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According to the regulations of the Securities and Exchange Board of India (SEBI), listed stocks are ranked based on their market capitalisation. Stocks that are ranked 251 and below in terms of market capitalisation are labelled as small-cap stocks.
They’re often new companies that don’t have a well-established business, lack financial stability and have limited resources. This makes them riskier than mid-cap or large-cap stocks due to their increased susceptibility to economic and market downturns.
Small-cap stocks have several features that set them apart from the other categories of stocks. Let’s look at some of the key characteristics of these stocks.
As you’ve already seen, small-cap stocks have a relatively low market capitalisation compared to mid-cap and large-cap stocks.
Due to less demand, small-cap stocks are generally less liquid compared to mid-cap and large-cap companies. Low liquidity may impact the ability to purchase and sell the stocks freely at the desired price.
Factors like low liquidity, limited analyst coverage and high susceptibility to economic and market changes make small-cap stocks more volatile than other types of stocks. This makes them more risky investments.
Despite the increased risk involved, small-cap stocks may likely deliver higher returns due primarily to their higher future growth potential as compared to other well-established companies.
The following small-cap stocks make a fine addition to your 2024 watchlist, based on their 5-year Compound Annual Growth Rate (CAGR).
| Stock Name | 5-Year CAGR | Net Profit Margin | Debt to Equity Ratio | EBITDA Margin | PE Ratio |
| Hazoor Multi Projects Limited | 275.37% | 5.87% | 26.89 | 8.13% | 11.71 |
| Authum Investment & Infrastructure Limited | 239.83% | 89.15% | 49.88 | 90.32% | 3.67 |
| Praveg Limited | 236.54% | 33.51% | 1.64 | 53.38% | 82.16 |
| Prime Industries Limited | 220.78% | 20.65% | 13.24 | 20.65% | 183.90 |
| Integrated Technologies Limited | 217.28% | 26.46% | 177.05 | 97.08% | 329.73 |
Note: The list of small-cap stocks is as of January 24, 2024.
If you are planning to invest in small-cap stocks this year, it’s crucial to have a long-term investment outlook so you can leverage the growth potential of these companies. However, before you buy any stock for the long term, you need to assess its financials and perform extensive fundamental analysis. The following metrics can help you with this.
Established in 1992, Hazoor Multi Projects Limited (HMPL) is involved in infrastructure development. The company operates on two different models – EPC (Engineering, Procurement and Construction) and HAM (Hybrid Annuity Model). HMPL currently has two major ongoing infrastructure projects. This includes the rehabilitation and upgradation of the Wakan-Pali-Khopoli section of National Highway 548A and Package 11 of the Samruddhi Mahamarg Expressway, which consists of a 29.93-kilometre stretch.
Key Financial Insights
Incorporated in 1982, Authum Investment & Infrastructure Limited is a registered Non-Banking Financial Company (NBFC) listed on both the Bombay Stock Exchange (BSE) and the Calcutta Stock Exchange (CSE). In addition to financing and lending activities, the company is also involved in investing in shares, securities and real estate. In 2022, Authum Investment & Infrastructure Limited acquired Reliance Commercial Finance Limited (RCFL) through a competitive bidding process, making RCFL its wholly-owned subsidiary.
Key Financial Insights
One of the leading event and exhibition management companies in India, Praveg Limited, was established in 1995. The company has a long and successful track record spanning almost 30 years and more than 3,000 events and exhibitions. In addition to exhibition and event management, Praveg Limited’s business also extends to the publication, tourism and hospitality sectors. The company has a well-established travel magazine known as ‘Praveg’s Tourism One’ and two resorts, namely, the White Rann Resort and the Tent City Narmada under its belt.
Key Financial Insights
Established in 1992, Prime Industries Limited was initially incorporated as Prime Proteins Limited. A year later, the company went ahead with an IPO of Rs. 2.9 crore. Prime Industries is in the business of manufacturing vanaspati ghee and has a dedicated manufacturing plant for the same in the Ferozepur district of Punjab. The shares of the company are listed and traded on the Bombay Stock Exchange (BSE).
Key Financial Insights
Incorporated in 1995, Integrated Technologies Limited is a New Delhi-based company that’s involved in the business of manufacturing and exporting Printed Circuit Boards (PCBs). The company’s dedicated facility is well-equipped and is capable of manufacturing single-sided, double-sided and multi-layered PCBs that meet internationally set standards. The manufacturing facility is located within a 20-kilometre radius of the New Delhi International Airport for facilitating faster and more efficient international export operations.
Key Financial Insights
Investing in small-cap stocks offers a plethora of different benefits to investors. Here’s a quick look at some of the key advantages.
Since the business of most small-cap stocks is relatively new, they often tend to have more room for growth in the long term. If managed well, small-cap stocks can grow into mid-cap and even large-cap stocks over time.
Small-cap stocks are generally overlooked by investors and market analysts alike. This may lead to them trading at far lower valuations, providing long-term value investors with attractive opportunities to snap up undervalued stocks.
The lower valuations combined with good growth potential provide small-cap stocks with the unique ability to create wealth in the long run. Small-cap stocks whose operations are managed well may even become multibaggers in the future, potentially multiplying your investment.
Investing in small-cap stocks may provide some much-needed diversification to your investment portfolio. Since these stocks don’t always move in tandem with mid-cap or large-cap companies, small-cap companies may be immune to downturns that affect the other categories of stocks.
Although small-cap stocks have many benefits, they also come with their fair share of risks. Let’s look at some of the key risks involved in investing in these stocks.
The low trading volumes of small-cap stocks can make purchasing and selling them a lot more challenging without significantly impacting their price. Furthermore, the stocks may also experience bouts of significant short-term price fluctuations on either side.
Small-cap stocks have limited financial resources, which can stifle their growth and make them more vulnerable to adverse business conditions. Also, they may face hurdles and challenges when attempting to access more capital to meet their business obligations.
Small-cap stocks usually receive less attention compared to mid-cap and large-cap stocks. This can result in less information availability, making it harder to conduct thorough research and make informed decisions.
Investing in small-cap stocks is a good way to bring diversity to your investment portfolio. However, it is advisable to conduct thorough research before making any major investment decision concerning these stocks. Remember to consider factors like your investment goals, risk tolerance levels, the company’s fundamentals, micro and macroeconomic conditions and industry risks.
With proper due diligence and a long-term investment outlook, you can effectively balance the rewards and the risks that are commonly associated with small-cap stocks.
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Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.
In the Indian context, small-cap stocks are defined as those stocks that are ranked 251 and below in terms of market capitalisation. The market cap of these stocks generally doesn’t exceed ₹5,000 crore.
Most small-cap stocks do not pay dividends because they tend to reinvest their profits for future growth. However, some small-cap stocks may pay dividends at periodic intervals. If you want a steady dividend income, it may be ideal to focus on large-cap stocks issued by established companies.
Since small-cap stocks generally belong to companies that are in the growth phase, they tend to be more susceptible to market movements and economic developments. This makes the stock prices quite volatile, contributing to increased risk.
Before you invest in small-cap stocks, you need to consider factors like the company’s financials, its growth potential, competitive advantage and management expertise. It also helps to perform thorough fundamental analysis.
Small-cap stocks could be included in a portfolio with a short-term outlook. However, if you are interested in leveraging the growth potential of the top small-cap stocks, it’s essential to remain invested in them over the long term.
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