Mutual funds went big on these 3 smallcap stocks in August. Should you follow?
Three smallcap stocks stood out, as they attracted strong buying from mutual funds beyond the large-cap universe. Let’s explore what their prospects look like, why mutual funds are backing them, and whether they deserve a place in your portfolio
August 2025 was a resilient month for Indian equities, as markets held their ground despite heavy FII selling. Foreign investors offloaded nearly ₹35,000 crore worth of equities during the month, pushing year-to-date outflows past ₹1.3 trillion on the back of rising geopolitical tensions, tariff shocks, and weak Q1 earnings.
However, markets were supported by domestic institutional investors (DIIs), who infused nearly ₹95,000 crore during the month, extending their 25th consecutive month of net buying.
While mutual funds invested across market caps, three smallcap stocks stood out, as they attracted strong buying beyond the large-cap universe.
Let’s explore what their prospects look like, why mutual funds are backing them, and whether they deserve a place in your portfolio going forward.
#1 Thirumalai Chemicals
Thirumalai Chemicals (TCL) is a global frontrunner in chemical manufacturing with a versatile portfolio spanning phthalic anhydride (PAN), maleic anhydride, malic acid, and fumaric acid.
The company ranks among the world's largest producers of phthalic anhydride and is the largest producer of fumaric acid. It is also the sole producer of malic acid in southeast Asia.
August saw heightened investor interest in this small-cap speciality chemical company as it raised ₹450 crores via a preferential issue. Notably, Motilal Oswal Mutual Fund increased its stake to 5.76%, while Bandhan Mutual Fund and ITI Mutual Fund also added the stock to their portfolios.
Consequently, total DII holdings jumped to 9.12% from 1.05% in June 2025, reflecting growing institutional confidence.
So, why the sudden interest in the company?
Despite a slowdown in top-line and bottom-line performance over the last four quarters, investors are optimistic about a turnaround in the company’s financials once TCL’s US facility becomes operational.
The company is expanding its capacity at its maleic anhydride and food acids plant in the US, a project delayed by the pandemic and global tensions. However, significant project work is already complete now, with operations expected to commence by FY26.
Currently, the US has only one manufacturer of malic and fumaric acid, operating at a cost disadvantage. With imports accounting for over 65% of malic acid consumption in the US and Mexico, and over 70% in the US, the market offers significant opportunity.
Recent acquisitions of two major maleic anhydride producers by end users have also opened merchant market opportunities.
Domestically, TCL has also initiated the second phase of its Dahej project, adding 90,000 MTPA of PAN capacity and 10,000 MT of Fumaric Acid capacity.
Once completed and stabilised, these projects are expected to enhance the company’s product portfolio, provide geographical diversification, and improve its operating margins.
The company’s medium-term performance is further expected to benefit from favourable trade protection measures by the Government of India and a positive demand outlook in domestic end-user industries.
TCL serves a broad customer base across construction, automotive, paints, food, personal care, and pharmaceuticals, giving it exposure to multiple growth drivers and reducing dependence on any single sector.
Over the past five years, the company’s revenue has grown at a CAGR of 14%, though growth has been uneven, marked by sharp spikes and recent declines due to a challenging global economic environment, a slowdown in China, and weak business conditions in the EU.
Operating profit margins have averaged 11%, peaking at 22% in FY22 before falling to 2% in FY25, reflecting volatile cost management. Net profits have been more erratic, with the company reporting losses in the last two years as higher interest, depreciation, and tax expenses weighed on profitability.
Thirumalai Chemicals currently carries a high debt-to-equity ratio of 1.55x, considerably above its peers, which limits financial flexibility. The company entered a borrowing phase to fund its investment projects in Dahej and the US, which led to higher interest costs and impacted key financial ratios.
The stock has rallied 37.7% over the past six months, reflecting market optimism, but caution is warranted. Its P/E ratio is not meaningful due to losses, and on a price-to-book basis, it is trading at 2.86x, suggesting a premium valuation despite recent financial stress.
#2 Clean Science and Technology
The company is one of the few global companies dedicated to the development of newer technologies using in-house catalytic processes that are both eco-friendly and cost-effective.
It manufactures functionally critical specialty chemicals, FMCG, chemicals, and pharmaceutical intermediates.
August saw heightened investor interest in the small-cap specialty chemical company after promoters Ashok Boob and Krishnakumar Boob sold off a 24% equity stake, through a block deal, reducing the promoter group's holding from 74.97% to 50.97%.
Leading mutual fund houses such as SBI MF, Kotak MF, and HDFC MF bought fresh stakes, while funds such as Nippon MF and UTI MF used the opportunity to increase their holdings.
