Top 5 Cash-Rich Smallcap Stocks to Add to Your Watchlist

Investing in cash-rich stocks can offer several advantages. (Photo: iStock)
Investing in cash-rich stocks can offer several advantages. (Photo: iStock)

Summary

  • Smallcaps can hold tremendous growth potential, especially when backed by solid financial foundations

Small-cap stocks are often overlooked by mainstream investors due to their relatively lower market capitalisation and lower visibility.

However, these companies can hold tremendous growth potential, especially when backed by solid financial foundations.

Smallcap companies that boast substantial cash reserves are particularly intriguing as they possess the financial muscle to weather market uncertainties, pursue growth opportunities, and maximize shareholder value.

In this article, we shine a spotlight on the top smallcap cash-rich stocks, uncovering the hidden gems that have the potential to outshine larger counterparts in the investment landscape.

Here are five companies that should be on your radar.

#1 NBCC India

The first stock on our list is NBCC (India)

The company is a government of India Navratna Enterprise under the Ministry of Housing and Urban Affairs. It operates in three major segments - project management consultancy, engineering procurement & construction, and real state.

Despite being categorised as a small-cap stock, this company stands out with an impressive cash position that dwarfs many of its peers. NBCC’s cash in hand of 49.2 bn stands at 66.1% as a percentage of its market capitalisation of 74.4 bn.

However, most of this cash is earmarked for specific projects and cannot be used for other purposes. The company’s business model entails execution of PMC (project management consultancy) projects against customer advances.

Despite being in the highly working capital-intensive construction space, the working capital cycle of the company is moderate.

NBCC transfer most of the risks with respect to execution, cost pass-through, etc. to sub-contractors through back-to-back arrangements and bank guarantees. This also leads to sizeable liquid surplus, generating sizeable non-operating cash flow.

The policy of executing projects against customer advances, which is also followed for real estate and redevelopment projects, keeps liquidity comfortable.

The company has no debt and does not have any plans to contract debt in the near term.

NBCC’s order book stands at 450 bn as of 30 June 2023, and the company aims to develop business worth 120-150 bn in the coming financial year.

The company is in discussions with various state governments, the central government, and PSU for award of works and signed an MOU with Zambia for construction of mass housing units.

It also has strong return ratios. Return on equity (RoE) of the company stands as at 19.3% while return on capital employed (RoCE) stands at 26.2%.

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#2 IRCON International

The second stock on our list is IRCON.

IRCON International is a railway construction company. It’s a sectoral leader in transportation infrastructure among the public sector construction companies in India. It specialises in railway projects on a turnkey basis.

It caters to both, domestic as well as international markets and receives orders on a tender basis. Earlier, the company used to be nominated by the MoR for various railway projects, which shifted to a competitive bidding basis in FY21.

IRCON International cash on hand of 51.2 bn stands at 61.2% of its marketcap of 83.7 bn.

This is largely because the company has client funds on its books pertaining to cost-plus projects earmarked for execution. It has also been generating steady cash accruals in the range of 5-6 bn per annum against no long-term debt servicing obligations.

IRCON’s does not have any fund-based working capital limits and has low reliance on external borrowings for meeting business requirements.

For its operations, it depends on project advances, mobilisation advances, as well as internal accruals. Most of the project advances availed by the company are interest-free primarily for railway projects. However, the NHAI charges interest at bank rates for the mobilisation advances availed.

As a result, the company’s debt to equity ratio stands low at 0.3x.

IRCON’s revenue has grown at a CAGR (compounded annual growth rate) of 24% in the last four years while its net profit has grown at a CAGR of 18%. The company’s return ratios are also comfortable with RoE at 15.5% and RoCE at 15.8%.

Going forward, the company plans to enhance its portfolio with projects in the international markets to achieve healthy profit margins offered by these projects.

It is also exploring new emerging areas for business diversification. As part of its diversification strategy, the company has entered the renewable power sector to establish a 500 MWH solar power plant with a joint venture partner.

The company's goal is to move ahead from being a construction company to a diversified company having a portfolio of BOT, DBFOT, EPC, and other contracts as well as project development and operation through subsidiaries and JVs.

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#3 Kalyani Steels

The third stock on our list is Kalyani Steels.

The company a part of Kalyani group and is primarily engaged in the business of manufacture and sale of iron and steel products.

The product portfolio of the company consists of camshafts, connecting rods, gears, transmission shafts, axle beams, steering knuckles, etc for automotive Industry, round casts for seamless tube industry, rolled bars for engineering applications.

