5 Fundamentally Strong Smallcap Stocks Trading Near 52-Week Lows. Do they Have the Potential to Rebound?

The Indian stock markets have been on a tear in recent months, rewarding investors with outsized returns after a tumultuous 2022.

Most stocks have soared, with some even nearing their 52-week highs. But this rising stock market tide did not take lift all its boats. A handful of stocks are still trading at their 52-week lows.

Investing in a falling stock is akin to catching a falling knife that has burned many, with investment values plummeting further. Therefore, buying the dip demands careful consideration.

However, if executed wisely, it presents a wonderful opportunity to obtain quality stocks at discounted prices, especially in the small-cap space.

Investing in small-cap stocks can be a lot like searching for hidden gems in the market. These companies, often overlooked by mainstream investors, can hold significant growth potential.

Here are 5 smallcap stocks trading close to their 52-week lows. Are they worth your attention?

Let's find out...

#1 Polyplex

At the top of our list, we have Polyplex.

Polyplex manufactures polyester films for packaging, electrical and other industrial applications. The company is an industry leader with a market share of about 25% in Thailand and Turkey, and around 10% in India, the US, and Indonesia.

The stock is trading at Rs 1,225, close to its 52-week low of Rs 1,110. It has been volatile throughout the year, swinging like a pendulum.

The first reason is the challenges the company has been facing despite a positive trend over the past few years. The combination of higher input costs, which are closely linked to crude oil prices, and a noticeable slowdown in demand due to weak market sentiment has significantly impacted profitability.

In its latest quarterly results, march ending 2023, Polyplex reported a 76% decline in net profit.

Despite these trying times, the management remains optimistic about achieving higher profitability in the future. They anticipate softening of raw material prices throughout the year.

While investors didn't mind the cyclical dip in profits, the news of the promoter stake sale didn't go down well with them. In May 2023, the promoters, who held a 50% stake in the business, decided to sell a 24% stake to AGP Holdco. AGP Holdco is a part of the Al Ghurair group, a diverse conglomerate.

The deal values Polyplex at Rs 56 bn, a 40% premium to its current marketcap of Rs 40 bn.

Polyplex Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	30.88%	-3.91%	9.43%	35.66%	13.32%
Operating Profit Margin (%)	19.58%	18.42%	25.39%	21.34%	12.00%
Net Profit Margin (%)	12.77%	10.80%	17.15%	14.34%	8.05%
Return on Capital Employed (%)	19.68%	17.92%	26.45%	29.08%	17.00%
Return on Equity (%)	21.95%	17.03%	28.35%	30.30%	10.20%

Source: Equitymaster

For the last five years, the company's sales and net profits have grown at a CAGR (compounded annual growth rate) of 16.2% and 16.7%, respectively. The Return on Equity (RoE) and Return on Capital Employed (RoCE) are at a respectable 5-year average of 22.1% and 21.6%, respectively.

It has a healthy track record of being generous to its investors with a 5-year average dividend payout of 36% and a dividend yield of 8.7%. The company has been investing in itself, expanding continuously and generating excess free cash flow for many years in a row and aims to continue at this rate.

While the company has debt on its books, the debt to equity is still reasonably low at 0.1x. The interest coverage ratio stands at 70x in the financial year 2023.

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

#2 IG Petrochemicals

Next on our list is IG Petrochemicals.

IG Petrochemicals is India's largest phthalic anhydride (PAN) manufacturer that enjoys a domestic market share of over 50%.

PAN is used as an intermediate to produce plasticisers, unsaturated polyester resins, and alkyd resins & polyols. The product finds application in consumer as well as non-consumer durable segments and is widely used for manufacturing paints, inks, coatings, boxes, containers, and packaging films.

At present, IG Petrochemicals stock is trading at Rs 463, close to its 52-week low of Rs 393.

The stock has been on a downward spiral for a year now, falling from Rs 633 in September 2022 to Rs 463 now. This poor performance is attributable to the weakness in the business, as reported by the company in the quarter ended September 2023 and the subsequent quarters.

The business has been suffering on the back of higher and volatile input costs (feedstock).

IG Petrochemicals Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	14.56%	-19.01%	6.02%	67.74%	24.18%
Operating Profit Margin (%)	17.92%	7.37%	26.87%	21.96%	14.00%
Net Profit Margin (%)	8.96%	1.97%	16.74%	14.05%	8.50%
Return on Capital Employed (%)	27.67%	5.68%	28.91%	33.25%	22.00%
Return on Equity (%)	20.21%	3.31%	25.86%	28.08%	17.50%

Source: Equitymaster

Despite the marginally compressed profitability, the company continues to lead the market. It's leading position and growing demand for chemicals have expanded its business in the past five years.

Sales and profits have nearly doubled. The 5-year CAGR is 15.4% and 6.4%, respectively. The 5-year average RoCE and RoE stand tall at 23.5% and 18.9%, respectively.

The company is confident of sustaining the business momentum in fiscal 2024 and plans to enhance 20% of its total capacity via a brownfield expansion. The company's fundamentals are intact, with a well-capitalised balance sheet in tow, to support future growth opportunities.

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

#3 PDS

Third on our list is PDS.

PDS is a textile player. It specialises in the design, development, sourcing and supplying of apparel and accessories for various global fashion brands.

The stock is trading at Rs 324, close to its 52-week low of Rs 282. The stock has been very volatile in the past year, led by a patchy operating performance.

The Indian cotton textile industry has been plagued with price volatility and high absolute raw materials prices. These issues have dented the margins of textile companies. International price differences put Indian players at a competitive disadvantage, slowing down the demand offtake.

