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  • Jun 28, 2022 - Fundamentally Strong Penny Stocks? Yes, it's Possible. Here's a List...

Fundamentally Strong Penny Stocks? Yes, it's Possible. Here's a List...

Jun 28, 2022

Fundamentally Strong Penny Stocks? Yes, it's Possible. Here's a List...

Editor's Note: For majority of investors, their attention these past few days is on accelerating inflation and reactive monetary policy decisions.

The Russia-Ukraine war seems old news now. New challenges have taken toll.

In these volatile markets, some are saying penny stocks are dead. Long live penny stocks...

While some are on the lookout for fundamentally strong penny stocks which can cushion their portfolio.

No matter the market environment, penny stocks are and will continue to remain popular among investors.

Back in December 2021, we wrote about the top fundamentally strong penny stocks. Read this updated article to know where these companies stand now, and if there are any new additions to our list.

Here goes...

Penny stocks have become very popular among retail investors and foreign institutional investors (FII) since the bullish market phase in 2020.

In the last two years, investors made good returns on their penny stock investments. Even penny stocks with dicey financials and nothing great to show on their books rallied. This further boosting the hype around these stocks.

Do remember that penny stocks are extremely risky investments. They are very tiny, less established companies and are yet to prove themselves to the world.

Besides this, these companies usually have high debt on their books, low promoter holding, and huge accumulated losses.

But it is wrong to categorize all penny stocks as risky bets.

There are penny stocks that have zero debt, stable revenue and profit growth, enough free cashflows, and consistent dividend payout record.

Such stocks have the potential to become multibaggers and prove to be a fruitful investment.

Top Fundamentally Strong Penny Stocks in India

Company CMP (Rs) YTD (%) 1-Year (%) 3-Years (%)
Engineers India Ltd. 57.9 -17% -28% -53%
International Conveyors Ltd. 57.9 -19% -5% 108%
NACL Industries Ltd. 76.5 -18% 2% 148%
Piccadily Agro Industries Ltd. 38.8 28% 102% 387%
Time Technoplast Ltd. 104.5 38% 24% 9%
SMC Global 90.8 16% 17% NA
Source: Equitymaster

Continue reading to know if our list of fundamentally strong penny stocks has stayed intact or not.

The penny stocks category is among the most popular in the market. Retail investors prefer these stocks for investment.

Why? Because penny stocks trade at lower prices and investors believe they can buy a huge chunk of shares.

And also, since penny stocks offer high returns in a short span of time, investors with a high-risk profile opt for them.

However, these stocks can also be a part of your long-term investing strategy, provided you are willing to take the risk.

Penny stocks with consistent revenue and profit growth, that have low debt to equity ratio, and pay dividends regularly, are fundamentally strong. They can add value to your portfolio.

Here's a list of fundamentally strong penny stocks that you should keep an eye on.

#1 Engineers India

Engineers India, a government of India enterprise, is a global engineering consultancy and an engineering, procurement, and construction (EPC) company.

It offers integrated project management services from 'concept to commissioning' to multiple sectors including oil & gas, petrochemicals, infrastructure, solar & nuclear power, water and waste management, and fertilisers.

The company has executed over 7,000 assignments successfully across many sectors. It has offices across India and has an international presence in Abu Dhabi, London, Milan, and Shanghai with over 2,800 employees.

Engineers India's revenues grew at a CAGR of 7% in the last 3 years (2018-2021). In the financial year 2021, its revenue stood at Rs 33,333 m. The pandemic led to a slight decline in revenues by 5%.

Despite the pandemic, the company's net profit margin in the financial year 2021 stood at 8.3%. The average 3-year net profit margin of the company is Rs 12.3%.

It has also been paying dividends consistently with a three-year average dividend payout of 61.9%.

Engineers India is a debt-free, cash-rich company that enjoys a Navratna status, has a good order book, and is financially strong.

Recently the company has announced a strategic alliance with Chempolis Oy, Finland, for conversion of biomass to green fuels in India marking its expansion into the green technology sector.

For more details, see the Engineers India company fact sheet and quarterly results.

#2 NACL Industries Limited

NACL Industries is a well-known player in the agrochemical space. It manufactures agrochemical active ingredients for all major crops.

The company exports its products to over 30 countries but draws a majority of its revenue from the domestic market.

One of the key strengths of the company is its reputed client base. Some of their clients are Dupont India (India), Syngenta Asia Pacific Pte, and Nissan Chemical Industries (Japan).

The company's revenues grew at a CAGR of 10.5% in the last three years led by a high growth in volumes.

Its profits tripled in the financial year 2021 and stood at Rs 504 m against Rs 158 m the previous year.

The three-year average dividend payout ratio is 9.3%, and there are chances this to go up as the company's cash accruals have improved.

It has maintained its debt-to-equity ratio below 0.2x indicating a strong financial risk profile.

Wide product portfolio, strong supply chain, reputed client base, diversified geographical presence, and robust financial profile are some of the key strengths of the company.

The company's positive performance is also reflected in its share price. Check out the company's performance in the last one year.


Update: With a growing population, there is a high need for food production.

Besides this, the landmass available for agricultural produce is also reducing, increasing the need to improve land productivity.

With low awareness of the benefits of agrochemicals in farming, the industry has a lot of scope for growth.

NACL, being one of the well-known players in this space, can benefit from this growth.

