Top Small-Cap Stocks with High Growth Potential

A List of the Best Small-Cap Stocks to Buy Now in India 2024

Small-cap stocks refer to companies that are ranked 251 and above in terms of market capitalisation. These stocks have the potential for significant growth in the long run. That being said, they can also be highly volatile and risky. If you are planning to invest in this segment, here is a small-cap stocks list to help you construct the ideal portfolio. 

Top Small-Cap Stocks to Watch

Let us now look at the top 5 small-cap stocks you can consider investing in. We will be exploring the business model of each of the companies and examine a few of their fundamental metrics.

• Maharashtra Seamless Ltd. 

Incorporated in 1988, Maharashtra Seamless Ltd. is one of the top 10 small-cap stocks from the construction and engineering sector. The company specialises in the production of seamless pipes, which are widely used in industries like oil and gas, power, and infrastructure. Among the best entities in the small-cap stock list of NSE, Maharashtra Seamless has a strong presence in domestic and export markets. 

The company boasts an impressive operating profit margin of 20.3%, which indicates its ability to maintain efficiency and profitability. With a zero debt-to-equity ratio and a 3-year net profit CAGR of 68.92%, Maharashtra Seamless is financially robust, making it one of the best small-cap stocks in India for the long term. 

• JK Paper Ltd. 

One of the leaders in the Indian paper industry, JK Paper Ltd. prominently features in the top 5 small-cap stocks in India. The company manufactures a wide range of paper and paper-based products through eco-friendly production methods. 

A 3-year sales CAGR of 34.27%, one of the highest among the small-cap stocks list, highlights its potential to adapt to changing market dynamics and grow consistently. One of the major drivers of the company’s growth is the rising demand for packaging paper from the e-commerce and FMCG sectors. JK Paper’s P/E ratio of 8.46 and dividend yield of 1.73% indicate its strong value proposition, placing it among the best small-cap stocks in India for the long term.     

• Nesco Ltd. 

Nesco Ltd. is the only diversified conglomerate in the top 10 small-cap stocks in India. The company operates across sectors such as exhibition centres, hospitality, IT parks, and realty. With a robust operating profit margin of 62.41%, Nesco sets itself apart as one of the most efficient in the small-cap stocks list of NSE.

Nesco is well-positioned to benefit from India's growing MICE (Meetings, Incentives, Conferences, and Exhibitions) market, supported by increased corporate spending on events and conventions. For investors seeking the best small-cap stocks in India for the long term, the company’s debt-free balance sheet and high return on capital employed (ROCE) of 22.39% make it an ideal choice.  

• Gulf Oil Lubricants India Ltd. 

The only entity from the oil and gas sector in the small-cap stocks list, Gulf Oil Lubricants India Ltd. specialises in producing high-performance lubricants for automotive and industrial use. As one of the top 5 small-cap stocks in India, the company has effectively capitalised on India's rising automobile sales and industrialisation, which has been one of the factors behind its 3-year sales CAGR of 25.73%. 

Fundamentally, the company is quite promising with a dividend yield of 2.91% and ROE of 24.73%. Gulf Oil Lubricants offers both growth and income opportunities for investors, making it one of the best small-cap stocks in India for the long term. 

• Ion Exchange (India) Ltd.

One of the more unique entities in the top 10 small-cap stocks, Ion Exchange (India) Ltd. is a leader in water treatment and environmental solutions in India. The company provides various cutting-edge solutions for solid waste and wastewater treatment. Being a pioneer in sustainable recycling, Ion Exchange is a prominent entity in the small-cap stock list of NSE. 

With a return on capital employed (ROCE) of 27.49% and a 3-year net profit CAGR of 10.37%, the company demonstrates strong potential for future growth. Despite being in a capital-intensive industry, the company has managed to keep its debt under control, which is evidenced by its low debt-equity ratio of just 0.15, making it an ideal choice for investors looking for the best small-cap stocks in India for the long-term. 

What are Small-Cap Stocks? 

Small-cap stocks are shares issued by companies with a market capitalisation of less than Rs. 5,000 crores. According to the Securities and Exchange Board of India, which regulates the equity market, small-cap companies are ranked 251 and beyond in terms of decreasing market capitalisation. You can find the top 10 small-cap stocks by assessing market indices like the Nifty small-cap 50 or Nifty small-cap 100. 

Small-cap stocks are often considered to be slightly riskier than mid-cap and large-cap stocks. This is because they often belong to growing companies or entities without an established presence in the equity market. Companies in the small-cap stocks list may also display volatile share prices. However, with the right research tools at your disposal, you can find the best small-cap stocks in India for the long term and invest in fundamentally strong companies. 

What are the Key Features of Small-Cap Stocks? 

Most of the shares from companies in the small-cap stocks listed on the NSE or the BSE have certain defining characteristics. In the top 10 small-cap stocks, these features may work to the investor’s advantage. The main characteristics of such stocks include:

• High Volatility

Many of the companies in the small-cap stocks listed on the NSE and the BSE have volatile share prices. This volatility may stem from uncertainty about the company’s future growth prospects and ambiguity in its sectoral outlook. Additionally, these stocks are also more sensitive to market fluctuations and may experience sharp price movements due to lower trading volumes and limited market interest.

• High Growth Potential

The best small-cap stocks in India for the long term often have a high potential for growth. This is because the issuing companies may be suitably positioned to leverage emerging market interest. Successful small-cap companies often operate in budding industries or capitalise on early stages of development. This offers the potential for rapid growth, which can significantly boost investor returns over the long term.

