Most Profitable Smallcap Stocks to Add to your Watchlist

History has shown that small-cap stocks have delivered phenomenal returns to investors. Thus, allocating a small portion to smallcaps in your portfolio could offer significant upside.

But identifying these stocks is a challenge. So, which smallcap stocks should you invest in?

Well, there is no specific answer to this. It all depends on one's risk appetite and goals.

However, the profitability of the underlying business can help you make a more reliable decision.

Keeping that in mind, here are the most profitable small-cap stocks in India as of March 2022. You should keep these smallcaps on your watchlist as we enter into a new year.

Please note, for some companies, the figures mentioned are standalone.

Let's get started...

#1 Indian Bank

You'd be surprised to know that among all smallcaps, the most profitable one turned out to be a public sector bank (PSB).

For financial year 2022, Indian Bank stood out as the most profitable company with a net profit of Rs 39,448 million (m).

The improvement in profitability is on the back of continuous growth in advances in the last three years, largely supported by business from the retail and agriculture segment.

In 2022, the bank's non-interest income also grew in double digits due to an improvement in recovery of bad debts.

The profitability has improved over the years as can be seen from the table below:

Indian Bank Financial Snapshot (2018-2022)

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Net Profit	12,629	3,209	7,581	30,157	39,939
Growth (%)	-11%	-75%	136%	298%	32%
Advances	1,565,689	1,812,619	1,978,870	3,626,691	3,891,861
Growth (%)	23%	16%	9%	83%	7%
Deposits	2,082,618	2,420,408	2,601,844	5,380,298	5,935,709
Growth (%)	14%	16%	7%	107%	10%
Return on Equity (%)	8.19	1.79	3.57	9.69	9.46

Data Source: Ace Equity

A lot of credit can also be given to Allahabad Bank's amalgamation with Indian Bank. Post that, Indian Bank became the sixth largest PSB in India.

The public lender looks set to surpass its 2022 profit figures as for the two quarters for this year, it has reported a combined profit of Rs 24,610 m.

The Q3 results of bank will especially be strong as most of public sector banks have guided for a firm quarter as credit growth has picked up and banks have reported improvement in asset quality.

Going forward, industry experts are of the view that the banking sector will remain on top of the list of investors as the capex cycle is strong and credit growth could be good enough for the next couple of quarters.

The market has not ignored all the positives and factored in a decent rise in shares of Indian Bank.

Shares of the company have gained over 150% in the past three years.

#2 Mangalore Refinery

Next on the list of most profitable smallcaps is Mangalore Refinery & Petrochemicals.

For the year ended March 2022, the company reported a net profit of Rs 29,553 m. This compared to the loss of Rs 7,611.7 m reported in the previous year.

Its revenue from operations went up by 69.4% compared to last year at Rs 861,063 m.

There are various reasons for this improvement like higher crude output, better gross refining margins, etc. MRPL took multiple initiatives to increase its domestic and export revenue.

The company also improved its operational performance and was able to achieve a capacity utilisation of 100.2% in fiscal 2021-22 as compared to 76.7% in the previous year.

This further improved to 114.6% in the first quarter of 2023.

MRPL Financial Snapshot (2018-2022)

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenue	490,550	634,461	502,304	319,590	697,271
Growth (%)	12%	29%	-21%	-36%	118%
Operating Profit	47,784	27,750	-30,683	10,803	50,336
OPM (%)	10%	4%	-6%	3%	7%
Net Profit	19,926	3,400	-33,546	-7,650	29,583
NPM (%)	4%	1%	-7%	-2%	4%
Debt to Equity (x)	1.46	1.57	2.91	5.61	2.92
ROE (%)	17.97	3.48	-49.6	-14.42	51.51
ROCE (%)	15.11	6.75	-16.48	-0.29	13.89

Data Source: Ace Equity

For 2023, the profitability might be lower compared to last year as MRPL has so far reported combined profit of Rs 9,116 m.

