Six small-cap stocks that can give big returns

Indian equity markets have witnessed a broad-based rally in recent months spanning across sectors & market cap. PSU stocks that have been missing in action for many years have been significantly outperforming recently on the government’s mantra of ‘Monetise or Modernise’. 

The current rally is driven by the positive impact created by supply-side policies announced over the last seven years. Hinting at the current uptrend for a board-based market rally to continue going ahead. 

B&K Securities in its report ‘Dark Horses’ has shortlisted Bajaj Consumer, BASF, Gateway Distriparks, Himatsingka, Kalpataru and Prism Johnson. While these companies have underperformed the BSE 200 over the last three years, are now showing triggers for change, making the probability of their success more than just dependent on the Macro. 

‘The triggers will help show improvement in return ratios and debt profile for all these companies and thus should help valuations,’ the brokerage firm said the note.

Bajaj Consumer Care

The brokerage house is of the opinion that Bajaj Consumer from current levels can give 41% returns and has a price target of Rs 350. 

The company is now turning the tide with strong volume-led growth. Besides, promoters pledged shares have come down to zero. And with the new management in place the company is targeting to double its market share in the hair oil category from ~10% currently, with a focus on categories like Almond, Amla, Cooling, etc.

‘The stock currently trades at inexpensive PE valuations of ~14x/13x its FY22/FY23 EPS estimates, respectively, versus the 5-year average of its one year forward PE of ~24x. Hence, given the improving growth trajectory and concerns on pledges now behind, we expect the stock to see a re-rating,’ the note added. 

BASF India

Witnessing subdued financial performance for quite a few years on account of numerous divestments in line with the parent company’s restructuring strategy BASF India is now seeing a turnaround. This stock can rise up to Rs 2,300 levels giving 9% returns. 

‘BASF has started reporting improvement in operating performance and has now reported very healthy EBITDA margins (9.6%). We expect improvement in financial performance to sustain. The stock is trading at a PE multiple of 29.7x FY22E and 27.7x FY23E. Maintain Buy with a target price of Rs 2,300,’ noted the report.

Gateway Distriparks

B&K Securities believes that Gateway Distriparks can jump 40% from current levels to Rs 250. 

‘Having suffered from an opaque business structure, poor macro environment and very high debt. Gateway Distriparks now has a simplified and focused business structure that will bring in greater operational synergies and efficiencies. Coupled with management’s accelerated efforts to reduce debt through divestment of its non-core assets,’ it said in the report. 

Himatsingka Seide

The brokerage firm has set a price target of Rs 237 which is 47% higher than current prices as the worst is now behind for Himatsingka Seide due to change in corporate strategy which is now focussed on improving capacity utilisation and thereby free cash flow accrual, resulting in a substantial reduction of debt over the next three years.

‘Increased earnings (EBITDA post-tax Rs 1360 crore over FY22-23E) coupled with no deterioration in working capital and end of capex cycle (only maintenance capex) is likely to generate free cash flow (FCF) of Rs 1310 crore. FCF is likely to reduce net debt to Rs 1850 crores in FY23E from Rs 2600 crores in FY20,’ the note added.

Kalpataru Power Transmission

‘Kalpataru Power Transmission is taking the right strategic route with the divestment of BOT assets (transmission and road). Strong order book with good traction in non-T&D business, improved subsidiary performance and operating leverage gains are expected to support consistent growth. In our view, multiple triggers like T&D asset sales, de-leveraging, the merger of JMC and KPTL, strategic stake sale in the logistics business and promoter pledge reduction will result in a significant re-rating over the medium-term,’ said the brokerage house in its Dark Horses report. 

The firm has set a price target for Kalpataru Power Transmission of Rs 477 which is 22% higher when compared to current prices. 

Prism Johnson

After going through a rough patch Prism Johnson is now witnessing a turnaround. In the first nine months of FY2021 net debt (excluding – Raheja QBE General Insurance Company) by Rs 3760 crores to Rs 1490 crore in 9MFY21, supported by robust operating cash flows and efficient working capital management.

‘Improved profitability and growth factor in tiles business would narrow the valuation gap with Kajaria Ceramics (currently trading at EV/EBITDA of 21x on FY23E against assigned EV/EBITDA of 6x for PRSMJ’s TBK business). Apart from that, improvement in overall performance and deleveraging of the balance sheet would re-rate the cement business,’ the note added. 

B&K Securities has set a target price of Rs 135 for the company based on the sum of the part valuations.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)