The company’s cash and bank balances of 9.7 bn stand at 59.5% of its marketcap of 16.4 bn.

It also has a low debt to equity ratio of 0.3x.

With a strong focus on financial prudence, this smallcap stock has amassed substantial cash reserves, which are instrumental in mitigating risks and enhancing overall financial stability.

KSL was promoted as backward integration unit of the Kalyani group from which majority of the requirements for the group companies is met through KSL.

The company benefits from established selling arrangements with approved vendor status from major original equipment manufacturers (OEMs) and arrangement with suppliers for procurement of raw material albeit absence of long-term contracts. This helps garner repeat orders.

The company has been a consistent dividend payer. Its five-year average dividend payout ratio stands at 17.3% while its 5-year average dividend yield stands at 2.7%.

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#4 Bombay Burmah

The fourth stock on our list is Bombay Burmah Trading Company (BBTCL).

Founded in the year 1863, BBTCL is a flagship company of the Wadia Group. The company has a presence in diversified business of tea, coffee, other plantation products.

The company’s cash and bank balance of 36.6 bn stands at 47.4% of its current market capitalization of 77.1 bn.

This is supported by regular income which includes interest on inter-corporate deposits and dividends received from subsidiaries. The company is also able to refinance its debt on regular basis due to its significant quantum of the market value of its investments.

In April 2023, the company’s subsidiary Britannia approved an interim dividend of 72 per share for the financial year 2023.

Bombay Burmah owns a 50.5% stake in Britannia Industries, holding a total of 122 m equity shares of the confectionery company.

As a result, the company received a total amount of 8.8 bn in dividends, on account of Britannia Industries’ interim dividend announcement.

Britannia’s dividend payout follows a 49% stake sale in its wholly owned subsidiary Britannia Dairy, as part of its joint venture agreement with the French company Bel SA for an amount of 2.6 bn, last year in November.

In February 2023, Bombay Burmah’s board decided to divest eight of its coffee estates known as ‘Elkhill Estates’ to the Ramapuram group-owned Orange County Resorts and Hotels for 2.9 bn.

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#5 Manali Petrochemicals

The last stock on our list is Manali Petrochemicals (MPL).

The company manufactures and sells Propylene Oxide (PO), Propylene Glycol (PG) and Polyols (PY), which are used as industrial raw materials.

It’s the only domestic manufacturer of Propylene Glycol. It is also the first and largest Indian manufacturer of Propylene Oxide which is the input material for the aforesaid derivative products.

The company’s cash and bank balance of 3.8 bn stands at 34.2% of its current marketcap of 11.4 bn.

The ample liquidity of the company has allowed the company to stay agile, quickly adapt to market dynamics, and invest in innovation, all of which contribute to its potential for exponential growth.

It plans to use its funds for acquisitions and expanding capacity. MPL has been constantly looking out for acquisition targets which could help the company in product differentiation through unique formulations and IP rights.

For this purpose, the company had set up a wholly owned subsidiary (WOS), AMCHEM Specialty Chemicals Private Limited, Singapore (Amchem), in September 2015 to identify potential investment opportunities across the globe and hold all the foreign assets of MPL.

In November 2022, the company acquired UK-based Penn Globe for 21 million pounds.

Penn Globe is a market leader in foam control agents and chemical products like lubricants, surface coatings, release agents and silicone emulsions. The boards of the two companies unanimously approved the acquisition.

In the last three years, the company’s numbers have been hit due to the pandemic. Though sales volume could be maintained, product prices had been falling on the one hand and the input costs going up on the other, wearing down the margins.

The company’s management has said that all possible steps are being taken to improve the performance.

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Why you should invest in cash rich stocks

Investing in cash-rich stocks can offer several advantages.

They can provide a sense of security to investors as a high cash balance indicates the company has sufficient liquidity to meet its short-term obligations and invest in growth opportunities.

Cash rich companies also have more flexibility to adapt. They can weather economic downturns more effectively, as they have the resources to sustain their operations and even take advantage of distressed opportunities.

Besides this, they distribute a portion of their excess cash to shareholders through dividends or share buybacks.

While cash-rich stocks offer potential advantages, they should be evaluated comprehensively, considering other fundamental factors too like the company's management, industry outlook, competitive landscape, and growth prospects.

Conducting thorough research and analysis is crucial before making any investment decisions.

If you’re interested in cash rich stocks, check out Equitymaster’s Screener on the Top Cash Rich Stocks in India.

Please note that these parameters can be changed according to your selection criteria.

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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