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  • Aug 31, 2022 - Top 5 Smallcap Growth Stocks with High ROE and ROCE

Top 5 Smallcap Growth Stocks with High ROE and ROCE

Aug 31, 2022

Top 5 Smallcap Growth Stocks with High ROE and ROCE

Investing in stocks without analysing the profitability ratios of a company is like going out for a road trip without checking the fuel in the tank.

Just like one cannot predict how long a vehicle with run without looking at the fuel tank, one cannot get an idea of how long a company will run without looking at its profitability ratios.

Profitability ratios include return on equity (ROE), return on capital employed (ROCE), and return on assets (ROA).

A combined analysis of these ratios indicates how effectively and efficiently a company is using its capital. Hence, while investing in stocks, it is important to analyse these ratios.

This becomes even more relevant when it comes to investing in smallcap stocks.

Here you are investing in companies that are very young in their journeys. They are away from the attention of big investors.

Only a few companies in the entire listed space are likely to do well on all these metrics. Those stocks deserve your attention.

Today, we are going to talk about 5 such smallcap growth stocks that score well on return ratios too.

Let's get started...

#1 Cosmo First

In 2022, Cosmo Films changed its name to Cosmo First. The company is an Indian multinational corporation that manufactures bi-axially oriented polypropylene films. This is used for packaging, labelling, lamination, and industrial applications.

This packaging company is also packed with good financials. Cosmo First's revenues have grown quickly. Even after the fall in revenues due to Covid-19, the revenues have quickly escalated.

In the last five years, revenues have grown by 14% on a CAGR basis.

All the profitability ratios also paint a positive picture. ROA, ROE, and ROCE have generously increased over the years.

The average ROE and ROCE of Cosmo First in the past five years are 21% and 17%, respectively.

Financial Snapshot

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 1,676 1,814 2,805 4,296 6,197
Operating profit margin 9% 8% 13% 18% 20%
Net profit 644 611 1,134 2,369 3,966
Net profit margin 3% 3% 5% 10% 13%
Return on Assets 3.90% 3.40% 6.00% 11.80% 16.30%
Return on Equity 10.90% 9.50% 16.10% 30.00% 39.00%
Return on Capital Employed 8.90% 8.80% 14.30% 23.60% 30.80%
Source: Equitymaster

For the last 22 years, Cosmo First has consistently paid dividends.

It paid a dividend of 350% for the year ended March 2022. Its dividend per share was Rs 35.

Over the last five years, the dividend per share has averaged Rs 17. Its end-of-year (EOY) dividend yield is 2%.

The dividend payout ratio for the year was 16%. The 5-year average stands at 19.6%.

Cosmo First Dividend Payout History

Year End Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Face value (Rs) 10 10 10 10 10
Dividend (%) 60 60 150 250 350
Dividend per share (Adj.) (Rs) 4.2 4.2 10.7 16.7 23.3
Dividend payout ratio (%) 18.1 19.1 25.7 19.2 16
Dividend yield (%) 2.4 3.1 7.2 4 2
Source: Equitymaster

Cosmo First total debt for financial year 2021-22 was Rs 8,100 m, which is quite high. Over the past five years Cosmo First's total debt has increased by 5%.

However, Cosmo First's debt to equity ratio has reduced over the past five years. It's latest debt equity ratio is 0.7.

To know more, check out Cosmo First factsheet.

#2 Maithan Alloys

Incorporated in 1984, Maithan Alloys is engaged in the manufacture of manganese alloys. It manufactures ferro manganese and silica manganese.

Maithan Alloys' plants are located in Kalyaneshwari and Meghalaya. The company also has a windmill at Jaisalmer, Rajasthan, and Sangli, Maharastra.

Total revenues of Maithan Alloys dropped significantly in the Covid-19 affected period. However, its profits were reduced marginally.

Over the past 5 years, its total revenues have grown by 17%.

Maithan Alloy's profitability ratios are quite high. The lowest reported ROE in the past five years is 16.4%, which is quite high.

Its profitability ratios have also jumped back in the financial year 2021-22. The average ROE and ROCE of Maithan Alloys in the past five years are 27% and 34%, respectively.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 18,960 20,141 18,970 16,438 30,246
Growth 40% 6% -6% -13% 84%
Operating profit 3,993 3,507 3,010 3,183 11,003
Operating profit margin 21% 17% 16% 19% 36%
Net profit 2,918 2,552 2,220 2,300 8,180
Net profit margin 15% 13% 12% 14% 27%
Return on Assets (ROA) 27.60% 18.70% 14.70% 13.50% 29.70%
Return on Equity (ROE) 40.20% 25.80% 18.50% 16.40% 34.80%
Return on Capital Employed (ROCE) 48.60% 33.00% 23.60% 21.10% 45.50%
Source: Equitymaster

For the last 15 years, Maithan Alloys has consistently paid dividends.

