Fundamentally Strong Small Cap Stocks? Our Top 10

A small matchstick is enough to burn up a whole room filled with petrol Similarly, a small-cap stock is enough to light up your entire portfolio.

But it can light up a portfolio in both ways, good and bad. Small-cap growth stocks are known for giving back huge returns. They are also known for being highly risky.

We have often heard stories of windfall gains from share markets. The star behind these windfall gains is often a small-cap stock.

We know that bluechip companies offer steady returns. But the problem with these stocks is that the share prices are already very high.

Also, as these companies are in a mature stage, the growth rate is very low.

Stocks of small companies are available at a lower price. They also have huge growth potential.

Hence, if a small-cap stock continues to grow then it can become your next multibagger stock in next 10 years.

However, these companies bear a high risk. They are in a developing stage. Hence they are either running in losses or have very high debts or have low ROE. Basically, their financial results are worrisome.

Hence wishing for smallcaps that are also fundamentally strong stocks is like being fit even after eating junk food. It's difficult to find them.

But it's possible.

You can be fit after eating junk food if you exercise well. You can find fundamentally strong small-cap stocks if you read this article.

Our Top 10 Fundamentally Strong Stocks

#1 Suumaya Industries

Originally incorporated as Richway Infrastructure, Suumaya Industries has come a long way.

From a small clothing shop in Santa Cruz East (Mumbai) to an emerging business conglomerate Suumaya Industries' journey has not been easy.

Today, Suumaya Industries operates in apparel, Agri produce value chain, logistics, retail, and supply chain.

Suumaya means a gorgeous lady in Greek. True to its name, it has given gorgeous financial results in the past 5 years. Suumaya's Income has grown at a CAGR of 100%.

The operating net profit margin and net profit have grown by 314% and 526% respectively.

2020 and 2021 were challenging years for all industries. But Suumaya found an opportunity in the face of difficulties. It turned the dreadful years into its best performing years.

Suumaya Industries reported an income of Rs 24,499 m in the financial year 2021. It is 1,063% higher compared to Rs 2,104 m, of the previous year. The financial year 2022, had also been a year filled with good numbers.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	3,774	1,750	2,107	24,499	67,542
Growth	78%	-54%	20%	1063%	176%
Operating profit	21	52	115	4,269	8,744
Operating profit margin	1%	3%	5%	17%	13%
Net profit	15	36	81	3,577	4,299
Net profit margin	0%	2%	4%	15%	64%

Source: Equitymaster

With a new generation at the helms of the business and an experienced team at the backend, Suumaya Industries is one of the emerging business conglomerates in India.

However, growing debt also means increasing debt. Suumaya Industries' debt has increased in the past three years. Suumaya also declared a bonus for shareholders in 2022.

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

#2 Ksolves India

With technology at its heart and a group of vibrant young team leaders, Ksolves India is a budding software developer in India.

With a presence in over 12 countries, Ksolves India provides services to all kinds of businesses, right from start-ups to small-size and mid-size companies.

Ksolves India is an expert in Apache Spark, Apache Cassandra, Apache NiFi, Salesforce, Machine Learning, Artificial Intelligence, OpenShift, Microservices, Penetration Testing, DevOps, etc.

Recent years witnessed a revolution in the IT sector as the demand increased for advanced technology. A clear impact of the same can be seen on the financials of Ksolves India.

For the financial year 2022 Ksolves India reported a total income of Rs 454 m. In 2018, the total income was Rs 34 m. Thus, income has grown by over 91% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 248% and 308% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	34	54	81	241	454
Growth	NA	59%	50%	196%	89%
Operating profit	1	3	11	109	204
Operating profit margin	4%	6%	13%	45%	45%
Net profit	0.6	1	6	79	152
Net profit margin	2%	3%	8%	33%	34%

Source: Equitymaster

Ksolves India is a debt free company.

