Best penny stocks for the long-term? Here are 5 To watch out for

Market


Penny stocks are a class of low-priced public companies. These low-priced stocks offer the chance to double, triple or quadruple your money over the long term. 

They can turn your 10,000 investment into tens of lakhs over the long term. That is, if you carefully select the fundamentally strong companies from the lot.

And who doesn’t like a bargain?

Unfortunately, penny stocks enjoy a bad reputation for burning investors’ wealth. Most investors assume that these low-priced companies tend to have major fundamental defects, flawed management teams, unfavourable competitive positions etc. Moreover, the dreadful price swings scare them away.

Penny stocks are known to erode wealth faster than any other group.

However, they also present the biggest upside potential of any group of stocks out there. So, if you do your due diligence and hold on to these stocks for the long term, you can make some fantastic returns.

These low-priced stocks can turn out to be the diamonds in the rough you have been looking for.

So, keeping that in mind, we highlight five penny stocks for long term that must be on your watchlist.

 

#1 National Aluminium Company Ltd

National Aluminium Company (NALCO) is a government entity that operates in mining, metals, and power segments. It is the country’s largest integrated bauxite-alumina-aluminium-power complex.

NALCO share price has fallen by 45% on year to date (YTD) basis. 

According to the June 2022 filings, the late Mr Rakesh Junjhunwala sold his stake in the company. While we don’t know the exact reason, fears of a recession resulting in weak demand for resources and a strengthening US dollar could be attributed to the same. 

Aluminium prices have been volatile recently, led by geopolitical issues. Moreover, NALCO has been facing issues in coal procurement due to disruption in the global demand-supply, further dampening profits.

All this has resulted in the stock taking a beating in the past. However, none of this takes away from the fact that the company is a fundamentally strong stock.

 

Financial Snapshot

m, consolidated FY20 FY21 FY22
Revenue

84,718

89,558

141,808

Growth (%)

-26%

6%

58%

Net Profit

1,382

12,995

29,520

Total Debt

0

0

0

Debt to Equity (x)

0

0

0

Source: Equitymaster

NALCO is one of the most efficient players in the country. Its performance bears witness to the same. The sales have grown at a 4-year CAGR of 10.8% and the net profits at 21.8% over the same period.

This performance has trickled down to the return on equity which is at a 4-year average of 13.2%. The company is a dividend paymaster with a 4-year average dividend yield of 7.2%.

While the business has suffered in the near term, the company is well poised to benefit from the growing demand for aluminium over the long term.

The highest growth in terms of absolute demand will come from the transportation sector. The shift from vehicles powered by traditional fossil fuels to electric vehicles (EVs), will go from consuming 19.9 MT of aluminium in 2020 to consuming 31.7 MT in 2030. 

More than half of the aluminium consumption growth comes from the transportation sector in Asia ex-China is expected to come from India (27%), Japan (17%), and the Middle East (12%). 

Apart from this, the transition towards green energy sources will strengthen the sector’s demand for aluminium, which will reach 15.6 MT in 2030 starting from 10.4 MT in 2020.

 

#2 Ircon International Ltd.

IRCON International, a Government of India entity, is a construction company that looks after the railway and highway construction, EHP sub-station (engineering and construction) and mass rapid transit system.

The largest revenue stream comes from the railway segment, which accounts for over 90% of the business. 

The company is to benefit heavily from the increased government focus towards infrastructure projects. It has reported a large orderbook over the next 1-2 years. 

Moreover, IRCON has just one other government entity to compete with, Rail Vikas Nigam. However, there is talk of the two being merged to form a giant monopoly. Not only will this boost capital allocation, but the business will benefit heavily from the synergies that may arise.

 

Financial Snapshot

m, consolidated FY20 FY21 FY22
Revenue

53,911

53,498

73,797

Growth (%)

12%

-1%

38%

Net Profit

4,549

3,592

5,323

Total Debt

0

3,121

13,044

Debt to Equity (x)

0

0.1

0.3

Source: Equitymaster

 

The company’s leadership status has allowed the business to expand. The revenue has grown at a 4-year CAGR of 16.5% and the net profit at 7.9%.

The 4-year average return on equity stands at 10.5%. The balance sheet is strong, with negligible debt on its books. This has allowed them to be generous to their shareholders with a 4-year average dividend yield of 2%.

 

#3 Genus Power Infrastructures Ltd.

Third on our list is Genus Power.

