Best Smallcap Stocks for Long Term? Here are 5 to Watch Out

Let us start right away by explaining why small-cap stocks are the right fit if you're willing to hold them for several years.

36% of the stocks in the mid-cap index today, belonged to the small-cap index 10 years ago.

This stat shows the potential of good businesses in the smallcap space.

But you should be comfortable with their stock price fluctuating greatly. The upward journey will not be unidirectional. There will be sharp corrections in between that you won't be able to predict or dodge.

If you are obsessed or spooked by these daily corrections or volatility, long-term investing is not for you.

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

Keeping that thought in mind, here's a list of five smallcap stocks that should be on your watchlist.

#1 Avantel

First on our list is Avantel, a company engaged in the business of designing, developing, and maintaining various wireless products for the aerospace and defence sector.

It has an established track record of over two decades in the electronics and telecom equipment business. This has enabled Avantel to offer a unique combination of embedded systems, as well as radio frequency systems used in the civilian telecom segment.

Having an established position sure comes with synergies as Avantel has tied up with Bharat Electronics for supplying subsystems in relation to the Indian defence orders.

What makes Avantel different from peers is its in-house R&D facility, which is certified by the Department of Scientific and Industrial Research (DSIR). In financial year 2021-22, Avantel spent approximately Rs 90 m on R&D.

The company has laid out a growth plan for the next two years where it plans to set up a new manufacturing unit by financial year 2024.

As far as financials stand, the company has been witnessing steady growth on the back of high value projects. Its revenue has grown at CAGR (compound annual growth rate) of 26% in the last five years while net profit has grown at a CAGR of 86%.

For the financial year 2022, the company saw a 35% YoY increase in revenue at Rs 1.1 bn. It reported a 18% YoY increase in net profit.

Financial Snapshot of Avantel

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenues	517	505	519	777	1,049
Growth (%)	54%	-2%	3%	50%	35%
Operating Profit	267	150	166	230	291
OPM (%)	52%	30%	32%	30%	28%
Net Profit	173	95	108	153	192
NPM (%)	33%	19%	21%	20%	18%
Total Debt	-	-	-	-	129
Debt to Equity (x)	0.0	0.0	0.0	0.0	0.15
Dividend per share (Rs)	4.0	5.0	4.0	4.0	4.0
ROE (%)	60.1	23.8	22.7	26.0	25.6
ROCE (%)	72.6	32.3	29.3	34.0	30.9

Data Source: Ace Equity

In 2023, the company expects revenue of its HF vertical to grow in view of the growing demand for indigenous HF (high frequency) systems. It expects to offer various configurations of indigenous HF equipment to customers in India.

Due to the government's increased capital outlay on the defence sector and emphasis on domestic sourcing, the company stands to benefit.

Going forward, Avantel's revenues are expected to remain near the peak as the company has received repeat orders from existing clientele. Currently, the company has an unexecuted order book of Rs 2.3 bn to be executed over the next two years.

If we consider Avantel's five-year performance, the shares of the company have gained 340% in the said period.

#2 Supriya Lifescience

Second on the list of small-cap stocks for long term we have a newly listed company from the pharma sector.

Supriya Lifescience is engaged in the manufacturing of active pharmaceutical ingredients (APIs). The company focuses on diverse therapeutic areas and niche products offerings of 38 APIs focused on diverse therapeutic segments.

The company is a market leader in the segment it operates. It has consistently remained the largest exporter of chlorpheniramine maleate, and ketamine hydrochloride from India.

Due to its established presence, the company is able to command a premium price over its competitors.

The company has, over the years widened its footprint to around 86 countries across the world. As the company has a significant exposure in Europe, its shares have taken a huge hit this year.

Another reason for its underperformance is a change in top management. In September 2022, the company's CEO resigned.

As far as financials go, Supriya Lifescience is as clean as they come. The company's sales grew by around 35% in 2022 supported by increase in sales volume across key geographies.

