Fastest growing smallcap companies of 2022 to add to your 2023 watchlist

Market


Of all the variables that went into markets, business and GDP forecasts, it was Coronavirus that caused the biggest swing, one that was never factored in.

Several countries including, China, Japan, and the US have seen a spike in Covid cases of the new variant BF.7. No one knows whether the new variant will cause a new covid wave in India or it will be less severe this time.

So how do we factor it in now, knowing that a cure has not been developed yet, and that Indian stock markets have already caught the flu?

Before we get to that, let’s look at how smallcaps performed after Covid initially struck the world.

The smallcap index gained 5,400 points (61.5%) in just 5 months (from April 2020 to August 2020). Even during the second wave, the BSE Smallcap index grew over 5,800 points (28%) in five months.

This shows that smallcaps have rebounded pretty quickly after uncertain situations like the current one.

Given that too many tailwinds are at play for smallcaps… China plus one, product linked incentive (PLI) scheme, and their aggressive capex for coming years, smallcaps are likely be on a growth trajectory as we move into a new year.

Today, we take a look at 2022’s fastest growing smallcap companies. These companies will be exciting to track as we move on to a new year.

#1 Vinyl Chemicals (India)

First on our list is Vinyl Chemicals, a Parekh Group company.

It is the fastest-growing smallcap company in 2022, with a sales growth of 114% over the last year. Its profit also grew by 206% during the same time.

This was driven by higher demand for chemicals and a depreciating rupee.

Vinyl Chemicals is engaged in trading chemicals with a focus on trading Vinyl Acetate Monomer (VAM). The company supplies monomers to the paint, textile, and adhesive sectors. It also trades in various other speciality chemicals in India and abroad.

In the last three years, its revenue has grown at a compound annual growth rate (CAGR) of 32.1%, driven by high price realisations. The net profit also grew at a CAGR of 67% during the same time.

As a result, its return on equity (RoE) has improved from 12.2% to 36.3% in the financial year 2022.

What’s more, the company has consistently paid dividends to its shareholders since 2011.

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Vinyl Chemicals has also posted record numbers in the latest quarterly results. Its revenue grew 23.8% year-on-year (YoY) due to China plus one strategy playing out and a temporary shift in demand from Europe to India.

The net profit grew by 188.6% YoY on the back of higher revenues.

The market has reflected all this in its share price performance. Vinyl Chemical’s share price rose more than 90% in the last one year.

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Going forward, high demand from domestic and international clients and the government’s support to improve the sector are expected to drive the revenue and profit of the company.

#2 Affle India

Second on our list is Affle India.

The tech company recorded a sales growth of 109.3% and a profit growth of 59.4% in the financial year 2022, driven by new consumer conversions.

Affle India is a global technology company with a consumer and enterprise platform that delivers acquisitions, engagements, and transactions for leading brands through mobile advertising.

It also enables offline businesses to go online through app development, online-to-offline (O2O) commerce, and data analytics.

Affle India strongly focuses on research and development (R&D) and has six patents related to digital advertising. It has also filed 14 patents for approval.

Its differentiated business model of cost per converted user (CPCU) has helped the company grow its revenue by 50.2% (CAGR) in the last three years. The net profit also grew by a CAGR of 48.7% during the same time.

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To cater to the growing global megatrends, the company unveiled Affle 2.0 strategy in 2020 for sustainable growth.

In line with this strategy, the company has acquired several companies to build its capabilities and improve its competitive moat.

Despite these acquisitions, the company has maintained its debt to equity at 0.1x with an interest coverage ratio of 35.7x.

Its RoE and return on capital employed (RoCE) for the financial year 2022 stood at 18.3% and 20%, respectively.

Since its inception in 2019, Affle India share price has risen by over 490%.

Affle India Share Price – Performance Since Inception

 

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Affle India share price is falling at present, in line with other technology giants.

Going forward, the fast-growing digital ad market, growing penetration of connected devices, rapid digitalization, and growth in online commerce will drive its revenue and profit growth.

#3 Apcotex Industries

Next on our list is Apcotex Industries, a leading producer of synthetic rubber.

The company’s sales and net profit grew by 77% and 123.5% in the financial year 2022, driven by growth in volumes.

Apcotex Industries produces synthetic rubber and synthetic latex in India. It also has the broadest range of emulsion polymers available in the market. To add to this, it has a monopoly in manufacturing some products, such as nitrile latex.

The company’s products find use in various industries, including paper, textiles, carpet, automobile, and footwear.

Apart from a strong domestic presence, the company exports its products to over 40 countries.

In the last three years, its revenue has grown at a CAGR of 24.3% on the back of volume growth, led by a change in product mix and customer mix. The net profit has also grown at a CAGR of 81.2% during the same time due to the de-bottlenecking exercise undertaken by the company.

