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Add the 5 Most Undervalued Small Caps to Your Watchlist

Historically, small-cap stocks have outperformed in times of economic recovery.

Looking to invest in the next Amazon, Titan or Bajaj Finserv?

Then you should definitely explore your options in small-cap stocks.

Now you may be asking…why are small caps a good investment?

Historically, small-cap stocks have outperformed in times of economic recovery. This is playing out as the economy is currently in recovery mode. The entire value chain across industries, including smaller companies, is expected to benefit.

Small-cap stocks have been known to generate returns in excess of 100 times their original value in some cases. Investors who are willing to take some high risk and want multiple returns can consider investing in small-cap stocks.

So can 2022 be the year you focus on building your small-cap portfolio? Possibly, yes.

In the long run, there are over 4,500 small cap stocks listed on the Indian Stock Exchange. If some of them are underrated, that’s just icing on the cake.

Here’s a list of the top 5 undervalued small caps you should add to your list.

#1 Nest Network

If you’re looking to invest in the media and entertainment (M&E) space, good news awaits, as fiscal 2022 is set for a strong recovery.

Some of the key factors driving the growth are favorable regulations, technological innovations, and emerging investment opportunities in the broadcast and cable TV markets.

This makes Den Networks, one of India’s leading cable distribution companies, a formidable competitor in the list of the most popular undervalued small caps for 2022.

It currently has a market capitalization of Rs 1,770 crore and its shares are trading at Rs 36.9 per share. The price-to-earnings (PE) ratio is low at 9.2, while the price-to-book (PB) ratio is 0.6, well below the M&E industry benchmark.

Founded in 2007 and led by an experienced management team, Den Networks is a company well-positioned for long-term growth.

With aggressive expansion plans in place, the company diversified into an all-India Internet Service Provider (ISP) offering broadband internet services. It currently operates in more than 500 cities/towns in 13 across the country.

Strong support from the parent company allows Den to focus on the next growth area. This includes creating regional content for the Tier 2 and 3 markets.

The goal is to be able to close the current supply and demand gap in these regional markets to enable this growth trajectory.

The proof of the pudding lies in Den Networks’ profit growth. In fiscal 2021, it surged to 184.9% despite the impact of the pandemic. The profit after tax (PAT) of Rs 245.9 crore came from its solid foothold in the Hindi region.

Behind the strong balance sheet, Den Networks recorded total sales of Rs 1,240 crore and reduced its total debt to zero in FY 2021 from Rs 2,133.35 crore in FY 2020.

Despite a low return on capital (ROCE) of 2.1% over the past 3 years, the company maintains a healthy current ratio of 4.7.

#2 Sandes

Here’s another undervalued small-cap stock from the media and entertainment industry.

Sandesh was established in 1923 and has a market capitalization of Rs 5.7 billion. The company is currently the largest and most influential media company in Gujarat.

Sandesh shares are trading at a high of Rs 759.6 per share – with a P/E ratio of 7.2, well below the 3-year industry average P/E of 15.8.

The PB ratio was 0.6 compared to the industry benchmark of 54.5 over the trailing 12-month period.

The company started out as a Gujarati daily newspaper. It has since branched out into various other branches of the media and entertainment industry, including TV channels, magazines, OOH and digital.

The company’s promoter holdings remained unchanged at 74.8% as of March 2022, giving the company a direction to make its digital footprint more robust.

The company also raised its EBIDTA from Rs 81.2 crore to Rs 122.2 crore in FY21, boosting returns from treasury operations.

Currently, Sandesh has virtually no debt on its books and maintains a healthy liquidity position. A strong financial risk profile, marked by a comfortable capital structure, indicates that the company has healthy profitability for the foreseeable future.

Profit growth rose to 53% last year, helping Sandesh earn a spot on our top 5 undervalued small caps list.

#3 Indian Man Industries

As the company of the Man Group, Man Industries India is one of India’s leading manufacturers and exporters of large diameter carbon steel pipe.

Founded more than 25 years ago, the company dominates the pipeline sector. It is an approved supplier to major domestic and international oil and gas facilities.

Man Industries is currently valued at Rs 5.3 crore. The PE is 5.3 and the PB ratio is hovering at 0.6. Both are well below the industry average at 31.5 and 2.9, respectively.

The stock is currently trading at a high of Rs 77.6. Shares are down 17 percent from yesterday’s high of Rs 89.5.

The company has a strong leadership team despite a reduction in promoter ownership to 44.7%.

