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  • Oct 6, 2022 - 5 Smallcap Stocks with Bluechip Heritage. Add them to Your Watchlist

5 Smallcap Stocks with Bluechip Heritage. Add them to Your Watchlist

Oct 6, 2022

5 Smallcap Stocks with Bluechip Heritage

Both the Sensex and Nifty are down over 2% in the past year on the back of weak global cues.

However, analysts believe the Indian stock market is unlikely to face any great challenges and will continue to outperform its global peers in the long term.

A surge in credit growth, healthy goods and services tax (GST) collections, along with continued buying by institutional investors is expected to push Indian share markets higher.

Riding this growth, will be many businesses - big and small. While the big companies will get bigger, the rise could catapult some of India's smallcap companies into the big leagues.

Here are five smallcap stocks that could be the blue chips of tomorrow. Add them to your watchlist.

#1 Supreme Industries

First on our list is Supreme Industries.

The company is the largest manufacturer of PVC pipes in India, with sales of above 4 lakh MT annually. It has a significant presence across the piping, packaging, industrial and consumer product category.

Why does Supreme Industries have the potential to be a bluechip someday?

Supreme Industries is a critical player in the economic revival of the country.

It is riding multiple tailwinds such as the infrastructure boom, rising housing demand, construction, the upturn in the capex cycle, and increasing government focus on water supply (Nal se Jal scheme with outlay of Rs 3.6 tn), and agriculture.

Now these trends are positive for all formal players in the plastic pipe and plastic processing companies. But Supreme Industries has better financials than the industry.

Despite being in a highly competitive industry, the company has been able to maintain operating profit margins (five-year average at 16.2%). In fact, in the financial year 2021, a pandemic ridden year, it reported its highest ever margins and double-digit revenue growth.

The RoE (return on equity) has also been strong (average of 28.5% over last three years) and the dividend payouts have been healthy (three-year average payout at 32.7%).

Also, it's ready to ride the trends with new product launches and an ongoing capex plan, most of which will be self-funded. The company is debt free.

With a strong distribution network, branding power, and economies of scale, the company definitely has what it takes to be a bluechip.

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

#2 CCL Products (Continental Coffee)

Second, on our list is CCL Products.

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

Why does this business make the cut?

To begin with, it 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. We see this in its healthy and stable profit margins.

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 that allow it low cost of production and competitive pricing.

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

Gradually but steadily, 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.

All these measures are likely to improve margins further without too much pressure on the balance sheet.

Without any dilution in the equity or pile up in debt, the company has more than doubled its capacities in the last decade.

Over this time, it has managed a net profit growth of 19% CAGR (compound annual growth rate) versus a sales growth of 11% CAGR.

Its cash flow from operations have been consistently positive and return on equity has expanded from 15% to 17.5%. The return on capital employed (not adjusted for tax) over this time has grown from 12.4% to 15.6%.

The company has also had minimal bad debts throughout its history.

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

#3 Oriental Carbon & Chemicals

Third on our list is Oriental Carbon & Chemicals.

The company commands a 60% share in the insoluble sulphur domestic market. It is also one of the top players globally, with 10-12% of global market share.

Insoluble Sulphur is used to 'vulcanize' rubber that goes into manufacturing tyres. Vulcanisation is nothing but heating rubber with sulphur.

Insoluble Sulphur comprises a miniscule percentage of the tyre cost. Yet it's critical to the functionality, life, and quality of a tyre. The process is highly technical and capital intensive in nature.

No wonder than OCCL is the only domestic player (60% market share) in this niche.

But what makes it a stock with bluechip heritage?

With its robust balance sheet, phased brownfield capacity expansions commissioning over next three years and recent forays in the fastest growing markets, OCCL is well set to benefit from the increase in tyre demand.

Despite catering to cyclical industry (auto) and dealing in chemicals (commodities where input price and realisations could fluctuate with demand and supply), the company has an impressive margin profile. Its lowest operating profit margin was over 19% in the financial year 2013.