As a result, the company’s RoE and RoCE also improved from single-digit numbers in the financial year 2020 to 24.9% and 31.6%, respectively, in the financial year 2022.

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Currently, the company has two manufacturing plants in India. It is planning to invest 2 billion (bn) towards capex to expand its capacity. This might slightly increase its debt-to-equity ratio, which is at 0.1x at present, as the company plans to fund its capex through debt.

However, the company’s high-interest coverage ratio (41x) shows it generates enough cashflows making it easy for the company to pay back its loans.

For the September 2022 quarter, the revenue grew by 16.6% (YoY) and net profit grew by 38.1% (YoY). This is mainly because Apcotex Industries has clients from stable growth industries, which ensures steady growth in revenues.

In the last one year, the shares of Apcotex Industries have risen over 30%.

Apcotex Industries Share Price – 1 Year Performance

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Going forward, capacity expansion, new product launches and changing customer mix are expected to drive its revenue.

#4 Goldiam International

Fourth on our list is Goldiam International, a jewellery manufacturer.

The company’s sales grew by 69.4% during the financial year 2022, mainly due to high demand amid improving customer sentiments. The net profit also grew by 58%.

Goldiam International manufactures and exports gold and diamond jewellery to global retailers. Its products include engagement rings, wedding bands, bridal sets, and earrings made of natural and lab-grown diamonds.

Though it exports to several countries such as UK, Dubai, and Russia, it mainly focuses on the US market and earns close to 95% of its revenue from here.

In the last three years, its revenue grew at a CAGR of 22.6%, driven by volume growth. The net profit grew by 32.8% CAGR, mainly driven by the backward integration across the supply chain of lab-grown diamonds.

As a result, its RoCE also improved from 15.6% to 28.7% in the last three years.

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Goldiam follows the omnichannel model, selling jewellery to customers through online and offline stores. It also launched a website in 2021 for its B2B (business to business) segment to cater to the needs of its clients efficiently.

In the last two years, it acquired two companies to expand its diamond business in India and abroad.

Despite these acquisitions, it retained its debt-free status and has a healthy interest coverage ratio of 181.2%.

Moreover, the company has been very generous in returning the money to shareholders in the form of dividends and buybacks in the last few years.

Share price of Goldiam has zoomed over 690% since April 2020.

 

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The company currently has a healthy order book of 1,500 million (m), expected to be executed in the next four to six months giving short-term revenue visibility.

Going forward, high demand for lab-grown diamond jewellery and high margins from them will drive the revenue and profit growth.

#5 Fineotex Chemical

Last on our list is another chemicals company, Fineotex Chemicals.

The company’s sales grew by 68.5% in 2022, driven by high volumes. The net profit also grew by 27.6%.

Fineotex Chemicals is engaged in the business of manufacturing chemicals for textiles. Over the years, it has diversified its manufacturing capabilities to other segments, including the leather, water treatment, fertilizer, construction, and paint industry.

Currently, it is focussing on diversifying into home care, hygiene, and drilling segments as well.

In the last three years, its revenue grew at a CAGR of 23.6%, driven by volumes led by capacity expansion. The net profit also grew by a CAGR of 58.5%.

Despite capacity expansions, the company improved its RoCE from 13.3% to 28.3% in the last three years.

It also remained debt-free with a healthy interest coverage ratio of 80x in the financial year 2022. And here’s more…

The company is very consistent with its dividend payments.

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It also delivered a stellar performance in the September 2022 quarter, with a revenue and profit growth of 71.1% (YoY) and 87.4% (YoY), respectively.

This consistent performance has not gone unnoticed by the market. Fineotex shares have gained over 90% in the last one year.

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Moreover, with the speciality chemicals industry expected to double its global market share to 6% by 2026, Fineotex Chemicals stands to benefit from it.

Going forward, its established position in the textiles segment, diversification into other segments, and capacity expansion will drive the revenue growth.

Why you should invest in the fastest growing smallcap companies

Smallcap companies could be real wealth creators and have a higher growth potential when compared to large and midcap companies.

In the last three years, BSE Smallcap index gave close to 109.8% return to investors as against 45.9% return of BSE Sensex, and 68.1% returns given by BSE Midcap index.

Though smallcaps have given magnified returns, their ride isn’t a smooth one.

When markets are on an uptrend, they tend to outperform the markets. But, when the tide turns, we’ve seen smallcaps struggle and erode investor’s wealth.

Therefore, before investing in smallcaps, it is important to understand the risks that come with it.

Do your due deliginece before investing in smallcaps and choose companies that are fundamentally strong for your portfolio.

We have curated a list of parameters on how to screen smallcap stocks. Do check them out before you choose one for your portfolio.

Happy Investing!

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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