Looking to invest in Small cap firms? Here are top 6 picks

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Updated: August 19, 2015 1:11:55 PM

MT Educare and Va Tech Wabag are the top small cap bets that may promise investors good returns.

Small cap stocksAnalysts recommend small cap companies as a good bet for investors in the long run. (Reuters)

Shares of small cap companies outperformed blue chips in the past one year. The BSE Smallcap index gained 16.9 per cent to 11,891.91 on August 18 this year as compared to 10,168.80 on August 19 last year. On the other hand, the BSE Sensex jumped 5.34 per cent during the same period.

Stampede Cap, Ricoh India, Rajesh Exports, Gayatri Projects and Bliss GVS Pharma surged 432 per cent, 332 per cent and 311 per cent, 296 per cent and 288 per cent to Rs 617.25, Rs 846 and Rs 604.95, Rs 469 and Rs 179.6, respectively, during this period.

Rasoya Proteins (down 98.43 per cent to Rs 0.27), PMC Fincorp (down 97.75 per cent to rs 3.47) and Centron (down 97.48 per cent to Rs 0.5) dipped the most and stood among the bottom in the performance chart of the BSE Smallcap index.

Jimeet Modi, chief executive officer, SAMCO Securities, said, “More and more retail investors are entering the stock market in the hope of earning quick money. The potential to double money in such small cap stocks are higher compared to the large cap stocks. This is because most of small cap companies tend to grow at the faster rate in an environment of growth in the country. Large cap companies are already well established and therefore are available at fair valuation and have appreciated in tandem with growth number.”

Analysts recommend small cap companies as a good bet for investors in the long run. Here are some top picks for your investment portfolio.

MT Educare
Recommended By: Angel Broking
*Current market price (CMP): Rs 128.40
Why Buy: The brokerage house expects MT Educare to report a strong top-line and bottom-line growth in the coming financial years (FY2016E and FY2017E) on back of healthy growth in its coaching business (school, science and commerce). This would be owing to its strong brand image and with it implementing innovative teaching technologies. Further, Angel Broking expects additional revenue growth from execution of government projects, Robomate product, and tie up with Shri Gayatri Educational Society (SGES) in Hyderabad which has a model similar to pre-university (PU) colleges.

 

Thomas Cook (India)
Recommeded By: Sharekhan
Target Price: Rs 265
CMP: Rs 208.05
Why Buy: In line with its long-term growth strategy, Thomas Cook India (TCIL) has entered into an agreement with the Kuoni Group to acquire Kuoni’s travel businesses in India and Hong Kong for a consideration of Rs 535 crore. At the combined revenue of Rs1,410.5 crore (Indian operations at Rs 897 crore plus Hong Kong operations at Rs 514 crore), the deal is valued at price to sales of 0.38. TCIL has cash and cash equivalent of above Rs 500 crore and hence the funding of acquisition will not put any significant stress on the balance sheet. The deal is expected to complete by December 2015.

The acquisition of Kuoni India will make TCIL a strong player in the branded outbound and inbound tourism space in India. Also, SOTC (Kuoni’s brand) has a strong customer connect in the Indian market. This provides opportunity for TCIL to go for a change in brand name (if required), as its licence to use the brand Thomas Cook will expire by 2025. Further, the acquisition of Kuoni’s Hong Kong business opens gate for TCIL to enter in China, which is globally one of the largest outbound tourism markets.

Kalpataru Power Transmission
Recommended By: Sharekhan
Target Price: Rs 325
CMP: Rs 263.90
Why Buy: For Q1FY2016, Kalpataru Power Transmission Ltd (KPTL)’s stand-alone reported a very healthy earnings growth of 16 per cent YoY to Rs 48 crore, ahead of estimate. KPTL (standalone) is having Rs 5,600-crore-worth of orders in hand and L1 of around Rs 2,500 crore. However, the management lowered its revenue growth guidance for 2015-16 from 15 per cent to 10 per cent, given the slower conversion of L1 orders into firm orders. On the positive side, the brokerage house expects operating margin of its standalone business to improve (above 10 per cent), with the turnaround of its infrastructure business and depletion of the legacy projects.

Sharekhan is positive on the KPTL.