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

#3 Gujarat Themis Biosyn

Incorporated in 1981 as a joint sector Company with GIIC and Chemosyn, Gujarat Themis Biosyn is India's First Company to start commercial production of the anti-tuberculosis drug Rifampicin.

This drug is a decade old. Yet no replacement has been found for the same.

Gujarat Themis Biosyn actively focuses on research and development. It aims to provide A-one drugs in India.

For the financial year, 2022 Gujarat Themis Biosyn reported a total income of Rs 1,189 m. In 2018, the total income was Rs 390 m. Thus, income has grown by over 27% in the past 5 years.

In the same period operating profit and net profit have grown at a rate of 56% and 58% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	390	433	868	938	1,189
Growth	8%	11%	101%	8%	27%
Operating profit	64	96	335	436	590
Operating profit margin	16%	22%	39%	46%	50%
Net profit	38	64	236	301	436
Net profit margin	10%	15%	27%	32%	37%

Source: Equitymaster

Gujarat Themis Biosyn's debt has also been reducing.

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

#4 Balaxi Pharma

Another Pharma stock making it to our list is Balaxi Pharma. Balaxi is an IPR-based pharmaceutical player focusing on frontier markets, with a vast and growing portfolio of prescription and OTC drugs.

It's present across multiple therapeutic segments. It aims to bring high-quality everyday medicines within the reach of populations in promising frontier markets.

For the financial year 2022, Balaxi Pharma reported a total income of Rs 2,844 m. In 2019, the total income was Rs 145 m. Thus, income has grown over 170% in the past 4 years.

In the same period operating profit and net profits have grown at a rate of 184% and 189% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY19	FY20	FY21	FY22
Total Income	145	462	2,336	2,844
Growth	NA	219%	405%	22%
Operating profit	24	88	449	558
Operating profit margin	17%	19%	19%	20%
Net profit	20	61	381	477
Net profit margin	14%	13%	16%	17%

Source: Equitymaster

However, the growth has come along with increasing debt. Balaxi Pharma's debt has increased in the past two years. But the total amount of debt is still low. The total debt for the financial year 2022 is Rs 37 m.

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

#5 Dolat Algotech

This small-cap stock is not just on our top list, but it was also listed by Forbes India in 2020, on its Best Under a Billion List.

The annual Best Under a Billion list spotlights 200 publicly listed small and midsized companies in the Asia-Pacific region with sales under US$ 1 bn.

Dolat Algotech is in the business of trading. It earns its revenues on securities, commodities & derivatives trading, and investment in stocks, commodities & derivatives.

For the financial year, 2022 Dolat Algotech reported a total income of Rs 2,892 m. In 2018, the total income was Rs 1,388 m. Thus, income has grown by over 29% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 166% and 162% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	1,388	1158	1,223	2,477	2,892
Growth	68%	-17%	6%	102%	17%
Operating profit	433	827	1,010	2,112	2,369
Operating profit margin	31%	71%	83%	85%	82%
Net profit	312	506	710	1,467	1,674
Net profit margin	22%	44%	58%	59%	58%

Source: Equitymaster

2020 was a great year for share markets, and that is clearly reflected in Dolat Algotech's financials. Even in 2019, when the sales declined, the operating profit margin and net profit margin increased.

In late 2021, the share markets started correcting. An impact of the same can be seen on the financials of Dolat Algotech. However, the reduction is marginal.

To know more about the company, check out its factsheet and news and analysis.

#6 Angel One

Earlier known as Angel Broking, Angel One is an Indian stockbroker established in 1996. The company is a member of the Bombay Stock Exchange, National Stock Exchange of India, National Commodity & Derivatives Exchange Limited, and Multi Commodity Exchange of India.