• Long-Term Investment Horizon

Small-cap stocks may also be better suited for long-term investments. The stocks of fundamentally strong small-cap companies may even become multi-baggers, given the right opportunities. So, you can consider including the best small-cap stocks in India for the long term in your portfolio. Alternatively, some traders may leverage short-term price movements to potentially earn quick profits. 

• Low Liquidity 

The shares of many companies on the small-cap shares list may have low liquidity. This could make it harder to buy or sell shares quickly without affecting the market price. So, before you buy any shares from the small-cap stocks listed on the NSE and the BSE, ensure that you assess the trading volume, liquidity and bid-ask spreads. Only choose stocks that garner significant market interest. 

• Undervalued Opportunities 

Some companies may have low market cap because of low share prices. These small-cap stocks may be undervalued, especially if they belong to fundamentally good companies. The reasons for such undervaluation may stem from different causes. They may not be analysed much in the market, or institutional investors may not be interested in them. However, these companies on the small-cap shares list offer investment opportunities.

Why to Invest in Small-Cap Stocks?

Despite their potentially volatile share prices, the best small-cap stocks in India for the long term hold many possible benefits. Here are some of the top reasons to consider investing in small-cap companies. 

• Potentially Higher Returns

Companies on the small-cap stocks list often offer opportunities to earn exceptional returns. Their smaller base allows them to grow faster in favourable conditions, and they may even outperform large-cap stocks during bull markets. This growth could lead to substantial capital appreciation, particularly for patient investors.

• Early Entry Into Growing Companies

Investing in the best small-cap stocks in India for the long term gives you access to companies in their growth phase before they scale into mid-cap or large-cap giants. Being an early investor in a high-potential business allows for potentially significant wealth creation, especially if these companies expand and improve profitability over time.

• Opportunities for Diversification

Companies in the small-cap stocks listed on the NSE and the BSE provide exposure to less-represented sectors and industries. This could diversify your portfolio and reduce your dependency on large-cap performance. It also opens up new avenues for potential gains and balances the portfolio risk with a mix of growth and value-oriented investments.

• Leveraging Market Inefficiencies

Companies in the small-cap stock list are often under-researched and undervalued. This may be due to limited analyst coverage. As a savvy investor, you can use this market inefficiency to your advantage by identifying the top 10 small-cap stocks that the broader market has overlooked. This will allow you to purchase at low valuations.

• Less Prone to Institutional Control 

Many companies in the small-cap stock list may have lower institutional ownership, making their price movements less susceptible to institutional trading. This creates opportunities for retail investors to participate in the small-cap market without competing against the algorithms and strategies of large institutional players.

What Factors to Consider Before Investing in Small-Cap Stocks?

Before you invest in a small-cap company, whether it is a part of the Nifty small-cap 100 index or a relatively lesser-known stock, you must consider these aspects:

• Financial Health of the Company

Examine the company's balance sheet, income statement and cash flows. Also, focus on debt levels, profitability and revenue growth. Companies in the small-cap stocks list often have limited resources, so you must ensure they have sufficient financial stability to weather downturns. This is critical for protecting your investment from unexpected losses.

• Industry and Sector Trends

You must also understand the industry in which the small-cap company operates and check if the sector’s long-term prospects are favourable. Investing in a promising sector can amplify growth potential, while declining industries may expose the company to higher risks, regardless of its individual performance.

• Management Team and Leadership

Strong and experienced leadership is vital for companies in the small-cap stocks list. So, review the track record of the management team and their vision for the business. An innovative and capable leadership team can successfully navigate challenges, scale operations and deliver long-term value to shareholders.

• Liquidity and Trading Volumes

Companies in the small-cap stocks list may have liquidity issues and lower trading volumes. This can affect your ability to buy or sell shares without significant price impact. To avoid this issue, check the stock’s liquidity and ensure that you can exit your position if needed, especially during volatile or bearish market conditions.

• Valuation Metrics

It is also critical to analyse valuation metrics like the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, EBITDA and operating profit margin, among others. Small-cap stocks can be overhyped, leading to inflated valuations. This is why you must check whether the stock is reasonably priced compared to its peers.

What are the Risks of Investing in Small-Cap Companies? 

Before you invest in the top 10 small-cap stocks, you must factor in the following risks of this equity market segment:

• High Volatility

Companies in the small-cap stocks listed on the NSE and the BSE are more prone to sharp price fluctuations. This is because of their lower market capitalisation and limited trading volumes. 

• Lower Liquidity

Companies in the small-cap stocks list may also have low trading volumes. This illiquidity can trap investors, especially during market downturns, and make it difficult to buy or sell shares at favourable prices.

• Limited Financial Resources

Companies in the small-cap stocks list could also have lower financial reserves and less access to capital compared to large-cap firms. This makes them vulnerable to economic slowdowns, rising costs or sudden expenses.

• Inadequate Analyst Coverage

Many companies in the small-cap stocks listed on the NSE and the BSE receive limited attention from analysts. This lack of coverage may make it harder to assess the company's financial health, growth potential and risks.

A Model Portfolio of Small-Cap Stocks 

At Samco Securities, we understand the importance of a well-structured portfolio that aligns with your investment goals. By leveraging our expertise in market analysis and stock research, we have curated a model portfolio of the top 5 small-cap stocks that combines value, growth potential, and resilience.

A Detailed Table With Various Parameters of the Companies in the Best Small-Cap Stocks List