Best Small Cap Stocks to Buy Now in India 2024

In this article, we will cover

• What are Small Cap stocks?
• Best Small Cap Stocks to Buy now in India
• List of Best Small Cap Stocks to Buy now in India 2023
• Things need to check while picking stocks in this collection of Small Cap stocks
• Detailed Profile, pros, and cons of Small Cap Stocks
• Key risks associated with Small cap companies
• Model Portfolio of Small Cap Stocks
• A detailed table with various parameters for Best Small Cap Stocks to buy

In this article, you shall get a complete list of best small-cap stocks to buy today. Our research experts have compiled this list. Let us understand about small-cap stocks before we get to the list of best small caps to buy today listed on NSE and BSE.

What are Small Cap stocks?

Smallcap is a term that consists of companies which are neither largecap nor midcaps. Smallcaps generally have market capitalization below Rs.5,000 crores. This classification can change with a change in a company’s market valuation. Market capitalization refers to the market value of a company’s outstanding number of shares available.

Market regulator SEBI defines smallcap stocks as the companies which rank 251st and beyond in terms of their market capitalisation. All these companies are small-cap companies as per SEBI definition. NSE and BSE both have a benchmark smallcap index to track the performance of smallcap stocks in India. These are the Nifty Smallcap 100 and BSE Smallcap index.

Best Small Cap Stocks to Buy now in India

One should know that every large or mid-cap company was once a small-cap company and the one who grows their business and sustains its profits can only graduate and step up the ladder from small to midcap or largecap company. Most of the small-cap companies have low revenues and small number of employees as compared to bigger companies.

However, these companies have high potential for growth and at the same time they also carry higher risk. Mostly Aggressive and higher risk tolerant investors are attracted towards small-cap companies in the hope of earning high returns. Here’s a list of best smallcap stocks.

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List of Best Small Cap Stocks to Buy now in India 2024

Things need to check while picking stocks in this collection of Small Cap stocks

Financial Strength

This is one of the common criteria which Investors should look at before investing in any company. Generally, small-cap companies do not have as much sales as large-cap or mid-cap companies. But if the company’s balance sheet is stable with decent cash flows and low debt, these companies can survive and do better against their peers. So, no matter what the size of the business is, it is important to invest in financially stable companies combined with high potential to grow in the future.

Top-Line & Bottom-Line Growth

It is also important to check the past performance of small cap companies. These companies should have a decent track record in atleast last 5 years. For instance check the company’s last 5 years Sales and Profit CAGR growth and compare the same with its peers. This will give you an idea as to how that particular company has performed compared to its peers. A company which grows its sales and profits consistently eventually provides better returns to investors.

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Market size & Positioning

Generally, small cap companies are single product or single service line companies. It is important to know the overall market size of the business a company is operating in, and also the presence of that company in that particular market. This will give you a broad outlook on the positioning of the company and the market size of its business. A niche positioning in the market or some entry barriers can make a significant difference to the company’s valuations.

Management Quality & Commentary

In every company its Management plays a crucial role in deciding the company’s future. Before Investing in a small-cap company it is better to scrutinize its management history and any possible lapses done by them in the past. As we see, a lot of small companies and even some bigger companies fall prey to poor corporate governance and inflation of financial statements. Also avoid those companies which are facing legal/regulatory battles. Small cap companies tend to get overwhelmed by such regulatory challenges and it is best to avoid such cases.

Detailed profile, pros, and cons of Small Cap Stocks

PSP Projects

Having embarked on its journey in 2008, today PSP Projects extend a differentiated assortment of construction and allied services across diversified industry segments including Industrial, Institutional, Commercial and Residential, Hotels and Hospitality, Hospitals and high-profile Government projects. The company works with more than 100 private and public clients across the country, with the repertoire of being one of India’s top EPC companies.

With a cash-rich balance sheet, healthy revenue visibility, and robust financial discipline, PSP Projects’ growth prospects remain positive for the future. The company has strong execution capability, thanks to its solid operational record of over a decade. Currently, the construction major has improved its eligibility for higher-ticket size projects and is witnessing significant traction for the pre-cast facility as well. The scope of geographical diversification and continuous order wins along with a growing client base will increase the revenue visibility in the long run.

The ownership of promoters has decreased over the previous 4 quarters. Over the past 5 years, the company has delivered revenue and profit growth CAGR of 21% and 16% respectively. It has also handsomely rewarded its shareholders as it has maintained an average ROE of 23% and ROCE of 32% during the same period.

Maharashtra Seamless

Maharashtra Seemless, a steel behemoth, where promoters have increased their ownership over the previous 15 quarters, thereby reaching 67.86% as of September’23.  The increase in the promoters’ stake is considered to be a good signal to shareholders as it showcases their confidence about the future prospects of the business. After all, promoters know in and out of the business. It has impressively grown its sales and profits over the past 5 years with a CAGR of 22% and 32% respectively.

It also has a low debt to equity at 0.05. In addition, the firm’s price-to-book value (P/B) at 1.8x is lower than the industry’s P/B of 2.18x. Further, the stock has a price-to-earnings (P/E) ratio of 8.91x, which is lower than the industry’s P/E ratio of 20.87x.

On the other hand, the firm is exposed to the cyclicality of the oil and gas industry and fluctuations in input prices.