At a time when margins for almost all API players have shrunk drastically, the company's performance, both in terms of topline growth and profitability, has been resilient. This could be due to its backward integrated business model and market leadership in exports for niche APIs.

Financial Snapshot of Supriya Lifescience

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenues	2,129	2,778	3,116	3,912	5,300
Growth (%)	16%	30%	12%	26%	35%
Operating Profit	306	728	1,095	1,782	2,216
OPM (%)	14%	26%	35%	46%	42%
Net Profit	87	394	734	1,236	1,518
NPM (%)	4%	14%	24%	32%	29%
Total Debt	1,304	898	822	701	213
Debt to Equity (x)	2.4	1.0	0.6	0.3	0.03
Dividend per share (Rs)	0.0	0.0	2.0	0.5	0.6
ROE (%)	18.4	53.1	60.4	59.2	34.3
ROCE (%)	13.8	36.5	49.7	60.1	43.3

Data Source: Ace Equity

#3 PSP Projects

Third on our list, we have PSP Projects.

The company offers diversified range of construction and allied services across industrial, institutional, government, government residential, and residential projects in India.

The USP of PSP projects is that it does not own a land inventory or take up typical developer's work. The company executes construction projects. The onus of securing land and site approvals is up to the client.

Further, it evaluates the client's capacity to pay. And always secures mobilisation advance (almost 5% -10% of the contract value) from the client.

It's evident by now that Indian government has given renewed focus to the infra segment. Growth in infrastructure is critical for the development of the economy. Hence, the construction sector assumes an important role. PSP Projects being a civil construction company, is a direct beneficiary.

Smallcap companies have laid out aggressive capex plans. PSP Projects is not an exception. It has set-up a manufacturing plant for precast concrete and allied elements near Sanad, Gujarat with a production capacity of 3 million square feet.

Shares of PSP Projects have been on a roll lately after the company announced confirmation of some big orders. Recently, the company was awarded with work orders worth Rs 1.8 bn in industrial, precast and residential segments.

The total order inflow for the financial year 2022-23 till date amounts to Rs 15.1 bn. The company has a target to take the order book to Rs 25 bn by the end of this year.

As far as financials stand, PSP has low debt which is rare for a company operating in the realty sector. Profitability has also improved to a great extent in the past one year.

Financial Snapshot of PSP Projects

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenues	7,516	10,504	14,993	12,409	17,481
Growth (%)	69%	40%	43%	-17%	41%
Operating Profit	1,232	1,713	2,150	1,516	2,802
OPM (%)	16%	16%	14%	12%	16%
Net Profit	655	894	1,285	815	1,667
NPM (%)	9%	9%	9%	7%	10%
Total Debt	302	311	798	839	997
Debt to Equity (x)	0.1	0.1	0.2	0.2	0.15
Dividend per share (Rs)	5.0	5.0	5.0	4.0	5.0
ROE (%)	32.7	26.6	31.1	16.8	27.2
ROCE (%)	43.9	40.2	40.3	21.8	35.3

Data Source: Ace Equity

The company's management is in discussion with L&T for an infrastructure project.

In the June 2022 quarter, PSP Projects faced temporary shortage of labour in UP projects as the marriage season gained ground. This resulted in lower-than-expected growth.

However, the company's management has indicated that the execution will improve substantially post-monsoon season and it maintains its target of achieving revenue of Rs 22 bn in financial year 2023.

Over the past five years, shares of PSP Projects have gained 50%.

#4 Tiger Logistics

Tiger Logistics was established in 2000 by a first-generation entrepreneur Mr Harpreet Singh Malhotra. He had prior experience of handling logistics of Hero MotoCorp and was instrumental in bringing BMW Bikes to India.

The company is a third-party logistics (3PL) player. It offers customised services in ocean and air freight forwarding, project cargo handling, custom clearances, warehousing, and transportation.

