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  • Sep 23, 2022 - 5 Most Undervalued Smallcap Stocks to Add to Your Watchlist

5 Most Undervalued Smallcap Stocks to Add to Your Watchlist

Sep 23, 2022

5 Most Undervalued Smallcap Stocks to Add to Your Watchlist

Editor's note: As the market corrected this year, the vulnerability of smallcap stocks was exposed. However, this led to price correction in the category offering an excellent investing opportunity.

Back in May 2022, we identified five most undervalued smallcap stocks.

Read to find out the latest developments of these companies.

Most Undervalued Smallcap Stocks in India

Looking to invest in the next Amazon, Titan or Bajaj Finserv?

Then you should definitely explore your options in small-cap stocks.

Now you may ask...why are small-cap stocks a good investment?

Historically, small-cap stocks have outperformed during times of economic recovery. This is playing out now as the economy is currently in a revival mode. The full value chain across sectors including small-cap companies are expected to benefit.

Small-cap stocks have been known to generate over 100x return on their original value in some cases. Investors with an appetite to take on some high risk and looking to make multibagger returns may consider investments in small-cap stocks.

So, can 2022 be the year where you focus on building your portfolio of small-cap stocks? Possibly, yes.

To put things into perspective, there are over 4,500 small-cap stocks listed on the Indian stock exchange. If some of them are undervalued, then it is just the icing on the cake.

Here's a list of the top 5 undervalued smallcap stocks that you should add to your watchlist.

#1 Den Networks

Good news awaits if you are looking to invest in the media and entertainment (M&E) segment as a strong revival is in the offing in the financial year 2022.

Some of the key factors that are propelling the growth are favourable regulations, technological innovations and emerging investment opportunities in the broadcasting and cable TV market.

This puts Den Networks, one of India's leading cable TV distribution companies, as a strong competitor in the list of most sought-after undervalued smallcap stocks for 2022 to have in your kitty.

It currently has a market capitalisation of Rs 17.7 bn with its shares trading at Rs 36.9 apiece -. The price to earnings (PE) stand at a lowly 9.2 whereas the price to book value (PB) ratio is 0.6, well below the M&E industry benchmarks.

Established in 2007 and spearheaded by a seasoned management team, Den Networks is a company poised for long term growth.

With an active expansion plan in place, the company diversified into providing all-India Internet Service Provider (ISP) for broadband internet services. It currently operates across 500+ cities/towns across 13 states in the country.

Strong support from the parent company enabled Den to focus on the next frontier of growth areas. This included regional content creation for Tier 2 and Tier 3 markets.

The goal was to be able to bridge the current demand-supply gap in these regional markets resulting in this positive growth trajectory.

The proof of the pudding lies in the profit growth for Den Networks. In financial year 2021, it skyrocketed to 184.9% despite the disruption of the pandemic. The profit after tax (PAT) of Rs 2,459 m came from its strong foothold in the Hindi speaking belt.

At the back of a strong balance sheet, Den Networks recorded gross sales of Rs 12.4 bn and reduced its gross debt from Rs 2,133.5 m in the fiscal year 2020 to zero in the financial year 2021.

Even though the return on capital employed (ROCE) was low at 2.1% over the past 3 years, the company managed to maintain a healthy position with a current ratio of 4.7.

To know more about Den Networks, check out its factsheet.

Update: In the June 2022 quarter, the revenue of the company declined by 6% year-on-year (YoY) due to a fall in subscription revenue. As a result, the net profit also took a hit and fell by 69% YoY.

#2 Sandesh

Here's another undervalued small-cap stock from the media and entertainment industry.

Established in 1923, Sandesh has a marketcap of Rs 5.7 bn. The company is currently Gujarat's largest and most influential media house.

Sandesh shares traded at a high of Rs 759.6 apiece - with a PE of 7.2 which is well below the 3 year average industry PE ratio of 15.8.

The PB ratio stands at 0.6 whereas the industry benchmark is 54.5 over a trailing twelve month period.

The company initially started off as a Gujarati daily newspaper. It has subsequently forayed into various other branches of the media and entertainment industry including television channels, magazines, OOH, and digital media.

As of March 2022, the company's promoter holding remains unchanged at 74.8% which has given the company direction to make its digital footprint more robust.

The company also improved its earnings before interest, depreciation and tax (EBIDTA) from Rs 81.2 bn to Rs 122.2 bn in the financial year 2021by improving its return out of treasury operations.

Currently, Sandesh has little to no debt on its books and has maintained a healthy liquidity position. A strong financial risk profile marked by a comfortable capital structure indicates healthy profitability in the foreseeable future for the company.

Profit growth rose to 53% in the last year which has helped secure a place for Sandesh in our list of top 5 undervalued smallcap stocks.

