These 3 smallcap stocks are fundamental picks of HDFC Securities

Smaller in size but with a potential for significant growth in the short to long term, is one of the beauties of small-cap stocks. However, not all small-cap stocks will benefit an investor as the basket also comes with high volatility risks. Hence, it is important to search for value-adding stocks whose business module has a promising growth prospectus ahead. With that, HDFC Securities has listed three small-caps as its fundamental picks due to a strong growth outlook going forward. The brokerage has recommended buying in these stocks with investment horizons for 2-3 quarters. These are Savita Oil Technologies, Satin Creditcare Network, and MM Forgings. They have given double-digit returns to their investors so far in the current year.

Here's what the stock brokerage highlights about these three small-cap stocks:

Savita Oil Technologies

LTP - ₹337.10 | Recommendation: Buy in the ₹322-328 band | Target price - ₹394

The company is engaged in manufacturing petroleum derivatives specialty products like transformer oil, liquid paraffin, petroleum jelly, white mineral oil, automotive, and other industrial lubricants.

According to the HDFC Securities report, the company has a balanced product portfolio through the increasing proportion of its white oils and lubricating oils business. Sustained growth in the performance of its key business segment of transformer oils along with longstanding client relationships, should support recovery in demand.

The stock brokerage expects an improvement in both volumes and realisations on account of recovery in the auto industry, benefits accruing from global base oil shortage, and the potential of increased market share due to consumer shift towards organised sector.

Also, the company's growth momentum in the business has been robust over the last few quarters despite volatile oil prices and rupee depreciation, aided by healthy volume and a better product mix. Its Q2FY23 has also been robust! Margins have continued to improve post-acquisition of Savita Polymers, and in FY23, they have bettered even more due to a rise in volumes, realisations, and a better product mix.

Taking into consideration the company's strong financial profile, led by healthy profitability levels and return indicators and a comfortable capital structure, HDFC Securities Fundamental Research Analyst Abdul Karim is positive on the stock.

He suggests investors could buy Savita Oil stock in the range of ₹322-328 band and add more on dips to ₹289-295 band (5.75x FY24E EPS). As per Karim, the base case fair value of the stock is ₹369 (7.25x FY24E EPS) and the bull case fair value of the stock is ₹394 (7.75x FY24E EPS) over the next 2 quarters.

On Monday, Savita Oil traded at ₹335.05 apiece down by 1.80% on BSE. The company's market cap is around ₹2,315.21 crore. Although, the smallcap corrected today, however, it has given double-digit returns year-to-date. So far in 2022, the stock has risen by over 52.5% on Dalal Street.

Satin Creditcare Network (SCNL)

LTP - ₹162 | Recommendation: Buy in ₹144-148 band | Target price - ₹188

One of the largest players in the MFI industry, SCNL has a wide geographical reach. SCNL is expected to provide growth momentum with lower asset quality due to its entry into MSME and housing finance segment through subsidiaries. SCNL has been reducing its risk by diversifying geographically.

Further, HDFC Securities believe that the banking correspondent business for IndusInd Bank is gaining traction, providing a strong source of other income, while improved asset quality may lend a hand to increased profitability and thus improve return ratios.

In a note, HDFC Securities Fundamental Research Analyst Atul Karwa said the worst period for SCNL seems to be behind as it has made adequate provisions in respect of past asset quality issues. While risks of further rise in NPAs remain, we think high-risk investors can have a look at SCNL for decent appreciation.

According to Karwa, the microfinance sector is seeing a revival in growth and a fall in delinquencies. SCNL currently trades at 0.7 FY24E P/ABV which is attractive in their view, given the potential in the coming years.

HDFC Securities analyst has valued the MFI at 0.8x FY24E ABV for a base case target of ₹167 and 0.9x FY24E ABV for a bull case target of ₹188 over 2-3 quarters. Karwa suggests investors can buy the stock in the band of ₹144-148 and add on dips in ₹125- 128 (0.6x FY24E ABV).

The analyst has valued the stock on a standalone basis as the size and contribution from subsidiaries are still not meaningful.

On BSE, Satin Creditcare shares traded at ₹161.35 apiece down by a whopping 6.11%. The company's market cap stood at nearly ₹1,277 crore. The stock did touch an intraday high of ₹172.65 apiece in the early deals today which was slightly closer to its 52-week high of ₹174.90 apiece.

This year, Satin Creditcare made strong gains. Year-to-date, the stock has climbed by over 94.4%.

MM Forgings

LTP - ₹902 | Recommendation: Buy in ₹855-870 band |Target price - ₹1,007

For MM Forgings, key growth drivers in the medium term are likely to be domestic medium and heavy CV (M&HCV) recovery and strong CV segment growth in US and Europe regions. HDFC Securities also believes that increased capacity available from FY24 could also help in boosting revenues and profits.

Further, the brokerage expects increasing share of machined products would drive better realisation and margins for the company, while the foray into EV motors could lead to a stronger foothold in the fast-growing electric PV segment.

The company expects its revenue to strike the ₹2,000 crore mark in the next two years driven by a buoyant order outlook on the back of increasing momentum for the China+1 strategy and improving business prospects in the Indian market.

In a note, a Fundamental analyst at HDFC Securities said, "We expect MFL’s Revenue/EBITDA/PAT to grow at 21/23/30% CAGR over FY22-FY24E, led by growing CV demand, higher overseas revenue and increased share of machined products."

Thereby, the analyst's note recommends investors to buy MM Forgings stock in the band of ₹855-870 and add on dips in ₹765-780 band (12.25x FY24E EPS) for a base case fair value of ₹945 (15x FY24E EPS) and bull case the fair value of ₹1007 (16x FY24E EPS) over the next 2-3 quarters.

On BSE, MM Forgings shares traded flat at ₹895.60 apiece compared to its previous closing of ₹895.60 apiece. In the early deals, the stock did touch an intraday high of ₹919.55 apiece. The small-cap's market cap is around ₹2,162 crore.

Year-to-date, MM Forgings stock has gained by nearly 24%.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.