IL&FS Transportation Networks
Recommended By: Sharekhan
Target Price: Rs 225
CMP: Rs 118.25
Why Buy: For Q1FY2016 IL&FS Transportation Networks (ITNL)’s consolidated adjusted earnings stood at Rs 2.9 crore as against an adjusted loss of Rs 6.4 crore (adjusting for Rs144 crore of stake sale gain during Q1FY2015). The earnings were affected sequentially on account of higher interest expense (up 21 per cent YoY) and depreciation (up 391 per cent YoY). The revenue for the quarter (up 16 per cent YoY) was supported by higher construction income (up 10 per cent YoY) and build-operate-transfer (BOT) income (up 9 per cent YoY). However, Elsamex revenue declined by 6 per cent YoY on account of currency devaluation. Further, a higher contribution of the toll and O&M income resulted in a better EBITDA margin (up 267 basis points) for the quarter.

The company will be commissioning three new projects during FY2016 taking its total portfolio of operational projects to 22 and is expected to maintain its BOT revenues over the next two years. However, the company is finding too difficult to get funding for special purpose vehicles (SPVs) in the near term which is likely to result in a higher interest outgo for the near term. Subsequently, ITNL’s consolidated debt-equity (D/E) ratio has risen to 4.21x (4.11x during Q4FY2015) relying more on short-term debt funding.

We have revised our earnings estimates for FY2016 and FY2017 factoring higher interest expense and lower fee income during the same period. Although, ITNL has been able to boost its order book with recent project wins, Sharekhan believes the near-term high leverage will remain an overhang to overcome. On the other hand, from the valuation point of view, the stock is currently trading at lower than book value with issues mentioned above. The brokerage house has ‘Buy’ rating on the stock.

Va Tech Wabag
Recommended By: Sharekhan
Target Price: Rs 850
CMP: Rs 759.65
Why Buy: For Q1FY2016, Va Tech Wabag (VTW) reported very weak consolidated earnings, despite a strong growth recorded by its standalone entity, due to losses incurred by its overseas subsidiaries. The standalone earnings doubled YoY to Rs 17 crore in Q1FY2016, backed by 98 per cent revenue growth and 241 basis points of OPM expansion. However, the overseas subsidiaries surprised negatively with a net loss of Rs 17 crore, as revenues declined by 26 per cent YoY and it turned negative at operating level with substantially higher employee cost due to extended stay of employees at Oman-based desalination project (worth Rs5 crore). Further, VTW has provided Rs 5 crore towards liquidity damage as a conservative and prudent accounting practice. These two are exceptional costs of Rs 10 crore which pressurised the subsidiaries’ result. Consequently, the consolidated entity reported a net loss of Rs 10 crore in Q1FY2016, as against a profit of Rs 6 crore in Q1FY2015.

The order inflow has been healthy in this quarter at Rs 1,106 crore, taking the order backlog to Rs 7,631 crore (including framework contracts worth Rs1,542 crore).

Sharekhan believes, while the opportunities in the water related business is huge globally, the company is in a phase of re-organising the structure with bringing the operations in four clusters geographically and is constantly looking for opportunities in emerging economies. To establish its brand and entry into some of the new regions, it could face some challenges but the long-term growth opportunities are intact. The brokerage house retains ‘Buy’ rating on Va Tech Wabag, given a quality engineering stock with its niche expertise, professional management, structural growth story of water industry, strong balance sheet (net cash positive) and RoIC of above 30 per cent in its favour.

Techno Electric
Recommended By: Centrum Broking
Target Price: Rs 630
CMP: Rs 563.40
Why Buy: The brokerage house retains ‘Buy’ rating on Techno Electric (TEEC), with TP of Rs 630. Earnings were driven by EPC segment, which delivered a high operating profit margin of 12.9 per cent in Q1FY16 and outlook appears robust, with a Rs 2,400 crore order book and margin guidance ahead of estimates. The company reported a book profit of Rs 250 crore and indicated a tax profit of Rs 100 crore (in line). But, by availing MAT credit, TEEC would have zero tax liability on the 45MW asset sale. The guidance to monetise the balance wind asset entailing an EV of about Rs 750 crore is intact and has the potential to unfold shareholder value. Additionally, our inference of RoE of over 30 per cent on EPC segment and RoCE of over 70 per cent for the forecast period, FCF yield of 11 per cent in FY17E, and low debt to equity of 0.5 in FY17E make it a compelling investment bet.

Factors to watch
Before investing in smallcap stocks an investor should look at the business model, management quality and consistent track record of delivering strong financial performance. One can also evaluate if the business has potential for scaling up operations to a larger size and whether the management has capability to scale up and run a bigger organisation.

(*Current Market Price as on August 18, 2015)

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