To know more about Sandesh, check out its factsheet.

Update: In the June 2022 quarter, the company's revenue grew by 37.5% YoY, driven by growth in circulation and readership base.

However, the net profit fell by 13.2% YoY due to increased cost of news print.

Though the company is concentrating on increasing its circulation in rural and semi-urban areas of Gujarat, it remains to be seen how the company plans to manage the migration from print to digital media.

#3 Man Industries (India)

A flagship company of the Man Group, Man Industries India is one of India's leading manufacturers and exporters of large diameter carbon steel line pipes.

Founded over 25 years ago, the company occupies a dominant position in the pipes segment. It's the approved vendor for major domestic and international oil and gas facilities.

Man Industries has a current market capitalisation of Rs 5.3 bn. The PE stands at 5.3 and the PB ratio is hovering at 0.6. Both are much below the industry average of 31.5 and 2.9 respectively.

The shares are currently trading at a high of Rs 77.6. The share price took a whopping 17% dip from yesterday's high of Rs 89.5.

Despite the promoter holding dwindling to 44.7%, the company boasts of a strong leadership team at its helm.

Man Industries continues to focus on leveraging its existing capabilities to drive overall growth for the organisation. The company has set up new manufacturing facilities with cutting edge technologies across the country to boost revenue in the fiscal year 2022.

Man Industries has proactively focused on higher ticket value projects during 2022 and has also ventured outside of its core business activities by setting up a subsidiary company in real estate.

Global demand for steel pipes is on the rise. The industry is expected to hit a CAGR of 6.2% by 2027. Domestic demand is also rebounding with the government of India announcing the expansion of the natural gas grid from 18,000 kilometres (kms) to 34,500 kms.

Man Industries has increased its cash flow in the financial year 2021. The company also recorded an 18.9% revenue growth in the financial year 2021 despite the ongoing challenges posed by the pandemic.

The earnings before interest, taxes, depreciation, and amortisation (EBITDA) shows a 27.8% increase year on year (YoY) while the PAT recorded an 81.7% jump as per the third quarter results in the financial year 2022.

All of these are indicative of the fact that Man Industries has consistently maintained a healthy financial risk profile which makes it a worthy entry in the list of the top 5 undervalued smallcap stocks to watch out for this year.

To know more about Man Industries, check out its factsheet.

Update: The company is working on upgrading its existing facilities to improve efficiencies across all operational aspects. It plans to increase its capacity utilizations, and reduce wastage to strengthen its competitive position and improve margins.

Additionally, it is investing Rs 7.1 bn as capex for adding new products to its portfolio with the aim of moving from project based to product based company.

In the June 2022 quarter, the company's revenue grew by 27.5% YoY. The net profit declined by 49.2% YoY, mainly due to higher commodity prices such as oil, metals, crude, and chemicals.

However, with downward trend in the commodity prices, the margins are expected to improve in the short to medium term.

#4 Kirloskar Industries

The next entrant in the list of undervalued small-cap stocks is Kirloskar Industries, a name that is synonymous with wind power generation in India.

It's a wholly owned subsidiary of the 130 year old Kirloskar Group, a company that has played a pivotal role in driving India's economic story.

Kirloskar Industries was incorporated in 1978. The company's shares trade at Rs 1,424.6 apiece.

The company currently has a market capitalisation of Rs 13.9 bn. The PE stands at 23.9. This is well below the industry average of 63.1. On the other hand, the PB ratio is 0.7 which is also trailing below the industry average of 2.3 for a trailing twelve month period.

Back in 2017, the earnings of the Kirloskar Industries skyrocketed and the growth trajectory was nothing short of eye-catching.

Since then, the company has been able to sustain through the ups and downs of the pandemic and has consistently been on the path to profitability.

During fiscal 2021, the company's earnings before interest and tax (EBIT) margins increased from 14% to 22% YoY.

A high promoter holding of 72.6% indicates that the company will be managed in the interests of its shareholders. With the owner having an investment of nearly Rs 12 bn in the company, they will be incentivised to build value in the long term for its stakeholders.

In 2022, the company is virtually debt free and boasts of a healthy liquidity position with a current ratio of 64.7. This makes Kirloskar Industries an undervalued small-cap stock that must look into this year.

To know more about Kirloskar Industries, check out its factsheet.

Update: In the June 2022 quarter, the company's revenue grew by a whopping 82.1% YoY driven by growth in its subsidiary company Kirloskar Ferrous Industries. The net profit, however, declined by 27% YoY due to higher expenses.

For the financial year 2022-2023, the company plans to concentrate on its real estate business and capture the growth in this sector. It plans to allocate its surplus funds to Avante Spaces, its real estate subsidiary for the same.