Geopolitical tensions, currency fluctuations, and delays in trade agreements added to the industry's woes. However, the new crop season brings hope as prices stabilise, potentially boosting margins.

However, the new crop season brings hope as prices stabilise, potentially boosting margins. While demand may remain buoyant in the near term, the industry's long-term prospects remain strong.

A growing disposable income, ever-changing fashion trends and China plus one strategy serve as major tailwinds for the industry. And PDS is well-poised to benefit from this.

PDS Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	31.40%	2.65%	-6.36%	42.62%	19.20%
Operating Profit Margin (%)	2.33%	3.56%	4.51%	4.71%	4.97%
Net Profit Margin (%)	1.06%	1.32%	2.44%	3.29%	3.09%
Return on Capital Employed (%)	11.48%	13.89%	17.55%	26.55%	28.31%
Return on Equity (%)	14.78%	17.13%	25.27%	39.08%	34.95%

Source: Equitymaster

The company enjoys a strong and loyal customer base across the world. It supplies companies across the apparel value chain, from Primark and TESCO to Zara and Ralph Lauren.

One of the company's strengths is its low concentration risk, as it's not heavily reliant on a few major players. The top 10 customers together contribute to less than 6% of the total revenues, ensuring a more stable and balanced revenue stream.

The business has reported an impressive growth trajectory. While sales have grown at a CAGR of 16.5% in the past five years, the net profit is up 15 times during the same period.

PDS's remarkable growth is attributable to expanding margins, which, in turn, have driven significant improvements in return ratios. The 5-year average RoCE and RoE are 19.6% and 26.2%.

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

#4 GMM Pfaudler

Fourth on our list is GMM Pfaudler.

GMM Pfaudler is a global leader in corrosion-resistant technologies, systems, and services. The company caters primarily to the chemical, pharmaceutical, food and energy industries.

The stock is trading at Rs 1451, close to its 52-week low of Rs 1,415. The stock has been moving within a narrow range, following the release of the quarter ending December 2023 results.

The results revealed that the business has been suffering, reporting a modest 1.5% quarter-on-quarter growth in revenues and a whopping 80% dip in net profit.

The fall in net profit was led by a one-time loss on restatement of foreign borrowings (Rs 180m) and by higher commodity and energy costs. Moreover, the company reported a higher interest cost and a slowdown in investments in both chemical and pharmaceutical, dampening profitability further.

Subsequent quarters also showed elevated operating and interest costs, contributing to the stock's rangebound performance.

GMM Pfaudler Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	23.17%	16.73%	71.67%	148.61%	24.76%
Operating Profit Margin (%)	16.90%	19.73%	16.04%	11.39%	14.00%
Net Profit Margin (%)	10.01%	12.01%	6.28%	2.95%	6.73%
Return on Capital Employed (%)	29.98%	31.44%	12.64%	16.37%	25.00%
Return on Equity (%)	20.37%	23.79%	17.29%	16.16%	26.80%

Source: Equitymaster

The business hasn't performed well in the near term but its past performance has been outstanding. While the revenue is up 7 times, the net profits are up 5 times over the last 5 years.

The 5-year average RoCE and RoE are also at a commendable level of 23% and 20.9%, respectively.

GMM Pfaudler is committed to expanding its business organically and inorganically, aiming for a 15% annual growth in revenue. The company boasts a healthy order book and expects a bump in revenue and net profit over the new few quarters.

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

#5 VIP Industries

Last on our list is VIP Industries.

VIP Industries is a leading manufacturer and supplier of luggage, backpacks and handbags in the world. The company operates through 10 wholly owned manufacturing facilities in India & Bangladesh, contributing around 70% of the total revenue.

The stock is trading at Rs 599, close to its 52-week low of Rs 549. It has been on a downward trend since February 2023, falling 17% from Rs 723.

The stock's underperformance is due to several factors, with one notable incident being a fire that occurred at one of the company's factories in Bangladesh.

Although the company had full insurance coverage, it still had to account for an exceptional loss of Rs 472 m due to the fire incident.

Additionally, the company had to make provisions for doubtful debtors amounting to Rs 120 m during the quarter ending March 2023. These one-time events impacted the company's performance. It reported a loss of Rs 43 m, compared to a profit of Rs 441 m in the December quarter.

While these are a one-time occurrence, investors are still not convinced. This explains the stock's underperformance.

VIP Industries Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	26.38%	-3.70%	-61.38%	98.75%	58.34%
Operating Profit Margin (%)	12.98%	16.36%	-2.21%	12.76%	14.66%
Net Profit Margin (%)	8.01%	5.92%	-13.56%	4.68%	6.69%
Return on Capital Employed (%)	37.83%	26.51%	-14.29%	16.63%	30.29%
Return on Equity (%)	27.17%	18.82%	-17.42%	12.61%	25.85%

Source: Equitymaster

A cursory glance over the financials of the past 5 years tells us the company has a good track record of growth. Sales have grown at a CAGR of 8.1% and the net profit 3.7%. The RoCE and RoE have averaged 19.4% and 13.4%, respectively.

The management is confident of growing its business at more than 15% annually, over the next few years and aims to invest Rs 2 bn to expand its own manufacturing capacities.

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

Conclusion

A stock trading at its 52-week high or low alone does not guarantee strong returns or vice versa.

Considering stocks just because they are rising or falling in value without a solid rationale can be dangerous.

There are several instances where stocks trading at their all-time highs have performed exceedingly well, multiplying in value and vice versa.

So, if you want to invest, a better approach is to dig deeper. Do your research.

Check to see if there are any long-term triggers to growth. Study and analyse the company's fundamentals and always look for a margin of safety before investing.

Happy investing!

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...