5 Smallcap Growth Stocks to Watch Out for in 2023

Smallcap growth stocks are one of the most exciting segments in the market, as small companies with higher growth rates often offer investors the opportunity for market-beating returns.

However, note that unlike value stocks, they usually tend to trade at a premium valuation. They are also prone to big price swings.

Yet if chosen carefully, they can grow your capital faster than the market average.

Keeping this in mind, here are five smallcap growth stocks to watch out for in 2023.They have high earnings visibility, low debt and a high return on capital.

#1 Tiger Logistics

First on our list is Tiger Logistics.

The company is a third-party logistics services provider. Its business covers international freight forwarding, supply chain management, project logistics, defence logistics, and cold chain logistics.

It's clients are large companies such as Honda, TVS, Bajaj, CEAT, Hero, Samsung, LG, Maruti Suzuki, Patanjali, etc.

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.

The management expects to be a Rs 20 bn company by the financial year 2027 (@30% annually), backed by green logistics, acquisitions, regional expansions, and digital integration.

It also stands to grow further supported by the 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.

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.

The platform, to be rolled out first in the country and then in some developing economies, will enable shipping accessible to more than 63 million MSMEs (Micro, Small, and Medium Enterprises) in the country,

As far as financials go, the company's revenue has grown at a CAGR of 16% in the last five years while net profit has grown at a CAGR of 27%.

The company also has healthy return ratios with ROCE (return on capital employed) at 52.3% and ROE (return on equity) at 45.2%.

Besides this, the company has zero debt and promoter holding is strong at 73.77% as of June 2022.

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

#2 Heranba Industries

Second, on our list is Heranba Industries.

The company is one of the leading agrochemical players in India. It is the market leader in the synthetic pyrethroids market. Pyrethroids find usage in significant applications across pest protection, environmental health and crop care.

Its clients include big names such as PI Industries, Sharda Cropchem, UPL, Rallis India, Dhanuka Agritech to name a few.

Heranba has all the elements that could help it make a dent in regulated markets - a strong product portfolio, distribution network, experienced promoters, and new product launch capabilities.

With multiple molecules going off patent in the near future, the company aims to capitalise on significant growth opportunities in the agrochemicals segment.

Further, new capacities going on stream will also support growth over the medium term.

The company is undertaking a capex of Rs 2.5 bn across its Sarigam and Dahej unit over the next two years. It plans to spend Rs 1.3-1.5 bn in the financial year 2023 and Rs 1-12.5 bn in the financial year 2024.

It is expecting sales of around Rs 8 bn from the said capex.

The company is also focused on entering into the regulated markets of USA and EU. It is also aiming to increase the share of branded formulation and public health products in its mix.

HIL's revenues have grown at a healthy pace at about 20% CAGR for the past 5 years. Its profits have grown at a CAGR of 56%.

Despite its ambitious capex plans, the company has no debt on its books. Institutional holding stands at 3.5% while promoter holding stands at 74.9% as of September 2022.

The management has guided for 15-18% revenue growth in the current financial year with operating profit margins at 16-18%.

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

#3 SJS Enterprises

Third on our list is SJS Enterprises.

The company is one of the leading players in the Indian decorative aesthetics industry. SJS's product offerings include decals and body graphics, 2D appliques, and dials.

It also offers a variety of accessories for the two-wheelers' and passenger vehicles' aftermarket under the "Transform" brand.

The company's key clients include OEMs such as Bajaj Auto, TVS Motors, Royal Enfield, Honda Motorcycle, M&M, Suzuki, and Volkswagen.

SJS Enterprises is riding the EV megatrend. It has recently received orders from Alladio and Gravton.

Alladio, is the part of the Mabe group, which was earlier owned by GE appliances. It is a US$ 4 bn company with plants across the world. SJS has entered this market and how fast it can grow depends on how this business grows, but the potential is huge.

Besides this, the company's effort in expanding its chrome plating division capacity is expected to support its growth in 2023.

It recently acquired the chrome plating business from Exotech Plastics Private Limited (EPPL). Significant capex is being undertaken for the expansion of the division.

The company has announced a capex of Ra 600 m for the financial year 2023.