#5 Gloster

The erstwhile Kettlewell Bullen & Company was rechristened as Gloster and comes with a 140 year old heritage in textile manufacturing. With an established presence in the jute industry, it is the last company to feature on our pick of undervalued small-cap stocks in 2022.

Promoted by the Bangur family, Gloster is listed on the BSE and currently has a market capitalisation of Rs 5.9 bn. The share is trading at Rs 1,077.7 apiece.

The PE is hovering around 7 which is less than half of the industry average of 18.8. The PB ratio stands at 0.6 whereas industry average is around 6.6.

The company is the market leader in the production and export of various types of jute and its allied products.

In addition to jute manufacturing, Gloster has diversified its product portfolio into woven and non-woven jute geotextiles and is heavily engaged in the production of jute products for interior decoration and packaging of industrial and agricultural produce.

To promote a sustainable alternative to plastic, Gloster entered into a Memorandum of Understanding (MoU) with the Telangana government for an investment of Rs 3.3 bn in the jute sector in September 2021.

Needless to say, a high promoter holding of 72.6% instils confidence in the company and its prospects of future growth. Gloster has a healthy cash flow management with a PAT of Rs 411.1 m as of 31 March 2021. This was a YoY growth of almost 20%.

Despite the risks arising from the regulated nature of the jute industry, Gloster offers a strong financial profile that makes it an attractive investment proposition to investors looking to expand their portfolio in this segment.

To know more about Gloster, check out its factsheet.

Update: The company has invested Rs 3.1 bn to add additional capacity at its existing plants through its subsidiaries. The capacity expansion will happen in two phases and will be operational by financial year 2024. This will boost the company's revenue in the medium term, given there is already a ban on single use plastic in the country.

In the June 2022 quarter, the revenue rose marginally by 1% YoY. However, the company's net profit took a hit and declined by 18.6% YoY mainly due to high raw jute prices.

What to expect from smallcap stocks in 2022?

Smallcaps have had a great run over the past two years.

The real question now is - will the party continue in 2022?

Market experts think the trend will spill over in 2022. That more or less makes your case for investing in undervalued small-cap stocks this year.

When the broader markets become cheap, like they were in March 2020, one should be greedy and look at undervalued and fundamentally strong smallcaps. However, given the volatile nature of small-cap stocks, you must account for high risk with the prospect of high gains. In other words, be prepared for some wild swings.

Here again, there's a way to beat volatility. Invest for the long term and that will help you ride out any short term market downturns.

Also, if you stick around for longer, a smallcap can potentially grow into a midcap or even a large-cap stock if the business performance is exceptional.

Now all you need to do is spot and invest smartly in some really undervalued small-cap stocks and you may just end up picking the next Amazon at a steal.

Wouldn't that be life changing?

Before signing off, we recommend you watch the below video where lead smallcap analyst at Equitymaster, Richa Agarwal, shares what you can expect from smallcap stocks this year.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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Which are the most undervalued stocks in India?

As per Equitymaster's Stock Screener, here are the list of the most undervalued stocks in India right now...

These companies have been ranked as per their PE (Price to Earnings) ratio and PB (Price to Book Value) ratio. The lower the ratios, the more undervalued the stock is.

Of course, there are other parameters you should take into account before forming a hard opinion on the stock valuation.

How do you know if a stock is undervalued?

One of the quickest ways to gauge whether a stock is undervalued is to compare its valuation ratios to the rest of its industry or its historical average. If it is trading below these numbers, it is likely to be undervalued.

Some of the most commonly used valuation ratios are the Price to Earnings ratio, Price to Book Value ratio and Price to Sales ratio.

How do you find undervalued stocks?

The first step to identifying undervalued stocks is to use a stock screener. A stock screener is a set of tools that allow investors to quickly sort through a large number of companies according to a few pre-defined criteria.

Some of the filters you can use to find undervalued stocks are the Price to Earnings ratio and the Price to Book Value ratio. The lower the number, the more undervalued the stock.

You can use Equitymaster's powerful Indian stock screener tool to find the top undervalued stocks in India.

Which are the top smallcap companies in India right now?

As per Equitymaster's Indian Stock Screener, these are the top smallcap companies in India right now.

These smallcap companies have been ranked as per their market capitalization. The higher the market cap, the higher the total value of the company.

Of course, there are other parameters you should take into account before forming a hard opinion on the stock valuation.

Equitymaster requests your view! Post a comment on "5 Most Undervalued Smallcap Stocks to Add to Your Watchlist". Click here!

1 Responses to "5 Most Undervalued Smallcap Stocks to Add to Your Watchlist"

Subrata aich

Mar 10, 2023

Very good

Equitymaster requests your view! Post a comment on "5 Most Undervalued Smallcap Stocks to Add to Your Watchlist". Click here!