27 Mar 2017 13:29 IST

Five dark-horse picks

Here are five stocks with market capitalisation of under ₹5,000 crore, for those ready for some risk

If you are a conservative investor, using the mutual fund route is the best way to invest in stocks. But if you are game for some excitement, you might want to dabble directly in stocks, especially small-cap stocks.

Stocks that are smaller in size, in terms of market capitalisation, carry higher risk. The reasons are — one, lower traded volume increases price volatility, two, information is usually scarce on these companies, three, business risk is higher since many of these companies are dependent on a single product and four, governance risk is also higher in these stocks.

That said, small-cap stocks have the capacity to deliver far greater returns when compared to large-cap stocks. Sample this: there were 16 stocks with market cap more than ₹50,000 crore in January 2009. These stocks delivered an average return of 138 per cent in the last eight years but 4 out of every 10 stocks in this group delivered negative returns.

On the other hand, there were 1,582 stocks with market cap less than ₹5,000 crore in January 2009. These have delivered 695 per cent returns till date and just a fourth of these delivered losses.

We have picked five stocks with market capitalisation of under ₹5,000 crore, for those ready for some risk. These stocks have delivered more than 20 per cent growth in revenue and profits in recent times and are operating in exciting niches. You can consider spicing up your portfolio with one of these dark horses.

UFO Moviez

UFO Moviez, which made its initial public offer in 2015, is well-placed to make the most of the increasing spends on leisure activities in India. While the name might make one smirk, the business isn’t that outlandish. The company was the front-runner in distribution of digitised Indian cinema content and is the key driver for the same-day release of movies across the country. It’s the largest player in this segment and has tie-ups with screens across India, West Asia, Israel, Mexico and the US.

Its platform for in-cinema advertising is expected to contribute a large chunk to its future growth. With its capital investments almost complete, the company is now trying to leverage its existing infrastructure to drive growth.

The stock is attractively valued, trading at 19 times its trailing twelve months’ earnings--near the lower end of its PE band of 17 and 21, since listing.

The company charges film producers for distribution, as well as movie exhibitors. In the first three quarters of FY17, it earned 26 per cent of its revenue from exhibitors, 44 per cent from distribution and 30 per cent from advertising. Growth in distribution and exhibition is expected to moderate in the coming years at lower single digit, especially with its agreements with major Hollywood studios expiring in June 2018.

It’s advertising revenue is expected to grow over 20 per cent in the near future. The company is trying to expand by opening theatres through the franchisee model in tier II and tier III cities. The first theatre under this model was recently operationalised in Punjab.

Other businesses such as Caravan Talkies, which takes movies to rural areas to screen after sun-down and open air movies are yet to take off but can bring some advertising revenue later.

UFO Moviez’ revenue grew at 29 per cent compounded annual rate between FY12 and FY16. The December quarter of FY17 was hit by demonetisation as well as one-time salary pay-outs.

But in the nine months to December 2016, revenue grew 4.3 per cent y-o-y, to ₹440 crore. Despite the difficult third quarter, EBIDTA margin was 30.5 per cent and net profit margin 9.8 per cent, in the first nine months of FY17.

Sterlite Technologies

The stock of Sterlite Technologies is a good buy for investors wanting to bet on the ‘digital India’ theme and data boom. The company has a leadership position in the domestic optic fibre/cable space, with about 40 per cent market share.

It offers system and network integration services to private telecom companies and government (for smart cities and ‘Digital India’ projects).

After the acquisition of Elitecore Technologies, a global IT product company with presence across 40-plus countries in 2015, Sterlite has set foot in software solutions too. The company has a manufacturing capacity of 25 million kilometre in optic fibre and 15 million km in optic fibre cable. Operating profit margins stand at around 21 per cent — the highest in the industry. Its peer, Vindhya Telelinks, also a listed player, reports margin of 17 per cent.

Sterlite has grown sales at a compounded annual rate of 28 per cent between 2011-12 and 2015-16 (revenue in 2015-16 was at ₹2,265 crore). Profits (before interest and tax) have grown by 40 per cent, helped by margin expansion.

With investment by global telecom companies in fibre infrastructure expected to witness a big jump in the next few years due to the roll-out of 4G and 5G, there is a good opportunity for optic fibre makers such as Sterlite.

The company exports its optic fibres to Europe, China and other countries. Contribution of export revenues increased from 24 per cent of the overall revenues in 2015-16 to 37 per cent in the first nine months of 2016-17. In the domestic market too, demand outlook for optic fibres is strong.

With the Centre wanting to ramp up the BharatNet project, Sterlite will benefit as it is one of the suppliers of OFC for the project.

Further, as the company is also working on a few smart city projects as a system integrator, revenue will grow strongly. In the Gandhinagar Smart City project, the company is creating a Wi-Fi city with 400-500 access points together with smart parking, setting up 200+ CCTV cameras and a central control room.

In the first half of 2016-17, Sterlite saw a slowdown in the products business but in the recent December quarter, it revved up. The overall revenue growth in the quarter was 23 per cent (volume growth in optic fibre of 26 per cent and optic fibre cable was 17 per cent).

The order book stood at ₹2,674 crore in the December quarter, up from ₹2,324 crore in the September quarter and ₹2,099 crore in the June quarter.

At the current market price, the stock of Sterlite Technologies discounts its estimated earnings for 2017-18 by 20 times.


The stock price of Cupid Ltd (Cupid), which manufactures and sells male and female condoms, has gone up by over 30 times in the last three years and currently trades at ₹320. The company, which has a current market capitalisation of about ₹350 crore, operates both in the business to business (B2B) category as well as business to consumer (B2C) category.