The balance sheet is strong, with debt to equity at 0.3 times, and cash, bank balance, and liquid assets higher than the total debt.

It has also been paying dividends (dividend payout ratio ranging from 13.7% to 20%) and has transferred cash back to shareholders through buybacks. The last buyback worth Rs 348 m was in the financial year 2019 at Rs 1,143 per share.

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

#4 Kaveri Seed Company

Fourth on the list is Kaveri Seed Company.

The company specialises in hybrid seeds in key Indian crops. It commands about 10% market share in the Indian market. It's one of the top three seed companies in India.

Now seeds are critical inputs for agriculture that employs the biggest chunk of working population and commands the largest land area. They are critical to our food security and economy.

But make no mistake. Not every company associated to agriculture finds it easy to survive. There are some critical filters you must look for in stocks before investing in them in these times.

These include market leadership in niche segments, operating in 'indispensable' segments, with a product/service offering that is essential or critical to the clients and the economy.

On the financial front, zero or minimal debt, high profit margins, comfortable cash position, and strong management quality is required.

Kaveri Seed Company has all that and more. The company is a bluechip in the making.

The business generates positive free cash flow and is low on capex intensity. The operating margins are healthy and the business is almost debt free with strong cash and liquid investments.

The average return on equity and return on capital have also been upwards of 20% in each of the last five years.

With the company planning to increase contribution from the high margin non-cotton segment, the profitability of the business is likely to improve.

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

#5 Kabra Extrusiontechnik

Last on our list is Kabra Extrusiontechnik.

The company is a market leader in manufacturing plastics extrusion machinery.

In simple words, KET manufactures and installs machines that make plastic pipes and packaging films. These end products cater to multiple industries - agriculture, irrigation, housing, infrastructure, construction, telecom, and flexible packaging.

Astral Polytechnik, Supreme Industries, Ashirvad Pipes, Finolex Industries and Mexichem are some of the key clients of the company in India and abroad.

Going forward, the demand for the plastic pipes is likely to grow in healthy double digits.

The government's push for infrastructure, sanitary facilities, agriculture, the rise in urbanisation, growth in affordable housing, and a growing preference to plastic pipes over iron pipes (boosting replacement demand), are the key growth factors.

The packaging film industry too is expected to grow at a healthy rate, driven by food industry, personal care, and pharma products.

KET is the largest player in the plastic extrusion machinery with a rich product portfolio. It's best placed to make the most of these growth opportunities.

What makes the company more interesting is it's foray into the electric vehicle (EV) space.

In the financial year 2021, the company decided to venture into the electric vehicle (EV) segment via its battery division, Battrixx. Battrixx is positioned to provide a wide range of advanced Li battery packs with smart battery management system (BMS).

Apart from this, the company's financials provide immense comfort, making it one with bluechip heritage.

The company has managed to grow its sales at a 18% CAGR over last three years. Its operating cash flows have also been consistently positive.

The debt on the balance sheet has been negligible. Further, the company has been paying dividends consistently, with average payout ratio over last three years at 43%.

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

Investment Takeaway...

The above mentioned five companies have strong fundamentals and business with bright growth prospects. But one cannot simply ignore that these companies have had their fair share of volatile periods.

Therefore, if you plan to invest in a company, assess the fundamentals and prospects of the business. Sustained research must not be compromised despite the positive odds. Then invest for the long term so you can ride out periods of volatility.

As small-cap stocks interest you, here's a proven approach on investing in small-cap stocks.

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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1 Responses to "5 Smallcap Stocks with Bluechip Heritage. Add them to Your Watchlist"

Abhishek

Oct 8, 2022

Good suggestions, I had heard of these but getting the views of Equitymaster certainly helps to delve deeper in these.

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Equitymaster requests your view! Post a comment on "5 Smallcap Stocks with Bluechip Heritage. Add them to Your Watchlist". Click here!