Top 4 Smallcap Growth Stocks in India to Watch Out for in 2022

Editor's note: Diversifying your portfolio is critically important. This gives you a good chance of picking the winners as your portfolio becomes versatile.

Among many other options available for an average investor, you can prefer investing in smallcap growth stocks.

Investing in smallcap growth stocks means you are investing in quality growth companies which are mispriced by the market. These companies possess large exploitable opportunities and are some of the fastest growing companies.

If you latch on to a company relatively inexpensive compared to its competitors, i.e. an undervalued stock, it can work wonders.

Also, if you are looking for the long term stocks to buy in India, smallcap growth stocks may be your best bet in the current environment.

This is because interest rates are rising across the globe and the stock market is a volatile place to be.

Smallcap growth stocks are a favourable play right now because they offer huge potential.

In December 2021, we wrote to you about the top smallcap stocks to watch out for in 2022.

Smallcap Growth Stocks

Company	CMP (Rs)	Marketcap (Rs bn)	1 Year (%)	YTD (%)
Heranba Industries	592	23.8	-27%	-12%
Tatva Chintan Pharma	2,361	52.6	2%	-11%
Rossari Biotech	850	47.4	-32%	-34%
NGL Fine Chem	1,748	10.7	-44%	-35%

Source: Equitymaster

This list is still relevant today.

Continue reading to know more about these companies...

Top Smallcap Growth Stocks to Watch Out for in 2022

Smallcaps have had a phenomenal run for the second consecutive year this year.

In 2020, the BSE Smallcap index delivered a 32% return against the BSE Sensex's 16% return. In 2021, the index is up 58.4% compared to a 21% rise in the Sensex.

If you were smart enough to allocate a portion of your capital to smallcaps you would have made some incredible returns.

You see smallcaps offer significant upside growth potential that is unmatched by larger companies.

Moreover, as the economy revives and demand plays out, the full value chain across sectors will benefit, including smallcap companies.

So which smallcap companies should you invest in?

While there is no perfect answer to this question as risk appetite and goals can vary from person to person, one of the strategies you can use is to invest in smallcap growth stocks.

What are smallcap growth stocks?

Smallcap growth stocks are companies in the smallcap space (marketcap of more than Rs 5 bn and less than Rs 1 tn) that grow at a faster rate than the average business in an industry or market as a whole.

They are attractive to investors because businesses that can grow faster than the average business for long periods tend to be rewarded by the market.

The faster they grow, the bigger the returns are for shareholders.

While a lot of the popular growth stocks are large companies, smaller companies too are fertile ground for investors.

Here are the top 4 smallcap growth stocks to watch out for in 2022.

#1 Heranba Industries

Heranba Industries (HIL) is one of the leading agrochemical players in India.

The company 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.

HIL's revenues have grown at a healthy pace at about 17% CAGR for the past 3 years. Its profits have grown at a CAGR of 49%.

In 2022, new product launches in the export market and new capacities are expected to drive the company's revenue growth.

The company recently announced it has started commercial production at its new facility in Gujarat.

The management expects the new production facility to generate an annual revenue of Rs 1 bn. The production capacity of the new unit will be 1,200 MTPA (million tonnes per annum).

Heranba Industries listed on the exchanges in February 2021 at a premium of 43.5% over its issue price, which resulted in an equity inflow of Rs 600 m.

Shares of the company are down 19.2% since then.

Update: This year, Heranba Industries incorporated a subsidiary for carrying out business in the field of agrochemicals.

More recently, the company declared a dividend of Rs 2 per share for the year ended March 2022.

#2 Tatva Chintan Pharma

Next on our list is Tatva Chintan Pharma. It's a leading manufacturer and supplier of specialty chemicals.

The company is the largest and only commercial manufacturer of structure-directing agents (SDAs) for zeolites in India. Zeolites are very useful catalysts for many important chemical reactions.

It also makes electrolyte salt for supercapacitor batteries which is crucial for battery efficiency.

The company has a leadership status in various product categories of specialty chemicals and a significant presence in export markets.

Its clientele includes Merck, Bayer AG, Asian Paints, Laurus Labs, Navin Fluorine, Divi's Laboratories, and many others.

Tatva Chintan's growth prospects are bright as the company is well-positioned to tap into the shifting global demand for specialty chemicals to India. With just 2-3 players in the domestic market, Tatva Chintan stands to benefit by a wide margin.

Also, given that it operates in segments that could see a rise in environmentally sustainable products, the growth potential is higher.

The company has plans to capitalise on growth opportunities in 2022 and beyond. It will expand its Dahej manufacturing facility and upgrade its R&D infra with a capex to the tune of 1.7 bn.

Tatva Chintan has a strong earnings track record with a net profit CAGR of 60% in the last three years. The company's revenue has also grown at a CAGR of 21.7%.

The stock is a new entrant in the secondary market. It listed on the exchanges in July 2021 at a 114% premium from its issue price.

The 5 bn issue was subscribed 180 times making it the second most oversubscribed IPO of 2021.

Shares of the company are up 9.8% since listing.