It paid a dividend of 60% for the year ended March 2022. Its dividend per share was Rs 6.

Maithan Alloys Dividend Payout History

Year End Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Face value (Rs) 10 10 10 10 10
Dividend (%) 30 60 60 60 60
Dividend per share (Adj.) (Rs) 3 6 6 6 6
Dividend yield (%) 0.4 1.2 1.7 1.1 0.6
Source: Equitymaster

FIIs had been steadily increasing their stake in Maithan Alloys. However, in June 2022 FIIs reduced their stake by 0.8%.

Maithan Alloys' has also significantly reduced its debt. Its current debt-equity ratio is zero.

To know more, check out Maithan Alloys latest shareholding pattern.

#3 Supriya Lifescience

Established in the year 1987, Supriya Lifescience is a global leading manufacturer of active pharmaceutical ingredients (API). It also focuses on products of various therapeutic segments like - Anti-Histamine, Anti-Allergic, Vitamins, Anaesthetics, Anti- Asthmatics, etc.

Supriya Lifescience's revenues have grown steadily. Over time, its profits have also grown, except in the financial year 2021-22. Over the past 5 years, its revenues have grown by 23%.

Profitability ratios have jumped significantly higher in the financial year 2018-19.The ratios remained high since.

The average ROE and ROCE of Supriya Lifescience in the past five years are 45% and 41%, respectively.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 2,215 2,862 3,227 3,962 5,376
Growth 16% 29% 13% 23% 36%
Operating profit 306 728 1,095 1,782 2,216
Operating profit margin 14% 25% 34% 45% 41%
Net profit 87 394 734 1,236 1,518
Net profit margin 4% 14% 23% 31% 28%
Return on Assets (ROA) 3.60% 15.80% 24.90% 31.60% 25.70%
Return on Equity (ROE) 18.40% 53.10% 60.40% 59.20% 34.30%
Return on Capital Employed (ROCE) 13.80% 36.50% 49.70% 60.10% 43.30%
Source: Equitymaster

Supriya Lifescience has paid nine dividends from 2011 to 2022.

It paid a dividend of 30% for the year ended March 2022. Its dividend per share was Rs 0.6.

Supriya Lifescience Dividend Payout History

Year End Mar-20 Mar-21 Mar-22
Face value (Rs) 10 2 2
Dividend (%) 100 27 30
Dividend per share (Adj.) (Rs) 0.4 0.5 0.6
Dividend payout ratio (%) 4 3.2 3.2
Dividend yield (%) 0 0 0.1
Source: Equitymaster

While businesses over the world were suffering because of Covid-19, there was one sector that was running in profits - the pharma sector.

An effect of that could be seen in the financials of Supriya Lifescience. Hence, in the financial year 2021-22, a slight decline can be seen.

However, the decline is not alarming. Covid-19 could have been the push that Supriya Lifescience needed to thrive.

#4 Tips Industries

Tips Industries is one of India's largest entertainment companies having a presence (along with its subsidiaries) in music, film production, film distribution, and artist management.

Tips Industries which started as a trading firm in the pre-1980s has grown to become a leading entertainment company in India in 3 decades.

An obvious impact of the lockdown can be seen in the revenues of Tips industries. Its revenues reduced significantly in the financial years 2019-20 and 2020-21.

Interestingly, even though the revenues have reduced significantly, its profit has increased. Its profit rose significantly in the financial years 2019-20 and 2020-21.

Over the past 5 years, revenues have increased by 16%.

The profitability ratios were stagnant for the financial year 2017-18 and 2018-19, but after that, the ratios increased sharply.

The average ROE and ROCE of Tips Industries in the past five years are 27% and 38%, respectively.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 499 2,077 1,088 954 1,388
Growth -25% 316% -48% -12% 45%
Operating profit 120 108 158 601 894
Operating profit margin 24% 5% 15% 63% 64%
Net profit 31 28 113 435 646
Net profit margin 6% 1% 10% 46% 47%
Return on Assets (ROA) 1.90% 1.90% 11.50% 32.60% 36.50%
Return on Equity (ROE) 4.50% 4.10% 15.00% 47.90% 63.40%
Return on Capital Employed (ROCE) 8.90% 10.30% 18.10% 64.50% 87.10%
Source: Equitymaster

For the last 14 years, Tips Industries has consistently paid dividends.

It paid a dividend of 20% for the year ended March 2022. Its dividend per share was Rs 2.

Over the last five years, it has averaged a dividend per share of Rs 7.5.

