Promising Big Gains
Have you of late looked at stocks of small companies for investing? Though they are rarely on the top of investors’ priority list, they can give very good returns, provided they are chosen with care.
20 PER CENT
is the fall in the Bombay Stock Exchange Small Cap Index between January 1 and June 3. However, select small-cap stocks have given stellar returns.
Small-cap stocks are like trees that have just been planted. Obviously, they will take a few years to grow and blossom.
Gokul Raj P
Executive Director and Head, Investments, HBJ Capital
The first thing one must check is for how long the promoters have been in the business and whether they are backed by a strong team. “Usually, we have a face-to-face talk with the management and visit the facilities of the company before recommending a penny or small-cap stock,” says Gokul Raj P of HBJ Capital Services.
A high promoter stake shows his confidence in the business. You should also ask if the promoter plans to increase his stake. “One has to be extremely cautious while investing in smallcap companies. Attributes such as promoter holding, shares pledged, return on equity and debt-to-equity ratio should be considered carefully,” says Jajoo of Nirmal Bang.
A unique and robust business model augurs well for the company in the long run. If a small company is present in areas dominated by those with deep pockets, then chances are that it will close shop sooner than later.
Small firms are relatively weak in terms of governance, dividend policies and professionalism of the board. This makes them risky.
Senior Research Analyst, Nirmal Bang
High debt means the interest outgo is huge, which can be a big drag.
Experts say institutions avoid buying shares of small companies due to lack of liquidity. But if you come across a small company in which institutions have bought stakes, you need to take the stock seriously. But be careful, as institutions can also take wrong calls.
There are 509 stocks available for trading in the BSE Small Cap index. Out of them, 11% are from the capital goods sector, followed by finance (10.7%), housing (9.75%), metal and mining (5.73%) and health care (5.39%).
Identifying small-cap stocks is more of a bottom-up exercise (being stock-specific) rather than a sector-specific call.
Head of Research, ShareKhan
It is an emerging new-generation private sector bank with 94 branches and 272 ATMs. Its unique selling proposition is the promoter background. The promoter, the Aga Khan Fund for Economic Development, is present in 16 countries and employs over 30,000 people. It holds 18.47% in the bank.
One of the oldest chemical makers in India with a vast experience of handling hazardous chemicals, Deepak Nitrite is an industry leader with 62% share of sodium nitrate and nitrite markets. With its new plant in Dahej, it will be the world’s first fully-integrated optical brightening agent manufacturer. “The brownfield expansion at Nandesari will enable the company to maintain market share amid rising global demand for sodium nitrite and nitrate. The new unit can produce enhanced solar salts which are under research for use in solar panels. The stock can touch Rs 330 in the next 12 months,” says Rajpurohit of Tathastu Advisory. On June 3, it was at Rs 268.
NDTV reported better-than-expected numbers in the fourth quarter of 2012-13. It booked a consolidated net profit of Rs 29.87 crore compared to a loss of Rs 44.68 crore in the corresponding quarter a year ago. The reason for this sharp turnaround is cost-cutting and digitisation. The latter helps in checking underreporting of subscriber numbers and enables broadcasters to command a premium on ad rates.