CSTL’s strong market position, diversified product portfolio, and broad customer base, make it an attractive small-cap specialty chemical play.
The company also maintains a robust financial risk profile, with low leverage and strong debt protection metrics, making it a preferred choice for institutional investors.
In terms of financials, Clean Science has demonstrated strong revenue and profit growth, with revenue growing at a CAGR of 18% and net profit at a CAGR of 14%, underpinned by robust demand across its product segments.
Operating profit margins, too, have remained exceptionally healthy, averaging around 44% over the period. This has translated into healthy return ratios for the company. Return on Equity (RoE) and Return on Capital Employed (RoCE), both have consistently stayed above 20%.
Going forward, the management has reiterated its guidance of 4,500 tonnes for hindered amine light stabilisers (HALS) volume in FY26, with new grades expected to be launched over the coming quarters. The product is likely to break even at the Ebitda level by Q2FY26, with monthly sales projected to reach ₹100 million.
New capacity additions are expected to be key growth drivers. The commercialization of the performance chemicals 1 facility is targeted for September 2025, while performance chemicals 2 is on track for commercialization in Q4FY26.
Both facilities are expected to enhance production capabilities, support new product launches, and strengthen the company’s market position.
Shares of CSTL are down 23.6% in 2025 after a punching error led to the stock witnessing extraordinary sell volumes during the stake sale.
As a result, the stock is now trading at a price-to-earnings ratio of 47.3x, which is around 21% below its five-year average PE of 59.6x, potentially offering a more attractive entry point for investors.
#3 India Cements
India Cements (ICL), one of the leading cement manufacturers in southern India, is a subsidiary of UltraTech Cement and also has business interests in related areas such as shipping, captive power, and coal mining.
In August 2025, UltraTech offloaded 6.5% of its stake in India Cements via an offer-for-sale (OFS) to comply with Minimum Public Shareholding (MPS) norms, reducing its holding to 75% from 81.49%.
The sale attracted strong institutional interest, with multiple schemes of Kotak Mahindra MF and SBI MF accumulating shares of the company. Why?
The company is of strategic importance to UltraTech Cement which is the largest selling cement company in India, making it an attractive investment. It has installed cement capacities of 14.45 metric tonnes per annum (mtpa) with 12.95 mtpa in southern India which is critical to UltraTech.
Yet, over the last five years, the company has struggled with a slowdown in the industry, leading to a decline in revenue and profitability. Operating profit margins (OPM) slipped from 18% in FY21 to -9% in FY25, reflecting both market headwinds and rising cost pressures.
ICL has been operating at a moderate scale of operations with subdued profitability, partly because of market-related dynamics and partly because of its legacy issues in addressing operational inefficiencies under erstwhile promoters.
However, this is expected to change, going forward. UltraTech has announced a capital expenditure plan of ₹1,500 crores to address these operational efficiencies, which is expected to improve operating profitability over the medium term.
Both brownfield and greenfield opportunities are being explored, underpinned by long-term demand over the next 10–15 years.
The management is confident in the company’s ability to outperform industry growth, emphasizing operational integration, cost optimization, and synergies from UltraTech’s backing.
It expects steady demand from ongoing government capex, particularly in roads and infrastructure, with major projects like Vadhavan Port and Maharashtra Shaktipeeth Expressway providing visibility.
In terms of leverage, India Cements has strengthened its balance sheet, with the debt-to-equity ratio declining to 0.1x from 0.3x in FY24. Its capital structure has improved significantly, aided by the recoupment of loans and advances from group entities of erstwhile promoters.
Reflecting this optimism, the stock has rallied 45.6% over the last six months and is currently valued at 1.2x its book value. While this may seem reasonable, there is still a long way to go in terms of improving profitability and sustaining growth.
Conclusion
While mutual fund backing can provide some reassurance, it should not be the sole reason for investing. Funds make decisions based on their own strategies, risk tolerance, or portfolio requirements, which may not align with every investor’s goals.
Additionally, market conditions, company fundamentals, and execution risks can change, so relying solely on institutional interest can lead to poor investment outcomes.
Investors should exercise caution and conduct thorough due diligence before taking any position.
For more such market analysis, read Profit Pulse
Ayesha Shetty is a research analyst registered with the Securities and Exchange Board of India. She is a certified Financial Risk Manager (FRM) and is working toward the Chartered Financial Analyst (CFA) designation.
The author does not hold shares in any of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers should conduct their own research and consult a financial professional before making investment decisions.
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