
Top 5 micro-cap stocks that turned into smallcaps

Summary
- These companies shrugged off their microcap status and saw their market capitalization soared, and eventually turned into smallcaps.
When a company transitions from a lower market capitalization status to a higher one, it undergoes changes that can greatly benefit its future.
Increased investor interest, particularly from institutional investors, enhances liquidity and trading volumes, making transactions easier with minimal impact on stock prices. This heightened visibility also makes it easier for the company to raise capital through equity or debt, often under more favourable terms. A larger market capitalization enables the company to attract broader analyst coverage, leading to more accurate valuations and bolstering investor confidence. The enhanced credibility resulting from this growth can strengthen business partnerships, aid in customer acquisition, and elevate brand perception. As the company expands, it seizes new opportunities through acquisitions, introduces new product lines, and explores new markets.
Today, we delve into five companies that have successfully transitioned from microcaps to smallcaps, showcasing their growth trajectories and market evolution.
Newgen Software
Newgen Software Technologies is a global software company engaged in product development, offering end-to-end solutions covering the entire workflow automation from document management to imaging. Their key revenue segments include annuity-based revenue, sales of software products, and sale of services.
As of FY24, the company operates in 17 verticals, including major sectors like banking & financial services, insurance, and government. The company's primary clients are from the banking segment, accounting for 66% of Newgen's revenue, followed by 9% from government & PSUs, and 8% from the insurance sector.
Over the past five years, Newgen Software has recorded a compounded annual growth rate (CAGR) in sales of 16%, while net income has grown by a CAGR of 20%. The five-year average return on equity (RoE) and return on capital employed (RoCE) have stood at 20.2% and 24.1%, respectively. In FY24, the company registered revenue growth of 28% YoY, while net profit increased by 42% YoY.
Looking ahead, Newgen plans to improve its existing products and launch new ones for its AI portfolio, expand in the insurance vertical focusing on life, general, and health insurance, and pursue tactical acquisitions for speed to market and access to larger accounts. The management aims to maintain historical growth rates and is confident in meeting targets. Newgen Software's current market capitalization stands at ₹134.7 bn, trading at a PE of 58.2x, a premium compared to its five-year median PE of 21.3x.
Kirloskar Brothers
Kirloskar Brothers is an engineering company involved in manufacturing systems for fluid management, covering large infrastructure projects such as water supply, power plants, and irrigation, as well as the production of pumps, valves, motors, and hydro turbines. With over 250 product categories and more than 100,000 SKUs, the company serves over 12 industries and has a customer base exceeding 2,500.
Financially, over the past five years, Kirloskar Brothers has recorded a sales CAGR of 4%, while the bottom line has delivered a CAGR of 155%. The five-year average RoE and RoCE have stood at 15.1% and 17.5%, respectively. In FY24, the company's revenue showed a steady YoY growth of 7.3%, while net profit surged by 48.3% YoY, primarily due to reduced interest expenses and increased other income for the year.
The management expects double-digit revenue growth in FY25, with a consolidated pending order book for the international business standing at ₹30 bn. Kirloskar Brothers is focused on continuous innovation with over 100 new product launches annually and is developing new products for green hydrogen and small modular reactors. The company is also making strategic investments in digital ventures and plans to capitalize on its localized global presence by introducing new products in the US and UK. Kirloskar Brothers' current market capitalization is ₹185.7 bn, trading at a PE of 54.9x, a premium compared to its five-year median PE of 21x.
RailTel Corp
RailTel is contributing to the implementation of the Kavach system for Indian Railways by partnering with Quadrant Future Tek Limited. This collaboration aims to explore and deliver Kavach projects for Indian Railways and abroad. RailTel enjoys the exclusive right to lay optical fiber cables and provide telecom services across the extensive Indian Railways network. Beyond this core function, RailTel has diversified into telecom networks, data centers, hosting services, and project execution.