Increasing awareness about the benefits of safe sex, consistent orders from international development agencies such as the United Nations Population fund, World Health Organisation, National Department of Health – South Africa and from Russia and Sub-Saharan African countries, have kept the pipeline robust. Export orders contribute close to 80 per cent of the sales revenue for the company.

Besides, Cupid and Hindustan Latex, two of the four major manufacturing companies worldwide, have started manufacturing female condoms recently.

With increasing female literacy and growing women empowerment worldwide, the female condom product is expected to see a substantial uptick in sales.

As of September 2016, the company has an order book of about ₹180 crore to be executed till June 2018. Of this, ₹40 crore is for higher margin female condoms.

Repeat orders

Besides, the company management has indicated good order book inflow through long-term repeat order contracts from existing B2B customers, international development agencies, governments of other countries and other private orders. The company has a high capacity utilisation of close to 90 per cent.

Going forward, the management intends to increase sale of higher margin female condoms through both B2B and B2C channels.

A small share of the revenue is contributed by the sale of lubricant jelly.

Between FY12 and FY16, sales and net profit grew at an annualised rate of 24.4 and 126.9 per cent respectively. For FY16, the revenue was about ₹62.8 crore and net profit was ₹15.9 crore.

For the nine months ending December 2016, revenue and net profit was ₹66.7 crore and ₹15.6 crore respectively, a growth of 49 and 38 per cent respectively compared to the same period a year earlier.

The cash at the end of September 2016 is around ₹17 crore, which can be used for brand promotion and plant automation and expansion.

Talwalkars Bettervalue Fitness

Looking for a bet on the consumption theme in the country? Talwalkars Better Value Fitness, a leading player in the country’s fitness sector, has a lot going for it. An under-penetrated market, a formidable young population that can afford to to invest in fitness packages, growing preference for organised sector players, and the company’s expansion plans should keep it on the growth path. From 90 fitness centres in 2011, the company now has about 200 centres across formats in India and Sri Lanka (owned and through subsidiaries and franchises). There are plans to add another 100 centres in the next three years.

With member additions and price realisations rising at a healthy pace, the company’s revenue grew at an annual average of about 20 per cent over the past four years to ₹260 crore in 2015-16. And with operating margin steadily improving to almost 60 per cent, profit grew more strongly (above 25 per cent on average over the past four years) to about ₹55 crore in 2015-16.

In the nine months ended December 2016 too, profit growth has been robust at about 18 per cent y-o-y. Opening 20 new gyms in Bengaluru helped the company shrug off demonetisation blues in the December quarter and grow profit 14 per cent y-o-y. Efforts at cost control through reduced rentals for premises should aid margins.

Growth potential

The company has a pan-India presence in 86 cities with nearly 60 per cent of its centres in Tier II and Tier III cities. Besides expansion plans, the impending de-merger of the lifestyle business into a separate company, which will also be listed, can unlock value for shareholders. Both businesses hold significant growth potential.

Despite taking on debt to fund acquisitions, the company’s financial position is healthy with debt-to-equity under one time, leaving room for expansion plans. The stock is also priced attractively. It currently trades at about 11 times trailing twelve month consolidated earnings. This is cheaper than the 14 times the stock traded at in the past three years.

Satin Credit Care Network

Microfinance institutions (MFIs) in India, catering to the needs of the weaker sections of society in the hinterlands, have had a good run in the last couple of years. Satin Credit Care Network, the fourth largest MFI in the country in terms of gross loan portfolio, is a case in point. The company, with strong presence in North India, has seen its loan portfolio grow by a stellar 76 per cent annually between FY14 and FY16. Earnings, as a result have nearly quadrupled during this period.

In the current fiscal too, the company’s loan and profit growth has been on a healthy footing but for the slowdown in disbursements and collections, post demonetisation.

Nonetheless, investors with a long-term perspective, willing to weather near-term volatility and take on some risk inherent with the microfinance industry, can bet on Satin Credit Care.

The positives

Consistent growth in profitability and good asset quality thus far, comfortable capitalisation, long-standing experience of the promoters and diversified funding mix are key positives.

Also, collection efficiency, which took a knock between November and December, is gradually on the mend, and the company has been focussing on cashless disbursements and collections.

Satin Credit’s gross loan portfolio (standalone) stood at ₹3,344 crore as of December 2016, of which the group lending business constituted over 99 per cent. The company recently started to diversify into other segments such as individual micro loans and loans to micro, small and medium enterprises.

It also recently acquired majority stake in TSPL which acts as a business correspondent for various banks. The company is also looking to foray into the affordable housing segment.

The cash crunch post demonetisation impacted the company’s disbursements. While the loan portfolio grew by 47 per cent YoY as of December quarter, it declined 11 per cent sequentially. Asset quality too slipped, with gross non-performing assets as a per cent of loans increasing marginally from 0.24 per cent in September to 0.5 per cent in the December quarter.

Collection efficiency, which was a robust 99 per cent pre-demonetisation, fell to 78 per cent between November 2016 and February 2017, driven by steeper slowdown in certain markets of UP, Uttarakhand and Maharashtra.

Due to concerns on asset quality, ICRA recently downgraded the outlook from stable to negative while retaining BBB+ rating on its debt instruments.

However, there has been an improvement in the collection efficiency in February to 89 per cent.

The lag for the months of November, December and January is 6 per cent, 7 per cent and 10 per cent respectively — implying that 6 per cent of borrowers have not paid their November instalment (over 90 per cent of borrowers are back into the system).

While the company has higher exposure in certain States -- UP, Bihar and MP constitute 68 per cent of loans — it has been consciously reducing concentration. In FY14, the three States constituted a little over 80 per cent of loans.

At the current price, the stock is trading at 2 times one year forward book. Bharat Financial Inclusion (formerly SKS Microfinance), the second largest MFI, trades at 3.2 times.

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