For the financial year, 2022 Angel One reported a total income of Rs 23,051 m. In 2018, the total income was Rs 7,845 m. Thus, income has grown by over 33% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 36% and 82% respectively.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	7,845	7,891	7,547	12,990	23,051
Growth	42%	1%	-4%	72%	77%
Operating profit	1,154	2,679	2,142	1,896	4,718
Operating profit margin	15%	34%	28%	15%	20%
Net profit	1,079	798	868	2,981	6,251
Net profit margin	14%	10%	11%	23%	27%

Source: Equitymaster

A clear impact of the pandemic years can be seen in the financial statements. However, Angel One's long-standing has built trust among the investors. Hence the numbers are not running negative.

Once the markets recover the number will again see a jump.

The company also has a high debt history.

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

#7 Punjab Chemicals and Crop Protection

It was established in Joint Collaboration with Excel Industries, Mumbai & PSIDC under the name of Punjab United Pesticides & Chemicals.

Punjab Chemicals and Crop Protection was listed in 1977.

Punjab Chemicals has a comprehensive product portfolio, strong brand presence and a wide distribution network. All its products are manufactured using international standards in both domestic and international markets.

For the financial year 2022, it reported a total income of Rs 9,344 m. In 2018, the total income was Rs 5,373 m. Thus, income has grown by over 12% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 11% and 233% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	5,043	6,495	5,627	6,800	9,344
Growth	-6%	29%	-13%	21%	37%
Operating profit	275	526	730	556	973
Operating profit margin	5%	8%	13%	8%	10%
Net profit	172	168	108	491	835
Net profit margin	3%	3%	2%	7%	9%

Source: Equitymaster

The company has come a long way from negative profit margins and high debt. Since the agriculture industry is a prime business sector in India, Punjab Chemical has a long runway.

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

#8 India Pesticides

Another agriculture-related stock on our list is India Pesticides. It is an R&D-driven agrochemical producer of technical with a developing formulation business.

It manufactures herbicides, fungicide technical, and active pharmaceuticals ingredients (APIs). It is the sole Indian manufacturer of several technicals i.e. Folpet, Thiocarbamate, and Herbicide.

For the financial year, 2022 India Pesticides reported a total income of Rs 7,293 m. In 2018, the total income was Rs 2,507 m. Thus, income has grown by over 31% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 39% and 48% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	2,507	3,460	4,897	6,554	7,293
Growth	NA	38%	42%	34%	11%
Operating profit	580	706	1,037	1,895	2,186
Operating profit margin	23%	20%	21%	29%	30%
Net profit	328	439	707	1,345	1,583
Net profit margin	13%	13%	14%	21%	22%

Source: Equitymaster

The total debt of the company has been reduced since its listing. Its total debt in the financial year 2022 stood at Rs 302.9 m.

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

#9 Cosmo First

In 2022, Cosmo Films changed to Cosmo First. It's an Indian multinational corporation that manufactures bi-axially oriented polypropylene films. This is used for packaging, label, lamination, and industrial applications.

The company is headquartered in New Delhi, India. Its manufacturing units are in India and South Korea.

Involved in the packing business Cosmo First has also packed some very good numbers on its financial statements.

For the financial year, 2022 Cosmo First reported a total income of Rs 30,867 m. In 2018, the total income was Rs 18,810 m. Thus, income has grown by over 14% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 17% and 36% respectively. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	18,810	21,767	22,230	23,229	30,867
Growth	17%	16%	2%	4%	33%
Operating profit	1,692	1,676	1,814	2,805	4,296
Operating profit margin	9%	8%	8%	12%	14%
Net profit	644	611	1,134	2,369	3,966
Net profit margin	3%	3%	5%	10%	13%

Source: Equitymaster

However, the increasing debt levels of the company may be a sign of caution for investors.

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

#10 Fiem Industries

Fiem Industries Ltd is one of the leading manufacturers of automotive lighting & signalling equipment and rear-view mirrors.

It's in the business of manufacturing auto components. These are mainly lighting and signal equipment, rear-view mirrors, prismatic mirrors, sheet metal parts, moulds, and block and dies. It sells to two-wheeler and four-wheeler firms.