Over the past five years, RailTel has recorded CAGR sales growth of 21%, while the bottom line has grown by a CAGR of 15%. The five-year average RoE and RoCE have stood at 12.5% and 16.7%, respectively. The company maintains a debt-free balance sheet, a significant advantage in today's economic climate. RailTel's experience of over two decades, coupled with its strategic relationship with Indian Railways, positions it as a preferred partner for government projects.
RailTel has been entrusted with implementing critical initiatives like the National Knowledge Network (NKN), Bharat Net, and the USOF-funded optical fiber connectivity project in North-Eastern India. Its collaboration with Indian Railways also extends to installing an IP-based video surveillance system at more than 6,049 railway stations across the country. RailTel's current market capitalization stands at ₹167.8 bn, trading at a PE of 63.2x, a premium compared to its five-year median PE of 24x.
Voltamp Transformers
Voltamp Transformers is a significant manufacturer of oil-filled power and distribution transformers, holding a 15% domestic market share. Its comprehensive product portfolio results from technical collaborations with various industry pioneers.
Over the past five years, Voltamp has recorded a 14% CAGR in sales, while the bottom line has grown by a CAGR of 29%. The five-year average RoE and RoCE have stood at 17.2% and 21.1%, respectively. The company reported a robust order book of ₹18.5 bn for FY24, representing a significant 37% increase compared to the previous year. This healthy order book indicates strong demand for the company's products and positions it for potential growth in the coming year.
Between 2020-24, net sales and profits registered a five-year CAGR of 13.3% and 29.3%, respectively. The returns have also been strong, with a five-year average RoCE and RoE of 15.8% and 12.3%, respectively. With a strong order book, a robust balance sheet, and a positive outlook for profitability, the company is expected to grow well. Voltamp Transformers' current market capitalization is ₹123.7 bn, trading at a PE of 41.9x, a significant premium compared to its five-year median PE of 16.1x.
Anand Rathi Wealth
Anand Rathi Wealth is an AMFI-registered mutual fund distributor and one of the leading non-bank wealth solutions firms in India. It ranks among the top three non-bank mutual fund distributors in the country. The company offers a wide product portfolio of wealth solutions, financial product distribution, and technology solutions to its clients. Anand Rathi operates in three primary business verticals: private wealth, digital wealth, and omni financial advisor, with offices in 17 major Indian cities and a representative office in Dubai.
From FY20 to FY24, Anand Rathi Wealth achieved a sales growth of 22%, while net income grew by a CAGR of 31%. The five-year RoE and RoCE stood at 38.5% and 41.3%, respectively. In the latest year, the company registered a sales growth of 34.5% YoY, with net income increasing by 34% YoY. The consolidated assets under management grew by 52% YoY, reaching ₹593.5 bn as of 31 March 2024.
The company's growth strategy includes equity mutual funds, digital wealth, and the OFA model to capture the wealth management landscape. Anand Rathi positions itself as a market-agnostic financial services provider, focusing on logical finance and client-centric solutions. The management emphasizes consistency, client performance, and long-term relationships to drive business growth. Looking forward, the management is optimistic about long-term growth, aiming for a 20-25% CAGR over the next few years by focusing on market growth, leveraging existing client assets, acquiring new clients, and adding relationship managers. Anand Rathi Wealth's current market capitalization stands at ₹173.6 bn, trading at a PE of 76.5x, a significant premium compared to its five-year median PE of 34.9x.
Conclusion
Transitioning from microcap to smallcap significantly boosts a company's financial stability, market presence, and growth potential. While increased regulatory and compliance requirements may raise operational costs, they also enhance corporate governance and investor trust. This evolution positions the company for a more promising and dynamic future, opening new opportunities and reinforcing its credibility in the market.
Investors should carefully evaluate the company's strategic plans, management capabilities, and market conditions to make informed decisions. Conducting thorough due diligence is essential to understand the potential risks and rewards associated with investing in a company undergoing such a significant transition.
Happy Investing!
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