Six Small-Cap Stocks to Consider After the Recent Market Decline

Small-cap stocks have captured significant attention as global market turmoil impacts equities worldwide, with India being no exception.

On Monday, the BSE SmallCap Index plunged by 4.21%, a sharper decline than the benchmark Sensex’s 2.74% drop. This marked the steepest single-day fall for both indices since June 4.

Currently, small-cap stocks are trading at high valuations, with the BSE SmallCap Index’s P/E ratio at 25.92x compared to its 10-year average of 19.65x. The index has surged over 45% in 2023 and 25% so far in 2024.

To navigate these turbulent times, Moneycontrol consulted analysts from Motilal Oswal Financial Services and Asit C Mehta Financial Services for their top three small-cap stock picks after the recent market decline. Sneha Poddar, VP, Research, Broking & Distribution at Motilal Oswal Financial Services, provided these recommendations:

1. Granules (Target Price: ₹680)
   Granules anticipates a 20% year-over-year growth in US sales for FY25. The company expects EBITDA margins to improve quarter-over-quarter, reaching approximately 22-23% for FY25. Granules is focusing on building a pipeline in oncology, large-volume products, and tech-based products (enzyme/contract manufacturing). Additionally, they are backward integrating the manufacturing process of legacy products, sustaining earnings growth beyond FY26.
2. Senco (Target Price: ₹1350)
   Senco Gold is a prominent player in the organized retail jewelry market with a strong presence in eastern India. The company operates 159 stores nationwide, with plans to add 34 more stores by FY26, totaling 193 stores. Senco holds a 4% market share in the eastern region, primarily in West Bengal. Store expansion is expected to drive growth for Senco in the coming years.
3. KNR Construction (Target Price: ₹400)
   KNR Construction’s order book stands at ₹65 billion, with 50% in roads (HAM), 18% in other road projects, and 32% in irrigation and pipeline projects. The company has eight HAM projects and aims to enhance its order book by expanding into new segments and markets. Despite slow contract awards by NHAI, KNR explores partnerships for BOT projects and diversification into non-road segments, expecting an 11% revenue CAGR over FY24-26.

Additional recommendations from analysts at Asit C Mehta Financial Services include:

1. Vishnu Prakash R Punglia (Current Market Price: ₹260, Target: ₹300)
   VPRPL specializes in water supply contracts, including constructing, designing, building, and maintaining water supply projects. The company’s integrated business model, with an in-house execution team and extensive construction equipment, reduces dependence on third parties. With an order book of ₹4,717 crores to be executed over 24-36 months, VPRPL stands to benefit from India’s infrastructure boom.
2. Bikaji Foods International (Current Market Price: ₹740, Target: ₹900)
   Bikaji, the third-largest ethnic snacks company in India, holds a 9% market share and has a strong international footprint. The company plans to increase its distributor coverage from 2.5 lakh to 4 lakh by FY26. With operational efficiencies and higher penetration, Bikaji expects volume growth and improved operating margins, making it a compelling buy.
3. Talbros Automotive Components (Current Market Price: ₹356, Target: ₹450)
   Talbros, India’s leading gasket manufacturer, serves major clients like Cummins, Bajaj Auto, John Deere, Volvo-Eicher, Honda, and Hero MotoCorp. The company has secured a ₹1,000 crore order from a leading European OEM for suspension arms tailored for both conventional and electric vehicles. Talbros is expected to benefit from its strong product portfolio and operational efficiency.