#3 International Conveyors Limited

International Conveyors manufacturers and markets PVC conveyor belts. The belts they produce are mainly used in transportation of coal, potassium, cement, among others in underground mines.

It has two manufacturing facilities in the country with a total installed capacity of 11.25 lakh meters.

The company draws the majority of its revenues from exports. Few of its key clients are Tata Steel, Coal India, Shree Cement within India, and Rosebud, BeltTech, and Mosaic outside India.

The revenues of the company grew at a CAGR of 23.7% during the last three years. During the financial year 2020 - 2021 its revenues grew 66.9% mainly due to high export orders.

A good order book and operational efficiency have led to higher profits. Profits grew at a CAGR of 42.8% in the last three years.

The company has been reducing its debt over the past few years and is now debt free.

On average, the company's dividend payout ratio is around 18.6% in the last three years. With zero debt, the company's liquidity position has improved leading to higher possibility of consistent dividends.

Lower competition from the domestic market, experienced promoters, a reputed client portfolio, and a stable order book are few of the key strengths driving its performance.

As of September 2021, company promoters held 63.4% stake in the company, with no shares having been pledged. To know more, check out the latest shareholding pattern of International Conveyors.

#4 Time Technoplast

Time Technoplast is a multinational conglomerate. It's a leading producer of polymer products used in industrial packaging, automotive, infrastructure, and lifestyle sectors.

It has market leadership in its value-added product, plastic drums. Also, it's one of the leading companies in manufacturing composite cylinders and intermediate bulk containers.

The company has 38 production facilities across the globe (28 in India) and has a distribution spread over 345 cities and towns.

Lockdown restrictions lead to slight decline in revenue in the financial year 2021. However, strong demand and high volume of its value-added products have contributed to the revenue.

Though its three-year average net profit margin stood at 5%, the company has maintained a healthy dividend payout ratio. The three-year average dividend payout ratio is 12.4%.

It managed to reduce its debt-to-equity ratio to 0.1x despite the heavy capex it has been doing since the past couple of years.

A diversified product portfolio, steady profitability, strong financial risk profile, and liquidity are some of its key strengths.

During the last one year, the company's share has given close to 50% return to its shareholders.


#5 SMC Global Securities

SMC Global is a financial services company that offers one stop investment solutions in trading and investments.

It offers advanced broking, financial analytics, investment banking, real estate advisory, clearing and depository services, NRI and foreign portfolio investment (FPI) services, and mortgage advisory services to its clients in India and abroad.

The company has around 4,000 employees serving over 1.8 m clients in 500+ cities in India and abroad.

The revenues of the company grew at a CAGR of 5.9% in the last three years. In the financial year 2021 alone, the revenues grew at 15%.

Its profits grew at a CAGR of 9.9% in the last three years and in the financial year alone the profits quadrupled and stood at Rs 993 m against Rs 239 m the previous year. Increase in the number of investors and lower costs have led to the higher profits.

The company has maintained its dividend payout ratio at an average of 27.6% in the last three years. It has a debt-to-equity ratio of 0.2x, which is much lower than its market peers.

A well-established presence in the capital market, a strong network of brokers and sub-brokers, diversified revenue distribution, and robust liquidity position are its key strengths.

Know more about the company here.

Update: Recently, the company's board approved a buyback of shares worth Rs 750 m which will increase the promoter shareholding from 62.37% to 66.18%.

#6 Piccadily Agro Industries

Piccadily Agro is a manufacturer of sugar and its by-products. The company engages in manufacturing sugar and liquor.

The company has a manufacturing capacity of 5,000 tonnes of cane per day (TCD) for sugar and 90 kilo litre per day (KLPD) for liquor manufacturing.

It also has a 6 megawatt (MW) in-house co-generation of power at its plant in Haryana.

The government of India's sugar export program has led to a revenue growth of 22.8% in financial year 2021 and the three-year CAGR revenue growth stood at 9%.

Its net profit grew at a CAGR of 48.3% in the last three years and stood at Rs 176 m in the financial year 2021 against Rs 136 m the previous year.

The company has been paying dividends consistently since the last two years with an average dividend payout ratio of 20.3%.

Piccadily Agro has a healthy business profile due to its integrated nature of operations from crushing of cane, to distillery, and power generation. The cyclicality of the sugar industry is balanced by its liquor business and supports its cash flows.

Over the past one year, shares of the company have more than doubled, gaining over 135%.


Things to consider while investing in penny stocks

Penny stocks are the most volatile stocks and hence require investors to have a higher tolerance for risk. However, they can be quite rewarding as they have huge growth potential.

Penny stocks look very attractive given their low price and high growth opportunity. But it's important to understand that with high returns comes high risk.

Giving into the temptation of earning huge returns can often lead to huge losses as well.

Before investing in a penny stock, you need to check whether the company has a strong balance sheet. A healthy financial profile indicates good growth prospects.

Next, check for future growth opportunities. Favourable government policies or good order book status are some indicators you can look at.

Finally, check for feasibility of business. The more viable the business, the longer will be its existence.

Investing in penny stocks is no rocket science. However, it requires you to practice caution while doing so. Picking the right penny stocks will help boost your portfolio returns.

In January 2022, Rahul Shah, Co-head of Research at Equitymaster, gave a guide to pick the right penny stocks for your portfolio.

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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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