The second quarter in particular was bad when the company reported a loss of Rs 17,959 m. This on the back of windfall tax levied by the government.

Coming to stock performance, the company did see a huge spike after it posted superb numbers for 2022. But the stock fell owing to volatility in global crude market, and windfall taxes.

With a strong backing from its promoters ONGC and HPCL, MRPL looks set to benefit from synergies.

#3 National Aluminum (NALCO)

Third on the list we have National Aluminum Company (NALCO).

For the year ended March 2022, the company reported a net profit of Rs 29,520 m. This is 127% higher compared to 2021's net profit of Rs 12,994 m.

This was also the company's highest ever profit. The company got a big boost to its operational performance and earnings owing to higher aluminium prices.

2022 also marked the year when NALCO reported record production of aluminium cast metal and achieved 100% capacity utilisation of its plant for the first time since inception.

NALCO Financial Snapshot (NALCO)

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenue	95,095	114,993	84,718	89,558	141,808
Growth (%)	26%	21%	-26%	6%	58%
Operating Profit	16,971	32,184	7,618	19,294	48,146
OPM (%)	18%	28%	9%	22%	34%
Net Profit	13,422	17,337	1,362	12,994	29,514
NPM (%)	14%	15%	2%	15%	21%
Debt to Equity (x)	0	0.01	0	0	0
ROE (%)	12.96	16.51	1.35	12.58	25.41
ROCE (%)	19.62	25.99	2.26	12.77	34.15

Data Source: Ace Equity

For 2023, the company may not be able to top the 2022 profit figures as it has so far reported a combined net profit of Rs 7,488 m for the first two quarters.

Also, aluminium prices have been extremely volatile recently, owing to geopolitical issues that the world has been dealing with.

NALCO has also been facing issues in the procurement of coal due to disruption in the global demand-supply. This in turn has affected its share price.

NALCO is one of the best dividend stocks in India.

Nalco's dividend history goes back to 1995. The government owned company has maintained its dividend payout consistency by declaring dividends throughout all these years.

#4 Sundaram Clayton

Fourth on the list we have TVS group company Sundaram Clayton.

For the year ended March 2022, Sundaram Clayton reported a standalone profit after tax of Rs 22,767 m. This compares with 2021's profit of Rs 758 m.

Two factors were responsible behind this - higher aluminium prices and increased capacity for production.

This year, Sundaram Clayton started an internal restructuring exercise to focus more on each of the business verticals.

The company has enjoyed a stellar run over the last 5 years. It's revenue and profit has shot up by a 5-year CAGR of 13.4% and 8.5% respectively. The average return on equity (ROE) over the last 5 years stands at 26.5%.

However, as rosy as its performance has been, the company's net debt to equity ratio has remained above 3% in the past five years.

Sundaram Clayton Financial Snapshot (2018-2022)

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenue	16,430	18,331	13,243	11,769	17,433
Growth (%)	18%	12%	-28%	-11%	48%
Operating Profit	1,078	2,778	2,376	2,616	3,245
OPM (%)	7%	15%	18%	22%	19%
Net Profit	549	1,197	687	758	22,767
NPM (%)	3%	7%	5%	6%	131%
Debt to Equity (x)	3.53	4.05	4.88	4.32	3.16
ROE (%)	31.23	32.26	25.48	22.17	20.57
ROCE (%)	18.25	16.48	13.03	11.93	11.84

Data Source: Ace Equity

For 2023, Sundaram Clayton might not be able to catch up with its 2022 profit figures. So far for the first two quarters, the company has reported a combined net profit of Rs 7,453 m.

Also, the promoter pledging for Sundaram Clayton stands at 86.92% as of September 2022. The company's promoter group, TVS Holdings, pledged its total holding to borrow money for the first time this year.

Coming to stock performance, the company has delivered multibagger returns of 143% in the past three years.

#5 HUDCO

Last on the list we have HUDCO.