Arman Financial Services (Arman)

Arman Financial Services is a mid-sized NBFC focused on catering to the financing needs of the under-served rural and semi-urban retail markets. It has a strong presence in the states of Gujarat, Rajasthan, Maharashtra, Madhya Pradesh, Uttar Pradesh, and Uttarakhand & forayed into two new states of Bihar & Haryana.  The company has strong underwriting measures by leveraging digital transformation. Its business model is centered around a conservative approach to high-yielding assets to deliver a sustainable ROA of 3-5%. The NBFC has a total loan book of INR 1,537 crore as of FY23. Out of its total AUM, the Microfinance segment constitutes 83.74%, MSME loans constitute 13.12%, and 2-Wheeler Loans are 3.14% of its total AUM. The company has a presence in 8 states and operates with 313 branches. The company’s high-growth trajectory is reflected in its AUM and net income YoY increase of 57% and 73% respectively.

The NBFC has a presence in high-margin retail lending segments with robust risk management and strong financial performance. On the other hand, any downtrend in the microfinance industry could be a drag for the company. Furthermore, its geographical presence is concentrated which remains a risk.

Mold-Tek Packaging

Mold-Tek Packaging, is a leader in rigid packaging in India across Paints, Lubricants, Food & FMCG industries. The Indian packaging industry is valued at around 75 bn USD and is expected to grow at CAGR of 26.7% in the next five years. Mold-Tek commands superior performance track records as its sales and profit grew at a CAGR of 17% and 21% over the last 5 years. Mold-Tek’s competitive advantages are centered around: (a) Constant focus on innovation which has helped it enter new segments and even grow market share in existing segments; (b) Strong and long-term relationship with clients (c) Backward integration capabilities (eg. in-house development of moulds, robots, labels, etc) and (d) Demonstrated ability to diversify into new product categories which are margin accretive. Due to these competitive advantages and a substantially healthier balance sheet than peers, the company is in a dominant position to expand its market share and target new growth drivers in the packaging area. The key risk for the company includes its high dependency on one key customer who alone contributes 25-30% to its total revenue. In addition, the firm is vulnerable to Regulatory concerns over the use of plastic-based products and raw material price volatility.

JK Paper

JK Paper Limited is one of India's leading paper manufacturers, producing branded copier paper, coated paper and packaging boards. The company is consistently following a policy of focusing on value-added products like Copier, Bond, Security, Coated Papers, Virgin Fibre Packaging Boards, High-end Maplitho, Food Grade Papers, and Boards. The company enjoys a leadership position in copier paper with a market share of ~24% currently. It is also among the leading players in Coated Paper and Packaging Board with a market share of ~10% and ~19%. JK Paper is respected for its manufacturing scale (among the largest in the sector), high asset utilization, output quality, consistency, and cost leadership, making the company an industry benchmark.

Green shoots are already in place as the paper industry is on the path of recovery. During Q4FY23, the company recorded its highest-ever quarterly Consolidated Turnover of Rs. 1,719 Crore (up 28% YoY), EBITDA of Rs.525 Crore (up 46% YoY), and Profit after Tax of Rs. 284 Crore (up 67% YoY). Despite the adverse impact of higher impact costs, it witnessed growth in volume driven by the ramp-up of new Packaging Board capacity coupled with overall better realization. JK Paper is ticking all the boxes, given (a) A diversified portfolio mix (b) Leadership position (c) Increasing capacity utilization (d) New product developments (e) Strong operating efficiency (f) Large expansion plans (g) Extensive distribution (h) Focus on deleveraging (i) Healthy financials. On the other hand, the company remains vulnerable to cyclicality inherent in the industry.

Key risks associated with Small cap companies

• Value Traps: Value trap is when a company is consistently operating in lower profits with very limited cash flows and cannot break through the phase while investors wait for them to turn profitable one day. Small-cap companies, especially the low ranking ones, are more prone to being value traps and might go defunct if the trend continues for a longer period.
• Stay away from small caps facing Regulatory charges: Small-cap companies are more prone to going bankrupt especially when they are facing any legal or regulatory issues. So it is advisable to investors to stay away from those companies which are facing any legal issues. Also, a company’s debt is an important factor, you should stay away from high debt companies as they are more prone to bankruptcy than any other stocks. It is advisable to invest in very low or zero debt companies to avoid this risk.
• Market cycle: A small-cap company’s exceptional performance can be a result of a high up-cycle. A small-cap company grows at an exponential phase in this up-cycle/financial bubble. Let’s understand this with an example. During the 90s almost all IT stock were booming and most of the returns were given by small IT companies because there was a consensus that IT sector will do well in coming decade so every IT stock was booming but the Dot-com bubble burst in the year 1999 and those small cap stocks were the first to get beaten down the most. So, It’s important to find the market cycle for a particular business before Investing in them.

Watch this video to understand, how to select the Best Small Cap Stocks

Model Portfolio of Small Cap Stocks

In order to get an exposure to best small-cap stocks, you need a total of Rs. 17,000/- for the below curated portfolio as of 18th Mar, 2024

A Detailed table with various parameters for the Best Small Cap Stocks to buy

Watch detailed video on small-cap stocks to buy today in India

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