Tips Industries Dividend Payout History

Year End Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Face value (Rs) 10.0 10.0 10.0 10.0 10.0
Dividend (%) 20.0 20.0 15.0 10.0 10.0
Dividend per share (Adj.) (Rs) 2.0 2.0 1.5 1.0 1.0
Source: Equitymaster

Tips Industries has significantly reduced its debt. Currently, its debt-equity ratio is zero.

Its financial performance has improved over time even when the sales have dropped. It indicates the deep roots of Tips Industries.

#5 Vidhi Specialty Food Ingredients

Vidhi Specialty Food Ingredients is a leading manufacturer of superior synthetic food grade colours.

Its colours are being distributed and consumed in over 80 countries across all six continents. Its manufacturing facilities are spread over an area of 176,000 square feet, located in Dhatav Village of Raigad District in the state of Maharashtra.

Vidhi Specialty Food Ingredients' sales grew generously over the past five years except for the financial year 2019-20.

Over the last five years, its revenues have grown by 23%.

Its profitability ratios have also increased gradually. The average ROE and ROCE of Tips Industries in the past five years are 27% and 30%, respectively.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 2,130 2,289 2,253 2,680 5,384
Growth 10% 8% -2% 19% 101%
Operating profit 319 467 512 542 860
Operating profit margin 15% 20% 23% 20% 16%
Net profit 156 291 341 367 586
Net profit margin 7% 13% 15% 14% 11%
Return on Assets (ROA) 9.40% 16.90% 18.00% 16.90% 16.70%
Return on Equity (ROE) 21.90% 32.70% 29.60% 25.30% 27.00%
Return on Capital Employed (ROCE) 23.60% 33.30% 31.40% 28.90% 35.10%
Source: Equitymaster

For the last ten years, Vidhi Specialty Food Ingredients has consistently paid dividends.

It paid a dividend of 80% for the year ended March 2022. Its dividend per share was Rs 0.8.

Vidhi Specialty Food Ingredients Dividend Pay-out History

Year End Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Face value (Rs) 1 1 1 1 1
Dividend (%) 80 80 100 80 80
Dividend per share (Adj.) (Rs) 0.8 0.8 1 0.8 0.8
Source: Equitymaster

Vidhi Specialty Food Ingredients has gradually reduced its debt. Over the past five years, it has reduced its debt by 13%.

Its current debt-to-equity ratio is 0.2.

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

Investment Takeaway

Ice creams are tasty, richly flavoured, and the perfect stress buster dessert. But one cannot simply ignore the health hazards of ice cream.

Similarly, smallcap stocks have huge growth potential, but they come with high risks too. One cannot simply ignore the cons of smallcap stocks for the pros.

When markets are volatile, smallcap stocks are the first ones to get hit.

The volatility of 2022 had shaken up even the bluest of bluechip stocks. For example, the mighty fall of Indian IT stocks.

Also, take a look at the table below which shows the performance of the stocks we listed out.

Despite having so many pros, they are barely surviving the volatility of 2022.

YTD Performance

Company Name Closing on 31-08-2022 Closing on 31-12-2022 YTD Performance
Cosmo First 918.8 1398.3 -34%
Maithan Alloys 1038 1013.4 2%
Supriya Lifescience 354.8 483.5 -27%
Tips Industries 1575.1 1,851.50 -15%
Vidhi Specialty Food Ingredients 391.2 395.7 -1%
Data source: BSE

Hence, when investing in smallcap stocks, investors should keep in mind that smallcap stocks come with a 'handle-with-caution' sign too.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Safe Stocks to Ride India's Lithium Megatrend

Lithium is the new oil. It is the key component of electric batteries.

There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.

So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.

If you're an investor, then you simply cannot ignore this opportunity.

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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...

Equitymaster requests your view! Post a comment on "Top 5 Smallcap Growth Stocks with High ROE and ROCE". Click here!

1 Responses to "Top 5 Smallcap Growth Stocks with High ROE and ROCE"

Pushpendra

Jan 14, 2023

Richa u r true YTD performance pointing negative returns in some of yr small despite good growth..indcating &cautioning.

But its after all this pack that gives hefty retuns over 10-15 years.. outbeating large one ..

As every companies grow it grows out of small cap midcap and then to large cap..be it infosys,Hcl,Hdfc anything..what is needed is there sustained growth.

So better u gives yr recommendation that fair so in last 20 years..

When I was buying Honeywell at 1250 ,Navin fluro at 250 Mrf at 1750 ,Srf at 88 in 2003-06 as against then large cap every one had doubts...but all of them had given huge retrun overtime..

I belives in growth story pays hefty...so continue yr best .we will not hesitate to invest by volitality for proven growth..goodluck

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