For the year ended March 2022, HUDCO reported a standalone profit after tax of Rs 17,166 m. This compares with 2021's profit of Rs 15,786 m.

HUDCO's profitability was impacted in Covid years (2020 and 2021) but it improved in 2022 and reached pre-Covid levels.

Profits and revenues have remained stable over the years owing to its public policy mandate with lending largely to government entities.

For the better half of decade gone by, when HUDCO stopped lending to private players, it has lent to the government sector. In 2022, government lending formed 97% of its AUM.

HUDCO Financial Snapshot (2018-2022)

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenue	41,714	55,559	75,321	72,355	69,544
Growth (%)	18%	33%	36%	-4%	-4%
Operating Profit	37,089	49,390	70,281	70,004	68,864
OPM (%)	89%	89%	93%	97%	99%
Net Profit	10,102	11,802	17,084	15,786	17,166
NPM (%)	24%	21%	23%	22%	25%
Debt to Equity (x)	3.65	5.45	4.98	4.62	4.25
ROE (%)	10.57	11.29	14.67	12.37	12.41
ROCE (%)	8.86	8.44	9.72	9.45	9.16

Data Source: Ace Equity

For the first two quarters of 2023, HUDCO has reported a combined net profit of Rs 8,081 m.

Over the years, HUDCO has played a significant role in the implementation of its various initiatives in urban infrastructure and social housing projects.

Its exposure to urban infrastructure is rising in line with the government's increased focus towards infrastructure development. This is a big plus for HUDCO, which sanctions loans under various infrastructure schemes.

Coming to stock performance, HUDCO has gained 26% in the past three years.

Some more profitable smallcaps

Apart from the above, here are a few more smallcap stocks which reported good profit in 2022.

Profitable Smallcaps of 2022

	Profit in 2022
Company	FY18	FY19	FY20	FY21	FY22
Gujarat Narmada Valley Fertilizers & Chemicals Ltd.	17,038	6,892	4,989	7,412	7,895
Vardhman Textiles Ltd.	16,774	3,667	5,455	6,959	5,458
Jindal Stainless Ltd.	16,745	4,279	1,529	1,390	3,183
Coromandel International Ltd.	14,125	13,126	10,592	7,139	6,848
Godawari Power And Ispat Ltd.	13,510	6,258	1,214	2,133	1,819
Chennai Petroleum Corporation Ltd.	13,424	2,376	(20,776)	(2,134)	9,129
Manappuram Finance Ltd.	13,045	16,979	12,303	7,905	6,891
Chambal Fertilisers and Chemicals Ltd.	12,871	13,470	12,243	5,453	4,802
Jindal Stainless (Hisar) Ltd.	12,752	4,778	3,203	2,617	3,957
NLC India Ltd.	12,368	10,105	14,139	12,670	18,488

Data Source: Ace Equity

Meanwhile, these smallcap stocks have reported the highest combined profit for the first two quarters of 2023.

Profitable Smallcaps of 2023

	Profit
Company	Q1FY23	Q2FY23	Total
Suzlon Energy Ltd.	24,326	565	24,890
Indian Bank	12,162	12,447	24,609
Chennai Petroleum Corporation Ltd.	23,588	200	23,788
Triveni Engineering & Industries Ltd.	581	13,798	14,379
Tata Chemicals Ltd.	6,120	6,380	12,500
Gujarat State Petronet Ltd.	6,162	6,218	12,380
Coromandel International Ltd.	4,976	7,400	12,376
The Great Eastern Shipping Company Ltd.	4,570	7,688	12,259
Cholamandalam Financial Holdings Ltd.	5,872	6,091	11,963
Rain Industries Ltd.	7,076	4,294	11,370

Data Source: Ace Equity

As smallcaps interest you, check out our guide on how to screen the best smallcap stocks.

Meanwhile, also check out the below video where Co-head of Research at Equitymaster Tanushree Banerjee discusses when to buy smallcaps in 2023.

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...