Genus Power offers end-to-end metering solutions to the power distribution industry. It is among the largest players in India’s electricity metering solutions industry, with a market share of 27%.

The company has developed ‘smart metering solutions’ with the help of an internal R&D centre. Apart from metering, Genus Power also engages in engineering, construction, and contracts (ECC) for the power sector, which complements its existing business.

Smart energy meters are a vital part of the advanced metering infrastructure. It is a critical component of the modern power infrastructure sector. The segment can strongly benefit from the country’s ongoing power sector reforms initiatives like curtailing the high aggregate technical and commercial losses (AT&C) losses. 

Besides, smart metering carries the potential to make the power sector increasingly resilient, transparent, digitized, and accountable, ensuring robust demand over the long term.

 

Financial Snapshot

m, consolidated FY20 FY21 FY22
Revenue

10,604

6,086

6,851

Growth (%)

0%

-43%

13%

Net Profit

735

697

584

Total Debt

233

75

8

Debt to Equity (x)

0

0

0

Source: Equitymaster

 

Genus Power’s business was affected by the pandemic. However, the total sales have grown by over 12% in the past year. 

The company is debt free. It reported a return on equity (ROE) of more than 6% in the past year and a dividend yield of 0.4%.

 

#4 Grauer & Weil (India) Ltd.

Fourth on our list is Grauer & Weil (India) Ltd.

Grauer & Weil is the only company in India offering complete corrosion and protection solutions on all types of substrates across various industry segments.

The surface finishing segment is the largest, accounting for over 88% of the company’s total revenues. The balance comes from the engineering and the mall business.

The business has been doing well on the back of significant investments in the manufacturing sector and is expected to benefit from the same going forward.

The uptick in demand for automobiles bodes well for the business. Besides, the rising demand for the irrigation, water supply and sanitation sectors are also key growth drivers for the corrosion and protection solutions segment. 

 

Financial Snapshot

m, consolidated FY20 FY21 FY22
Revenue

6,194

6,050

7,682

Growth (%)

3%

-2%

27%

Net Profit

758

688

788

Total Debt

2

2

1

Debt to Equity (x)

0

0

0

Source: Equitymaster

 

The company’s leadership has enabled a smooth road to profitability. The total sales and net profit grew at a 4-year CAGR of 12.1% and 5.4%, respectively.  

The return on equity has been strong, averaging 14.7% over three years. The company has rewarded its investors well, sporting a three-year average dividend yield of 1.2%.

 

 

#5 Haldyn Glass Ltd.

Last on our list is Haldyn Glass. 

The company has been in the soda lime flint & amber glass containers business for over five decades. Simply put, the company manufactures glass bottles and containers for packaging for the fast-moving consumer goods (FMCG), pharmaceutical, beverages, liquor, and beer industries.

The vision of a plastic-free India has already stopped the use of single-use plastic. The government’s efforts to curb the use of plastic in most forms of packaging is a major growth driver for the business. 

The ban on plastic has led to an increased usage of glass, and it continues to gain momentum as the preferred packaging option for environmental well-being.

The demand for glass containers and bottles is expected to grow well, led by the world’s enormous youth population and rising urbanisation. This bodes well for the company’s business in the long run.

 

Financial Snapshot

m, consolidated FY20 FY21 FY22
Revenue

2,294

1,779

2,128

Growth (%)

3%

-22%

20%

Net Profit

105

100

109

Total Debt

0

0

0

Debt to Equity (x)

0

0

0

Source: Equitymaster

 

The sales and profits have grown at a 4-year CAGR of 6.9% and 13.8% respectively. However, the returns have been weak at a 4-year average of 7.2%. 

The company is debt free and has been generous to its shareholders, registering a 4-year average dividend yield of 1.9%. 

 

In conclusion

Investors who are new to the market usually get lured into investing in penny stocks. 

While they do offer the potential for quick returns, you must not forget that penny stocks can be very risky. They can fall as quickly as they can rise, eroding 50-70% of your investment value in a short span. That is why penny stocks are not for an investor with a low-risk profile.

While you may not eradicate these risks, you can certainly minimise them. A great way is to invest only 5-7% of your total equity portfolio in penny stocks. Doing this will minimise your exposure, lowering your risk.

In the end, it all boils down to one thing, research. If you conduct independent research and follow sensible investing principles, you may spot the next multibagger stock (like Eicher Motors or Bharti Airtel) for your portfolio.

 

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

 

This article is syndicated from Equitymaster.com

 

 

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