Top 5 Undervalued Smallcap Stocks to Add to Your Watchlist

According to the stock market regulator, smallcap companies are the ones that rank 251 and below in terms of market capitalisation.

As they have a high growth potential, they usually outperform largecaps in a bull market.

Take for example the Nifty Smallcap Index, an index that is designed to reflect the performance of smallcaps. The index gave close to 54% returns in 2021. The largecap index, Nifty 50, on the other hand, gave only 22.9% during the same period.

However, with high returns comes high risk. Small-cap stocks are very volatile and investing in them comes with a fair share of risks.

The only way to beat this volatility is to invest for a long-term horizon.

What better strategy than value investing, to invest for a long-term horizon?

Value investing is an investing approach based on intrinsic value. Value investors hunt for undervalued stocks and invest for the long term as they provide an excellent buying opportunity.

Here are the top five undervalued small-cap stocks in the market right now.

#1 Mangalam Organics

Mangalam Organics, the world's largest manufacturer of camphor, is first on our list of most undervalued small-cap stocks.

Currently, the stock's P/E ratio stands at 8.4 while its P/B ratio stands at 3.3.

Compared to its peers, the shares of the company are trading below the industry average. The average P/E ratio of the chemicals industry is 37.7.

Mangalam Organics primarily manufactures pine chemicals such as camphor, sodium acetate, and synthetic resins.

The company's products are used in industries such as pharmaceuticals, flavour and fragrance, paints, rubber, and tyre chemicals.

It has a reputed and diversified client base. Some of them are Emami, Dabur, Asian Paints, Berger paints, Kansai Nerolac Paints, and Pidilite.

The company also manufactures innovative home care products using camphor under the brand name CamPure, which has a strong retail presence in stores such as DMart and Reliance Retail.

It draws a majority of its revenues from B2B clients from its domestic operations.

The company's revenues grew 66.6% year on year (YoY) and its net profits grew 55.9% (YoY) in the recent quarterly results. Higher realisations due to the reduction of raw material prices led to higher profit growth.

The promoters have increased their holding in the company from 46.9% in the financial year 2018 to 54.9% in the financial year 2021.

Shares of Mangalam Organic are up 149% in 2021.

#2 GHCL

The next on our list of undervalued stocks is GHCL, a diversified company with a presence in chemicals, textiles, and consumer products.

The company's P/E ratio stands at 8.1, while is its P/B ratio stands at 1.4.

It's trading much below the industry average P/E of 37.7.

GHCL primarily manufactures soda ash and sodium bicarbonate, a few of the important raw materials for detergents, glass and ceramics, bakery, and pharma industries.

It's the second-largest soda ash manufacturer in India and draws a majority of its revenues from selling soda ash under the brand name Lion.

It also manufactures finished goods such as sheets and duvets that are exported to the United Kingdom, USA, Canada, Australia, and European countries and consumer products such as salt and spices.

GHCL has been actively paying off its debt. It has reduced debt by Rs 2.4 bn in the financial year 2021.

The company's revenues grew 21.8% (YoY) and net profit grew 30.2% (YoY) in the recent quarterly results mainly due to higher profit margins from its textile business.

It has been investing to increase its greenfield and brownfield capacity and capture growing demand in all its segments, primarily soda ash.

The company's shares have risen almost 77.7% in 2021.

#3 Rail Vikas Nigam Limited

Rail Vikas Nigam Limited (RVNL), a public sector enterprise, is next on our list.

The company's P/E ratio stands at 6.9 while its P/B ratio is 1.3.

Compared to its peers, the shares of RVNL are trading at a much lower level. The industry P/E of the engineering sector is 33.7.

RVNL was established as an executing agency to fast track the implementation of rail infrastructure projects.

The company has 38 implementation units across the country in 25 locations. It has completed 13,145 km of project length out of a total of 17,123 km in 187 sanctioned projects until the financial year 2021.

Its major clients are the Indian Railways, and other central and state governments.

In the last three years, the company's revenues grew at a CAGR of 14.9% and its profits grew at a CAGR of 16.1%. Revenue is mainly driven by large value contracts the company put in place to speed up project execution.

In the recent quarterly results, the company's revenue grew 26.5% (YoY) and profit after tax grew 28.7% (YoY).

RVNL enjoys a high success rate of projects in the country with respect to rail infrastructure. With this, the company has an opportunity to secure rail infrastructure projects overseas.

Shares of RVNL have given more than 41.2% return in 2021.

#4 Prakash Pipes

Prakash Pipes, a manufacturing company, also made it to our list of undervalued stocks.

The PE ratio of the company stands at 7.4, while the P/B ratio is 1.6. It's trading much below the industry average P/E of 44.7.

Prakash Pipes primarily manufactures PVC pipes and fittings. The company's products include agri pipes, column pipes, garden pipes, and fittings that are used for irrigation, housing, drainage, and sanitation.

It has also ventured into flexible packaging and manufactures laminates that are used in the packaging of food, oil, beverages, and pharmaceutical products.

Under the flexible packaging segment, the company has a strong and reputed client base such as Haldiram, Bambino, Havells, and Amul.

The company has a total manufacturing capacity of 60,000 metric tonnes per annum (MTPA) for its pipes and fitting business and 14,400 MTPA for its flexible packaging business. It's planning to expand its capacity to meet the growing demand.

Despite the huge capex, the company is almost debt-free.

In the recent quarterly results, the company's revenue grew 41.7% (YoY) and profit grew 37.5% (YoY) mainly due to higher revenue from value-added products and higher realisations from CPVC pipes.

Shares of Prakash Pipes have given 11.2% return in 2021.

#5 IOL Chemicals and Pharma

Last on our list is a pharmaceutical company, IOL Chemicals and Pharma.

Its P/E ratio stands at 9.5 while the P/B ratio stands at 2.2. Compared to its peers, the company's shares are trading at lower levels. The industry average P/E of the pharmaceutical sector is 47.

IOL Chemicals, an associate of the Trident Group, manufactures and sells APIs, bulk drugs and speciality chemicals to domestic and international markets.

The company is the largest manufacturer of ibuprofen with a 35% global market share and the second-largest producer of iso butyl benzene (IBB) with a 30% global share. It's also India's largest producer of ethyl acetate at a single location.

IOL Chemicals exports its products to over 50 countries and draws around 30% of its revenues from exports.

In the last three years, the company's revenue grew at a CAGR of 6% mainly led by growth in the sales of ibuprofen and IBB. Its net profit grew at a CAGR of 23% in the last three years, mainly due to lower finance expenses as a result of debt repayment.

Shares of IOL Chemicals and Pharma fell by 38.6% in 2021.

Why should you buy undervalued stocks?

Investing in undervalued stocks allows you to have a high margin of safety.

The margin of safety is the difference between the current market price and the intrinsic value of the share. The larger this difference higher will be the returns and the lower will be the downside risk.

As a result, the chances of earning high returns are also more.

Moreover, you can also easily ride out short term market volatility if you invest for the long term.

Make sure you invest in stocks that are fundamentally strong, have a good financial profile and are consistently growing. These will most likely boost your portfolio returns.

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...