It's clients are in industries such as auto, consumer durables, infrastructure, yarns and textiles, commodities, defense, and others.

Clients Across Industries

The company has an asset light business model with 98% of its fleet hired from a network of truck vendors/operators. This model helps reducing fixed costs.

This year, in a first, the company said it will launch a price discovery and supply-chain automation platform. This will ensure efficiency and transparency in the fragmented domestic shipping industry.

Once the pilot phase kicks off, it will incorporate cargo insurance and financing, among other features on the platform. The platform will offer real-time rates, complete visibility and access to instant information about shipment updates.

As far as financials go, the company had a rough pandemic. Profits were wiped off for two years, but the company made a strong comeback.

Financial Snapshot of Tiger Logistics

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenues	3,242	3,304	3,015	1,679	6,151
Growth (%)	9%	2%	-9%	-44%	266%
Operating Profit	202	147	(67)	(83)	397
OPM (%)	6%	4%	-2%	-5%	6%
Net Profit	114	63	(123)	(124)	336
NPM (%)	4%	2%	-4%	-7%	5%
Total Debt	253	354	367	150	-
Debt to Equity (x)	0.4	0.5	0.7	0.4	0
Dividend per share (Rs)	0.0	0.0	0.0	0.0	0.0
ROE (%)	21.5	10.3	-20.9	-26.2	57.8
ROCE (%)	28.5	14.8	-8.1	-13.9	59.2

Data Source: Ace Equity

Going forward, the company looks set for a further rebound supported by government's National Logistics Policy 2022.

With backing from experienced management team, the company has the potential to scale up and expand operations across verticals and geographies.

Shares of Tiger Logistics have gained 13% in the past five years.

#5 CCL Products

Last on the list we have CCL Products.

The company is engaged in the production, trading, and distribution of coffee.

The company is the market leader, not just in India, but globally. CCL Products is the world's largest private label manufacturer with a capacity of 35,000 tonnes of instant coffee.

Now market leadership isn't much of an advantage in a highly commoditised businesses like the coffee industry. But this company has developed a strong moat in the industry. It has ring fenced itself against raw material price fluctuations.

As a result, we can see healthy and stable profit margins over the years.

Financial Snapshot of CCL Products

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenues	11,367	10,814	11,392	12,425	14,620
Growth (%)	16%	-5%	5%	9%	18%
Operating Profit	2,437	2,488	2,904	3,011	3,352
OPM (%)	21%	23%	25%	24%	23%
Net Profit	1,481	1,549	1,659	1,823	2,044
NPM (%)	13%	14%	15%	15%	14%
Total Debt	3,110	4,164	4,689	5,592	6,508
Debt to Equity (x)	0.4	0.5	0.5	0.5	0.52
Dividend per share (Rs)	2.5	3.5	5.0	4.0	5.0
ROE (%)	21.7	19.6	18.8	18.1	17.5
ROCE (%)	23.0	18.8	18.3	16.5	15.7

Data Source: Ace Equity

The business model also has many features that are hard to replicate. CCL Products does not own green coffee/raw material plantations. It has a strong sourcing network with multiple countries including India.

Add to this the high technology integration required to produce instant coffee from coffee beans and unique blends.

Being the largest supplier of instant coffee to private players, the company enjoys huge economies of scale. This allows low for cost of production and competitive pricing.

What makes CCL Products an exciting story at this point is the expected ramp up in volumes. This will be due to higher capacity utilisation and the addition of incremental capacities.

The company is taking measures such as smaller packs, agglomeration, packaging, and labelling. It's also getting into specialty coffees and the branded B2C business.

In the past five years, shares of the company have given returns of 56%.

Conclusion

Every investment carries a potential of return and risk. The key to investing successfully in any type of company, small or big, is to minimise your risks.

Focus on building a sound investment strategy. If you don't have one, start working towards it. If you do, check to see if your investments are on track and continue to reflect your investment horizon, financial situation, and risk tolerance.

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...