SJS Enterprises listed on the bourses in November 2021. For the financial year 2022, the company reported a 47% YoY increase in sales at Rs 3.7 bn and 15% YoY growth in net profit at Rs 550 m.

The company's return ratios are healthy with RoE at 15.3% and RoCE at 21.5%. It also has no debt on its books.

Promoters hold 50.37% stake in the company. Institutional holding in this microcap stands at 23.62% with FII holding at 5.09% as of June 2022.

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

#4 Moldtek Packaging

Fourth on the list is Moldtek Packaging.

The company is a market leader in rigid plastic packaging in India. It manufactures injection moulded containers for lubricants, paints, food, and other products. The company's key customers include ITC, HUL, Asian Paints, Nestle, Britannia, etc.

In 2023, the company is expected to benefit from the ramp up of its existing segments.

Moldtek will carry out a capex of Rs 1.25 bn for the financial year 2023. With total capex, the capacity is expected to be 70,000 MT with revenue potential of up to Rs 12.5 bn.

The company will be adding a second plant at Daman to cater to the growing food and FMCG demand in the Western region by beginning of the financial year 2024.

The plant for IBM products, injection blow moulded products coming up at Sultanpur will also be operational at the same time and will be used for pharma, IBM products, cosmetics and OTC counter products.

Besides this, its pilot plant to produce OTC products will start in September - October 2023. The company has already received a major order from FMCG firm for the OTC product.

Post a successful entry and execution in food and FMCG packaging, the company is also shifting gears. It has recently announced entry into pharma (domestic and OTC) packaging and the revenue from the pharma segment is expected to kick in from next year.

Mold-Tek has enjoyed a smooth road to profitability. The company's sales have grown at a 5-year CAGR of 16%, while the net profit has grown at a 5-year CAGR of 19%.

The RoE has also been strong at 14.5% and ROCE at 20.7%. Promoter holding stands low at 34.2%. However, institutional holding has increased over the last couple of years and stands at 28.77% as of June 2022.

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

#5 PSP Projects

Last on our list is PSP Projects.

The company is the fastest growing construction company in the smallcap category in India. It offers a range of construction and allied services across industrial, institutional, government, and residential projects in India.

The real estate sector in Indian economy is at an interesting inflection point. While the weaker players are getting shunted out, the opportunity for organized players has increased as the economy is undergoing major infrastructure revival.

PSP Projects is a microcap that seems well placed to ride this boom.

The company currently has 49 ongoing projects in six states - Gujarat, Rajasthan, Maharashtra, UP, Karnataka, and New Delhi.

The orderbook at the end of the September 2022 quarter stands at Rs 50.8 bn (3x of FY22 revenue). Of this, orders for precast stand at Rs 2.4 bn. 50% of the order book is based in Gujarat, followed by UP (36%), and Maharashtra (14%).

The company doesn't own any land inventory. It only 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 a mobilisation advance (almost 5-10% of the contract value) from the client. This explains its negative working capital cycle and asset light model.

PSP Projects revenue has grown at a CAGR of 34% in the last five years while net profit has grown at a 5-year CAGR of 31%. This has been on the back of a steady increase in its order book.

Return ratios also remain healthy with RoCE at 35.2% and RoE at 24.2%. The balance sheet remains strong with debt to equity at 0.22x.

To add to this, promoters hold a 70.39% stake. Institutional holding stands at 6.71% with FII stake at 1.89% as of June 2022.

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

Investment Takeaway...

Investing in smallcap growth stocks can be risky.

Unlike value stocks, they tend to be more expensive than the average stock in terms of metrics such as price-to-earnings (P/E) and price-to-sales (P/S) ratios.

This means that while there are chances that they could generate multibagger returns, companies that disappoint even slightly could get punished heavily by the market due to high valuations.

Smallcaps also tend to be more volatile than largecaps, as they are more vulnerable to recessions, market crashes, and other shocks. They often have bigger swings on news like earnings reports.

Before investing in any company, make sure you study the fundamentals and growth prospects thoroughly. Since small-cap stocks interest you, here's a proven approach on investing in small-cap stocks.

You can also check out the video below where lead smallcap analyst at Equitymaster Richa Agarwal talks about top smallcap growth 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...