares of the company are currently trading at a P/E of 65.2x.

With over two decades of experience, Rossari BioTech is a pioneer in the speciality chemicals space.

The company has three main business segments: home and personal care, textile speciality chemical, and animal health nutrition.

It has a diversified product portfolio of 3,500 products that find use in soaps and detergents, paints, inks and coatings, ceramics and tiles, and pulp and paper.

Rossari BioTech has a total installed capacity of 252,000 metric tons (MT) spread across two manufacturing units.

It has a pan India network of over 150 dealers and 29 dealers in seventeen countries.

The revenue has grown at a CAGR of 11.6% in the last three years, driven by the home and personal care and textile speciality chemicals. The net profit has also grown at a CAGR of 20.3%.

Rossari BioTech is a debt-free company.

The company faces intense competition in the speciality chemicals segment. Hence, due to limited pricing flexibility, the margins are limited. Moreover, it's also susceptible to raw material pricing risk.

However, with a diversified product portfolio and established relationship with its customers, Rossari BioTech is expected to grow its revenue in the medium term.

To know more about the company, check out Rossari Bio Tech's factsheet and its latest quarterly results.

#5 VIP industries

Last on our list is VIP Industries, Asia's largest luggage manufacturer.

The shares of the company are trading at a P/E of 202x.

VIP industries are engaged in the business of manufacturing and marketing luggage and bags. It's the world's second-largest luggage manufacturer and has sold more than 100 m units of luggage throughout the globe.

The company caters to both premium and economy segments through its products. Its brands include VIP, Skybags, Aristocrat, Alfa, Carlton, and Caprese.

It has seven manufacturing facilities in India and Bangladesh. The company also has a Pan India distribution network of over 1,500 stores, 1,100 dealers and distributors, and 11,000 points of sales.

It's planning to expand its manufacturing capacity in Bangladesh to reduce its dependence on imports from China and cut costs.

VIP Industries' revenue declined by a CAGR of 28.1% in the last three years, mainly due to the pandemic. As the tourism industry suffered due to lockdown restrictions, the company's sales also dwindled at a fast pace.

As a result, the company reported a net loss of Rs 975 m in the financial year 2021.

VIP Industries is a debt-free company and has been paying dividends consistently except in the last fiscal due to losses.

With revenge travel picking up, the company expects to grow its revenue in the medium term. However, the promoters have reduced their share by almost a CAGR of 4% in the last three years indicating a potential warning sign.

To know more about the company, check out VIP Industries factsheet and its latest quarterly results.

Should you sell your small cap investments?

Investors either look at valuations or fundamentals of the company before investing in it.

But just because the stocks look overvalued and expensive, it doesn't mean you have to sell.

Fundamentally strong companies are worth holding onto despite being highly overvalued. This is because the future growth prospects for such companies tend to be high.

Before taking any decision, check for the fundamentals of the company and stay invested in the companies with good revenue and profit growth, low debt, and good growth opportunities.

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...