Man Industries continues to focus on leveraging its existing capabilities to drive the overall growth of the organization. The company has established new manufacturing facilities with cutting-edge technology across the country to increase revenue in fiscal 2022.

Man Industries is aggressively focusing on high-box-office projects in 2022 and has established a real estate subsidiary outside of its core business activities.

Global demand for steel pipes is rising. The industry is expected to grow at a CAGR of 6.2% through 2027. Domestic demand is also as the Indian government announced an expansion of the gas pipeline network from 18,000 kilometers (kms) to 34,500 kilometers.

Man Industries increased cash flow in fiscal 2021. The company also posted an 18.9% increase in revenue in fiscal 2021 despite ongoing challenges from the pandemic.

Based on the results for the third quarter of fiscal 2022, earnings before interest, tax, depreciation and amortization (EBITDA) increased by 27.8% year-on-year, while PAT increased by 81.7%.

All of this points to the fact that Man Industries has maintained a healthy financial risk profile, making it a noteworthy entry on this year’s list of the top 5 undervalued small caps to watch.

#4 Kiroska Industries

The next entrant on the list of undervalued small-cap stocks is Kirloskar Industries, a name synonymous with wind power in India.

It is a wholly owned subsidiary of the 130-year-old Kirloskar Group, which has played a key role in driving India’s economy.

Kirloskar Industries was established in 1978. Shares of the company are trading at Rs 1,424.6 per share.

The company is currently valued at Rs 1,390 crore. PE was 23.9. This is well below the industry average of 63.1. On the other hand, the price-to-book ratio of 0.7 also lags the industry average of 2.3 over the past 12 months.

Back in 2017, Kirloskar Industries’ earnings soared and the growth trajectory was impressive.

Since then, the company has been able to weather the ups and downs of the pandemic and has been on a path to profitability.

In fiscal 2021, the company’s EBIT margin increased from 14% year-on-year to 22%.

A high promoter holding of 72.6% indicates that the company will be managed in the interests of shareholders. With owners investing nearly Rs 12 billion in the company, they will be incentivized to create long-term value for their stakeholders.

By 2022, the company has virtually no debt and a solid liquidity position with a current ratio of 64.7. That makes Kirloskar Industries an undervalued small-cap stock to this year.

#5 Gloucester

The former Kettlewell Bullen & Company has been renamed Gloster and has 140 years of textile manufacturing heritage. With its solid position in the jute industry, it’s the last company to appear in our pick of undervalued small-cap stocks in 2022.

Driven by the Bangur family, Gloucester is listed on the BSE and is currently valued at Rs 5.9 crore. The shares are trading at Rs 1,077.7 per share.

PE hovers around 7, less than half of the industry average of 18.8. The PB ratio is 0.6, while the industry average is around 6.6.

The company is a market leader in the production and export of all types of jute and related products.

In addition to jute manufacturing, Gloucester also diversifies its product portfolio into woven and non-woven jute geotextiles, and produces large volumes of jute products for interior decoration as well as packaging for industrial and agricultural products.

To promote sustainable alternatives to plastics, Gloucester signed a Memorandum of Understanding (MoU) with the Telangana government to invest Rs 330 crore in the jute industry in September 2021.

Needless to say, a high promoter holding of 72.6% instills confidence in the company and its future growth prospects. Gloster has healthy cash flow management with a PAT of Rs 41.11 crore as at March 31, 2021. A year-on-year increase of nearly 20%.

Despite the risks of the regulated nature of the jute industry, Gloster offers a strong financial profile, making it an attractive investment proposition for investors looking to expand their portfolios in this space.

What to expect from small-cap stocks in 2022?

Small caps have done well over the past two years.

Now the real question is – will the party continue in 2022?

Market experts believe this trend will spread in 2022. That more or less gives you a reason to invest in undervalued small-cap stocks this year.

When the broader market gets cheap, as in March 2020, one should greedily focus on undervalued small-cap stocks with strong fundamentals. However, given the volatility of small-cap stocks, you have to consider the high-risk and high-reward outlook. In other words, get ready for some wild swings.

Again, there is a way to overcome volatility. A long-term investment that will help you through any short-term market downturn.

Also, if you stick around longer, small caps may grow into midcaps or even large caps if the business does well.

All you need to do now is spot and smartly invest in some truly undervalued small-cap stocks, and you may end up easily picking your next Amazon.

Isn’t that life changing?

Happy investing!

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be considered a stock recommendation.

This article was co-published by Equitymaster.com

(This story has not been edited by NDTV staff and was automatically generated from the syndicated feed.)

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