List of Best Small Cap Stocks to Buy in India

Best Small Cap Stocks

Small cap stocks, as the name suggests, refers to companies with a relatively small market capitalisation. Investors often overlook these companies in favour of larger, more established companies. However, small cap stocks may offer a significant growth potential for those willing to take on the added risk. Here, we glance at small cap stocks, including what they are, how they work, and how to find the best ones. We also provide a list of top picks for the best small cap stocks to invest in.

What Are Small Cap Stocks?

Small cap stocks are stocks issued by companies with a market capitalisation that is less than Rs. 5,000 crore. This means that these companies are smaller than large-cap companies, which have a market capitalisation greater than Rs. 20,000 crore, and mid-cap companies, which have a market capitalisation between Rs. 5,000 crore and Rs. 20,000 crore.

Small cap stocks are generally considered riskier than large-cap and mid-cap stocks due to their smaller size and relative lack of financial resources. These companies may also have less liquidity, making it more difficult to buy or sell shares quickly.

How to Find the Best Small Cap Stocks

Finding the best small cap stocks can be challenging, as these companies are often not widely followed by analysts and may be less well-known than their larger peers. However, there are a number of strategies that investors may use to identify a promising list of small cap stocks.

1. Look for Companies with Strong Fundamentals

One way to identify promising small cap stocks is to look for companies with strong fundamentals. This means looking at earnings growth, revenue growth, and return on equity (ROE). Companies with strong fundamentals may be more likely to grow and succeed over the long term, making them attractive investment opportunities.

2. Identify Industry Trends

Investors can also identify promising small cap stocks by observing the industry trends. Companies that operate in industries expected to grow rapidly in the future, may be more likely to experience significant growth themselves. For example, companies that operate in the renewable energy sector may be well-positioned to benefit from the shift away from fossil fuels.

3. Consider Valuation

Valuation is another important factor to consider when considering small cap stocks. While these companies may offer significant growth potential, ensuring that you are not overpaying for this growth is important. Look for companies with reasonable price-to-earnings ratios (P/E ratios) and price-to-book ratios (P/B ratios) to assure you get a fair price for your investment.

4. Look for Catalysts

Investors can look for small cap stocks that have potential catalysts that drive future growth. For example, a company that is about to release a highly anticipated product or announce a major partnership may experience a boost in stock price, if the news is well-received by the market.

Top Picks for the Best Small Cap Stocks to Invest in Right Now

Small-cap companies typically have a market capitalisation between INR 500 crore and INR 5,000 crore, making them smaller than large-cap companies but potentially more volatile. These companies often have more room for growth and can benefit from a favourable market environment. In this article, we note some of the top picks for the best small-cap stocks to invest in, presently in India.

• Route Mobile Ltd (ROUTE)

Route Mobile is a cloud communication platform that provides a suite of messaging, email, voice, and SMS APIs. The company's technology helps businesses communicate with customers more effectively, making it a valuable asset for companies in a range of industries. The company's shares have been performing well in recent years, with its revenue growing at a CAGR of 40% over the past three years. As of March 2023, Route Mobile has a market capitalisation of INR 3,500 crore.

• L&T Technology Services Ltd (LTTS)

L&T Technology Services is an engineering and R&D services company that provides services to companies in a range of industries, including aerospace, automotive, and telecom. The company's shares have performed well in recent years, with its revenue growing at a CAGR of 16% over the past three years. The company has a market capitalisation of INR 16,000 crore, making it one of the larger small-cap companies on this list.

• Dixon Technologies India Ltd (DIXON)

Dixon Technologies is a consumer electronics company that manufactures products like LED TVs, washing machines, and mobile phones. The company is a leading player in the Indian electronics industry and has partnerships with global brands like Samsung and Panasonic. Dixon Technologies has a market capitalisation of INR 4,700 crore and has been growing at a CAGR of 34% over the past three years.

• Aavas Financiers Ltd (AAVAS)

Aavas Financiers is a housing finance company that provides loans to low and middle-income households in rural and semi-urban regions of India. The company has a market capitalisation of INR 8,800 crore and has been growing at a CAGR of 56% over the past three years. With the Indian government's push for affordable housing, Aavas Financiers is well-positioned to benefit from increased demand for housing finance.

• L&T Finance Holdings Ltd (LTFH)

L&T Finance Holdings is a non-banking financial company that provides a range of financial products and services, including retail and corporate loans, housing finance, and wealth management. The company has a market capitalisation of INR 9,500 crore and has been growing at a CAGR of 19% over the past three years. With India's growing economy and increasing demand for financial services, L&T Finance Holdings is well-positioned to benefit from these trends.

• Varroc Engineering Ltd (VARROC)

Varroc Engineering is an automotive components manufacturer that provides products like lighting systems, electronics, and engine components to global automotive OEMs. The company has a market capitalisation of INR 4,000 crore and has been growing at a CAGR of 13% over the past three years. With the global shift towards electric vehicles, Varroc Engineering is well-positioned to benefit from increased demand for automotive components in this space.

• Galaxy Surfactants Ltd (GALAXYSURF)

Galaxy Surfactants is a speciality chemicals manufacturer that provides products like surfactants, polymers, and other speciality ingredients to a range of industries, including personal care, home care, and agro chemicals. The company's shares have performed well in recent years, with its revenue growing at a CAGR of 15% over the past three years. The company has a market capitalisation of INR 7,500 crore, making it a mid-sized small-cap company. With the growing demand for personal care and home care products, Galaxy Surfactants is well-positioned to benefit from these trends.

Conclusion

Small cap stocks can offer significant growth potential for investors willing to take on an added risk. Investors may overlook these companies in favour of larger, more established companies. But these companies also offer opportunities for significant returns. While small cap stocks can be riskier than larger companies due to their smaller size, they may also be undervalued and have a greater potential for future growth.

While evaluating small cap stocks, it's important to conduct thorough research and consider various factors, such as company fundamentals, industry trends, valuation, and potential catalysts for future growth. It is also important to consult a financial advisor and diversify your investment portfolio to mitigate risk.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.