#3 Rossari Biotech

The third smallcap growth stock on our list is another specialty chemicals manufacturer.

Rossari Biotech is among the largest manufacturers of textile specialty chemicals in India. It has three main product categories - home, personal care, and performance chemicals (HPPC); textile specialty chemicals; and animal health and nutrition.

Within these categories, it has over 2,000 products which cater to diverse end-user industries.

Rossari Biotech has everything going for it at the moment - an established market position in the textile speciality chemical industry, strong in-house research and development (R&D) capabilities, and a diverse product portfolio.

Moreover, the company has witnessed robust growth in revenue at a CAGR of 33% in the last 3 years. Its net profit has also grown at a healthy CAGR of 40%.

Going forward, Rossari Biotech is expecting to close the financial year 2022 with at least 50% growth in both top line and bottom line on the back of rising demand and a substantial price hike that will help boost margins.

The company also recently announced the acquisition of Unitop Chemicals which is expected to help boost its revenue significantly as well as provide diversification benefits.

Moreover, the company's board has set a target to more than double the revenue and profit from 2020 levels by 2023, both through organic as well as inorganic routes.

In July 2020, Rossari Biotech listed on the exchanges. Using the IPO proceeds, it repaid its entire debt. As of March 2021, it has surplus cash of Rs 1.1 bn on its books.

It also raised Rs 3 bn in April 2021, which will be utilised towards its acquisition of Unitop. Unitop is also a debt-free entity.

Shares of Rossari Biotech are up 25.7% in the last year and 33% in 2021.

To know more, check out Rossari Biotech's 2021-22 annual report analysis.

#4 NGL Fine Chem

The last smallcap growth stock on our list is NGL Fine Chem.

The company is a manufacturer of pharmaceuticals and intermediates that are used in veterinary and human medicine.

Veterinary APIs (active pharmaceutical ingredients) is the main product of the company. It accounts for 89% of its revenues, followed by veterinary formulations, human APIs, intermediates & others.

It has a diversified client base with more than 400 customers, with the top five accounting for 23-25% of total sales.

Healthy relationships with its customers over the last two decades have resulted in several repeat orders. The company has also been able to increase its market share in the lower share of its portfolio which has increased to 50-60%.

NGL has registered steady revenue growth over the last three years at a CAGR of 31%. This was on account of an increase in average realisations as well as sales volumes.

NGL's net profit also grew at a CAGR of 64% during the same period.

In 2022, the company's revenue is expected to grow as it expands into new geographies.

Its revenue from the rest of the world (RoW), especially Latin America and Africa saw significant traction this year. These geographies now form around 15% of its revenues.

The company also made inroads in the US market, which contributed 5% to its revenues in this year.

In 2020, the company acquired Macrotech Polychem, a company involved in the manufacturing of pharmaceutical intermediaries and spent Rs 280 m towards its expansion.

The expansion should contribute to its revenue as well, from March 2022 onwards.

Shares of NGL Fine Chem are up 138% in the last year. In 2021, the stock is up 140%.

To know more, check out NGL Fine Chem's 2021-22 annual report analysis.

Be smart when investing in smallcap growth stocks

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.

This is exactly what has happened with the companies that we have listed. Due to input cost pressure, the chemical companies have been hit hard in 2022.

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.

If you plan to invest in such stocks, assess the company's fundamentals and allocate wisely in the fundamentally strong stocks. Also, keep in mind the overall factors favouring and impacting the company and industry.

Before signing off, we recommend you to check out the below video where lead smallcap analyst at Equitymaster Richa Agarwal talks about what to expect from smallcap stocks in 2022.

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...

FAQs

1) Which are the top smallcap stocks to watch out in India?

If you stick to a fundamentally strong smallcap stock for longer duration, it can potentially grow into a midcap or even a large-cap stock if the business performance is exceptional.

There are over 5,000 smallcap stocks listed on the Indian stock exchange. The idea is to look for undervalued smallcap stocks.

Check out Equitymaster's stock screener to find the quality smallcap stocks.

2) Which smallcap stocks will become multibagger stocks?

You can find multibagger smallcap stocks by looking for companies that have the following characteristics:

• dominant players with a strong competitive advantage
• fundamentally strong balance sheet low debt to equity ratio and high liquidity ratios
• run by quality management

Alternatively, you can browse through the Equitymaster screener to access an exhaustive list of small-cap stocks using a variety of filters like low debt to equity, high growth, high ROE, low PE ratio.

3) Are smallcap stocks a good investment now?

Most investors buy smallcap stocks on the basis of tips, recent price movements, and noise. This is not the ideal approach.

You should avoid timing the markets. Think from a long term perspective - at least three to five years. Focus on structural trends rather than cyclical. Then work backwards to see which businesses/companies will be most relevant.

As things stand now, the Smallcap to Sensex ratio chart is still not close to the previous peak of January 2018. This means in the long term, smallcap stocks could fetch gains much higher than the index.

4) Smallcap stocks list

Here's the list of BSE smallcap stocks. For more detailed updates, check the latest BSE Small-Cap stock results and see the latest BSE Small-Cap long term chart.

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