5 Small-cap Stocks with Zero Debt

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5 Small-cap Stocks with Zero Debt

Sep 3, 2021

One of the most popular categories of stocks in the Indian share markets is smallcaps.

Smallcaps tend to have relatively lower liquidity and are more volatile. Also, because of the small size, most companies have limited disclosures compared to largecaps and midcaps, they're relatively less tracked.

However, smallcaps tend to have significant return potential. Since January 2021, the BSE SmallCap index is up by 48%, outpacing the Sensex, which is up 20% in that time.

Smallcaps with stable and strong balance sheets - with low or zero debt and decent cash flows from operations - can fare much better against their peers, both in positive and adverse times.

Such companies deserve to be a part of the stock watchlist.

Debt plays an important role in the present performance and future growth of any company.

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It's really important to know the extent of leverage in a company, especially in these challenging times, when most businesses are struggling due to the pandemic-led disruption.

Companies with low or zero debt and no interest burden stand a better chance at surviving than those with high debts.

Here is a look at the five small-cap debt free companies in India.

#1. Bhansali Engineering Polymers

Bhansali Engineering Polymers manufactures acrylonitrile butadiene styrene (ABS) and styrene acrylorinite (SAN).

These are raw materials used for manufacturing various applications related to automobiles, home appliances, telecommunications, luggage, bus body, and others.

It was the first company in India to start manufacturing quality ABS resins using foreign technology.

The company has 2 manufacturing facilities in Rajasthan and Madhya Pradesh with a total capacity of 137,000 TPA of polymers.

A major risk for the company is that it imports acrylonitrile monomers and styrene, the primary raw material for its operations. This makes it heavily exposed to the risk of foreign exchange fluctuations.

Since 2017, it has been a debt-free company. Going forward, the management expects to rely on internal accruals (reserve of profits or retention of earnings) for expansion.

Along with the debt, let's take a look at other financial parameters to get a better picture of the company's performance.

Key Parameters (2020-21)

Particulars  
Return on equity (ROE) 64.30%
Return on capital employed (ROCE) 86.10%
Cashflow from operations (Rs m) 880
EBIT margin 29.30%
Profit after tax (PAT) margin 21.90%
Price to earnings (PE) 7.3
Data Source: ACE equity

#2. Engineers India

Engineers India (EIL) is an Indian government corporation. It's under the ownership of Ministry of Petroleum and Natural Gas.

It's an engineering consultancy, and engineering, procurement, and construction company in the hydrocarbons and petrochemicals industry.

The company offers various technologies for petroleum refining and oil and gas processing.

Engineers India operates into two major segments namely consultancy & engineering projects and turnkey projects.

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For the June quarter, the company's total order book stood at Rs 75 bn year on year (YoY), down 17%.

Out of the total order book, consultancy & engineering projects accounted for 60% of its value, while the other 40% was comprised by turnkey projects.

The company's balance sheet carries no debt.

Key Financial Ratios (2020-21)

Particulars  
ROE 18.3%
ROCE 28.9%
Cashflow from operations (Rs m) 3.8
EBIT margin 21.2%
PAT margin 13.4%
PE 13.5
Data Source: ACE equity

#3. CARE Ratings

Credit Analysis & Research (CARE) Ratings is a leading credit rating agency of India.

The company provides various credit ratings to help corporates to raise capital for their various requirements as well as assist investors to form an informed decisions based on the credit risk and their own risk return expectations.

CARE entered into collaboration with four credit rating agencies from emerging markets like in Brazil, Portugal, Malaysia, and South Africa each to provide ratings and set up ARC ratings in those countries.

It also provides research services and it has been expanding its product portfolio to include newer services.

The company is exploring opportunities to provide risk management solutions and has acquired a 75.1% stake in Kalypto, a firm providing risk management software solutions in Nigeria.

At present, CARE Rating's revenues are very much concentrated on its rating business. This accounts for 97% of its revenues, compared to CRISIL and ICRA which are more diversified in terms of their revenue profiles.

The company's balance sheet is debt free.

Key Financial Ratios (2020-21)

Particulars  
ROE 16.9%
ROCE 21.3%
Cashflow from operations (Rs m) 862
EBIT margin 48%
PAT margin 36.6%
PE 23
Data Source: ACE equity

#4. VST Industries

VST Industries is a public conglomerate company. It manufactures and distributes cigarettes.

It is the third-largest player in the Indian cigarette market, with a significant presence in West Bengal, Andhra Pradesh, Telangana, Bihar, and Uttar Pradesh.

In an industry with strong entry barriers, VST has created an ideal position for itself as a leading player in lower end category industry.

It has an 8% market share in low priced cigarette segment. The company faces though competition with ITC, Godfrey Phillips, and unorganised players in the industry.

The company has a strong track record of consistent free cash flow generation.

VST has been debt free since 2003. The company has also not made investments in any other company. It has used their internal accruals for business expansion.

Here's a snapshot of its key financial ratios.

Key Financial Ratios (2020-21)

Particulars  
ROE 25.6%
ROCE 35.3%
Cashflow from operations (Rs m) 525
EBIT margin 7.6%
PAT margin 5.5%
PE 17
Data Source: ACE equity

#5. Sasken Technologies

Sasken Technologies is a specialist in product engineering and digital transformation providing concept-to-market, chip-to-cognition research and development (R&D) services to global leaders in semiconductor, automotive, industrials, smart devices & wearables, enterprise grade devices, satcom, and transportation industries.

For the June quarter, Sasken Technologies reported net profit at Rs 359.5 m YoY, up 26%. However, its operational revenue declined by 2.1% YoY in the same period.

According to the shareholding data available on the BSE, promoters hold up to 40.48% stake, while 59.43% stake is owned by the public.

Over the last 5 years, the company's market share decreased from 3.67% to 1.56%.

At the current share price, it has a market capitalisation of Rs 21.3 bn.

Over the last few years, the company has reported no debt on its balance sheet.

Take a look at the other financial parameters to get a better overview of the company.

Key Financial Ratios (2020-21)

Particulars  
ROE 22.1%
ROCE 29%
Cashflow from operations (Rs m) 1.2
EBIT margin 34%
PAT margin 25.8%
PE 20.7
Data Source: ACE equity

If you are interested in getting to know more about such companies that are debt-free, you could access the list here.

Are debt-free companies always good to invest in?

One should not blindly bet on any company. It's true that having zero debt on the company's balance sheet is a good thing because they can avoid finance or interest costs and are also likely to fare better amid tight liquidity conditions.

However, there could be cases where a firm with low or no leverage lacks growth opportunities. Hence there is no trigger for stock to offer returns.

Further, there are companies that have used debt judiciously, and have allocated capital well to position the company for growth.

As an investor, you must adopt a holistic approach. Consider the management quality, capital allocation skills, growth prospects, and margin of safety in valuations while betting on stocks.

What should an investor look at while investing in zero debt companies?

Remember, while investing in these companies there are several factors at play.

While nil or low debt on the balance sheet is a comforting factor, one must consider growth prospects in the business.

A zero debt company with no growth or business contraction is unlikely to offer great returns to investors.

If a company has the ability to manage its debt efficiently and uses it for growth, then such companies are better investment avenues than those with zero debt but restricted growth.

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...

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