5 Smallcap Stocks that Could Turn into Midcaps in 2023

Did you know that some of the biggest blue-chip stocks were once smallcaps and midcaps?

Yes, a lot of successful businesses of today started small. Eicher Motors, Titan, and Infosys were all small companies a few decades ago.

Small businesses are more agile and have more room to grow in comparison to their larger peers. So once the company grabs a great opportunity, the business can quickly get on the fast track to growth.

As Warren Buffett says, "If the business does well, the stock will eventually follow."

So if the business performs well, a small-cap company can eventually swell into midcap or even a largecap over time.

Keeping this in mind, we highlight five stocks we think can grow into midcap stocks by 2023.

#1 Cosmo First

First on our list is Cosmo First.

Cosmos first is a pioneer in BOPP (biaxially oriented polypropylene) films. These films are for the FMCG sector, used in flexible packaging applications. Apart from this the company also caters to the tapes, textiles, industrial sectors.

The company is a leading player in the polypropylene segment. It has redefined its cost structure to advance as the most cost-effective player in the world. Over the years, the company has successfully restructured its business, moving from manufacturing commoditised products to specialised value-added products.

This is mirrored in the company's performance.

The company's revenue has grown at a 4 year CAGR of 13.5%. But the profitability has been robust, registering a 4 year CAGR of 57.3%. This strong growth comes on the back of capacity and margin expansion.

Cosmo's industry dominance has propelled its margins culminating into healthy and strong return ratios. The return on equity has jumped from 9.1% in the financial year ending 2019 to 33.3% in 2022.

The balance sheet is strong, sporting a debt to equity of 0.4. The company distributes dividends generously. Its 4 year average dividend yield stands at 3.5%.

Cosmo First's incredible performance should continue as the company is on the fast track to growth. It plans to spend a total of Rs 3.7 bn on expansion plans. They are expanding their capacity and venturing into new specialised products.

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

#2 Mayur Uniquoters

Next on our list is Mayur Uniquoters.

The company is a market leader operating in the synthetic leather market. They cater to the automotive, footwear, and bags industries.

It has an impressive client roster which includes original equipment manufacturers (OEM) like Chrysler, Ford, Mercedes, Honda, Nissan etc.

The business has suffered in the near term due to issues like chip shortage, rise in raw material prices, and high freight costs.

While the sales have grown at a 4 year CAGR of 4.1%, the profitability has been erratic.

However, the company is focused on turning this around, driven by a healthy demand environment, abating raw material costs and operating leverage.

It also has no debt and enjoys a strong cash flow.

The prospects for the company seem strong. The new capacity is up and running. Moreover, the aggressive plans to scale up the high margin furnishing and accessories categories combined with increased approvals from global auto OEMs should boost margins.

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

#3 Mold-Tek Packaging

Third, on our list is Mold-Tek Packaging.

A one-stop shop for packaging products, Mold-Tek is the leader in rigid plastic packaging in India. The company manufactures injection moulded containers for lubricants, paints, food, and other products.

It boasts a long-term relationship with the titans in these industries. Not only is it a key supplier to Asian Paints, but are also the largest supplier to Castrol Ltd.

Mold-Tek has enjoyed a smooth road to profitability. The company's sales have grown at a 4 year CAGR of 17.1%, while the net profit has grown at a 4 year CAGR of 23.3%.

The return on equity has also been strong, averaging 17.2% over five years. The company has rewarded its investors well, sporting a five-year average dividend yield of 1.3%.

The balance sheet is also pristine and well-poised to fund the company's expansion plans.

Mold-Tek plans to diversify into new the new domain of Injection Blow Molding. The estimated market size of this opportunity stands at a whopping Rs 50 bn.

Apart from this, it is also expanding the existing capacity and has outlined a total capital expenditure of Rs 1.2 bn for the financial year ending 2023.

The prospects for the company seem strong. The current business is booming, and the new opportunity will only enhance the substantial growth the company enjoys.

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

#4 GHCL

Fourth on our list is GHCL.

GHCL is one of the leading soda ash players in the country, with a staggering 25% market share. The company caters to the detergents, glass and ceramic industries.

The soda ash industry is a lot like the cement industry. Soda ash cannot travel distances and is produced and consumed locally. Setting up a plant is not only capital intensive but also time-consuming (up to 4 years).

These factors highlight the high barriers to entry the business enjoys, giving the strongest player a leg-up. This added advantage is mirrored in the past performance of the company.

The company's net profit has nearly doubled in four years, growing at a 4 year CAGR of 13.8%. The business is also cash rich, allowing the company to maintain a low debt-to-equity ratio of 0.1.

This allows the company to dish out dividends to its shareholders. The 5 year average dividend yield stands at 2.5%.

The company also has a small textile business which brings in 25% of the total revenues. But it is hiving it off retaining focus on the soda ash business.

GHCL is well-poised to benefit from the growing demand for soda ash led by the booming housing demand and a rapid increase in glass manufacturing.

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

#5 Nocil

Last on our list is Nocil, India's largest rubber chemical maker, with a 40% market share.

The company's products are used to manufacture rubber, which is then used for a myriad of products. The leader in the domestic market has a strong export order book, accounting for 30% of the total sales.

The company has grown its sales at a CAGR of 13.5% over the last five years. However, the company's margins have deteriorated as a result of raw material and fuel price hikes in the global inflationary environment.

The bleak margins have affected the return on equity as well. Over the years, it has fallen from 16.3% in 2018 to 12.2% in the financial year ending 2022.

Despite a weak performance, the company has not failed to reward its shareholders. Their 5 year average dividend yield stands tall at 1.6%.

The company is confident in turning the business around. With enhanced capacities in place, strong technological capabilities and a long-standing connection with domestic and global tire companies, NOCIL is well-positioned to capitalise on the upcoming opportunities.

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

In conclusion

As attractive as smallcaps look, they come with their own set of risks.

It is important to understand that the prospect of outsized returns comes in tandem with high volatility. But there is a way around it; invest for the long term.

Not only will it help you ride out any short-term market swings, but it will also give the stock time to realise its full potential.

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...