For the financial year, 2022 Fiem Industries reported a total income of Rs 15,573 m. In 2018, the total income was Rs 12,243 m. Thus, income has grown by over 9% in the past 5 years.

In the same period, net profits have grown at a rate of 23%. Thus, the financials show a stellar performance.

Financial Snapshot of the company

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	12,443	14,500	13,817	12,243	15,573
Growth	22%	17%	-5%	-11%	27%
Net profit	526	566	787	469	942
Net profit margin	4%	4%	6%	4%	6%

Source: Equitymaster

The auto sector was one of the worst hit sectors in the pandemic. However, Fiem Industries has managed to keep the profit numbers in the green.

With the auto sector finally reviving and the opportunity in the EV sector, Fiem Industries stands on the edge of huge growth potential.

The stock has fallen 46% in the last year.

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

These are our top 10 strong small-cap stocks. All these companies exhibit huge growth potential. Of course, all these companies exhibit some weaknesses too.

However, we think the pros outweigh the cons.

The secret of successful investing is balancing the portfolio between the large, mid, and small-cap stocks. Hence investors must carefully analyse their risk and reward expectations before they decide to buy small-cap stocks.

Small-cap stocks are the first ones to be hit by a slowing economy and a correction in the share markets.

So if an investor is ready to bear that risk, only then he should think about small-cap stocks.

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...

FAQs

1) What are smallcap stocks?

The Indian market regulator's rules state that all the companies that are ranked from the 251st position onwards in terms of market cap are automatically categorised as small-cap companies.

In terms of market capitalisation, small-cap stocks are companies that have a market capitalisation of less than Rs 50 bn. These companies are relatively smaller in size and have significant growth potential.

Small-cap stocks are often referred to as emerging market or frontier market stocks, as they tend to be more volatile than large caps. However, this volatility also means that small-cap stocks offer investors the chance to make potential multibagger returns over a shorter time frame.

You can succeed at the game of investing in smallcap stocks if you focus on long-term business quality, the quality of the management, and margin of safety in valuations. This will give you an edge and there's a good chance the smallcap stock you pick today grows to be a future midcap.

You can use Equitymaster's powerful Indian stock screener to filter out the best smallcap stocks.

2) How to find fundamentally strong smallcap stocks?

To know if a company is fundamentally strong, it is important to look at its earnings, profit margins and growth rate. The strength of these parameters will help you determine whether the company is worth investing in or not.

Here are some tips for finding fundamentally strong smallcap stocks:

1) Look at the company's financials such as profitability, debt-to-equity ratio (D/E), return on equity (ROE), etc., before deciding on an investment

2) Check whether the company has enough cash reserves to support its long-term plans or not.

3) Also look at how quickly the company is growing revenue and profit margins. Pick only those stocks that have been performing well for at least three years, ideally five years or more.

3) Is it good to buy small-cap stocks?

The answer to this question depends on your investment objective and risk appetite.

Smallcap stocks carry higher risks due to high volatility and relatively low liquidity. However, if chosen well, fundamentally strong small-cap stocks could potentially offer massive returns in the long run.

If you are looking for short-term gains, then it is better not to invest in smallcaps because they are highly volatile. Investors should have a long-term view when investing in small cap stocks.

When it comes to picking stocks, we recommend to:

• Focus on sectors and industries that are going through a structural upcycle, and enjoy inelastic demand. Think of sectors like FMCG, pharma, packaging, e commerce, and companies benefitting from digitalization of the economy.
• Focus on niche leaders that are critical suppliers in the economy and enjoy better cost advantage and economies of scale as compared to competitors.
• Stick to companies with healthy financials, the ones with low debt or debt free balance sheets and good liquidity.
• Look for managements that are competent, ethical, and have shown prudence in navigating the crisis well in the past.

Last but not the least, look for margin of safety in valuations.

For more details, check out Equitymaster's asset allocation guide to decide where to safely park your funds.