Here's How Smallcaps Are Likely To Perform In 2023

Recently, we wrote about the penny stocks that rallied more than 1,000% in 2022.

While none of the smallcap stocks were able to deliver such huge gains, there were a few which rallied over 200%.

Let's take a look at the top performing smallcap stocks of 2022 and how they are set up for 2023.

We will discuss how these stocks performed over the last few quarters and identify the core opportunities that exist for them going forward.

#1 Cressanda Solutions (313%)

In what was possibly one of the worst years for Indian IT stocks and tech stocks across the globe, this IT company managed to rise over 3x!

Cressanda Solutions offers a host of IT, digital media, and IT enabled services. It's a software development company that provides middleware products, systems integration services, and bespoke software solutions.

The company started the year 2022 at a share price of Rs 6.47. On 30 December 2022, i.e. the last trading day of 2022, the stock price closed at Rs 26.75.

As is visible in the chart above, the real gains came post April 2022. This was after Cressanda forayed into the machine learning and artificial intelligence (AI) space through an indirect route.

In May 2022, Cressanda acquired a 100% stake in Bengaluru-based Lucida Technologies. Lucida is a digital technology company providing support services such as data analytics, AI and machine learning.

Some of the gains might also be attributed to the company doubling profits in financial year 2022 and reporting mind-blowing numbers for the September 2022 quarter.

After the massive surge in 2022, foreign investors have taken interest in the company and have take a minor stake in the September 2022 quarter.

Going forward, the company is likely to report a massive jump in its FY23 profits as suggested from the quarter numbers. So, it might be placed better for the time being.

#2 Choice International (294%)

Second on the list is a holding company.

Choice International offers services in the areas of project financing, assisting in raising funds by equity or debt routes, debt structuring, private equity, acquisitions, long term strategic planning, turnaround and structuring and joint ventures, divestitures and takeovers.

The company started the year 2022 at a share price of Rs 63.42. On 30 December 2022, the stock price closed at Rs 249.70.

As can be seen from the chart above, the company has had a stellar 2022, rising gradually every month.

The rally started when the company announced rights issue in early 2022 at a price of Rs 51 per share.

What added fuel to the fire was the company reporting around threefold jump in its net profit in financial year 2022.

The company has reported a decline in net profit for June 2022 as well as September 2022 quarter. So FY23's profitability might be a tad lower compared to year ago period.

Interestingly, FIIs have doubled their stake in the company to 14.1% in September 2022 quarter from 7% in June 2022.

#3 BLS International Services (248%)

Third on the list is BLS International Services.

BLS International is a part of the decades old BLS Group with a global presence and diversified range of services in polymers and petrochemicals, education, electronics, asset management, visa processing, and management consulting.

The company has also expanded its business operations to provide front-end and citizen services to state governments in India.

The company started the year 2022 at a share price of Rs 47.5. On 30 December 2022, the stock price closed at Rs 165.40.

The company enjoys virtual monopoly in the space it operates. It has an extensive network and has operations present in around 66 countries.

In 2022, it acquired a majority stake in a company called Zero Mass. It's the first ever business correspondent in India providing business correspondent and business facilitator services to banks. India's largest bank SBI also has a stake in Zero Mass.

In financial year 2022, the company more than doubled its profit on the back of spike in revenues.

Even the half year numbers are encouraging with the company reporting a substantial increase in revenue and profits.

According to the company's annual report, there is a large market available to be captured as majority of the governments are yet to outsource visa services. This is a big positive for BLS and it may see the positive trend continue in 2023.

In a recent interview, the company's MD said that the company expects even more positive quarters going ahead as it is actively pursuing new contracts.

Here's an excerpt:

We have a strong focus on upcoming tenders on visa and outsourcing services with a potential market size of over $1.5 bn.

Post-pandemic there is a rebound in travel and tourism, which we have already capitalised on in 2022 and expect to increase the numbers further in 2023.

Interestingly, the company has declared two bonus issues in one year (2022)!

#4 Ugar Sugar (241%)

Fourth on the list is Ugar Sugar.

It's the flagship company of the Shirgaokar group. This company is located in a township by the name- Ugar Khurd, Karnataka, close to the border of Karnataka & Maharashtra.

Ugar Sugar is the largest ‘single location' manufacturer of sugar in Southern India.

The company started the year 2022 at a share price of Rs 30.1. On 30 December 2022, the stock price closed at Rs 102.7.

A prime reason for the company's rally in the year gone by has to be the government's increased focus on ethanol. The center had asked sugar companies to increase ethanol production.

Any sugar company with a credible ethanol story and decent financials were rewarded. Ugar Sugar had both things in place.

It's net profit in 2022 more than doubled even as revenues more or less remained near the same levels.

Quarterly numbers paint a different story as the company has reported a loss in September 2022 quarter.

Still, it may enjoy tailwinds in 2023 as reports state that the government might raise export quota, as soon as January 2023.

It appears FIIs are taking note of the company's potential as they have increased stake for the past four consecutive quarter.

#5 Jyoti Resins & Adhesives (233%)

Last on the list is Jyoti Resins & Adhesives.

The company manufactures and markets adhesives and paints products. The company's products include maleic resins, paints, and alkyd resins.

It started the year 2022 at a share price of Rs 375.18. On 30 December 2022, the stock price closed at Rs 1,248.7.

As can be seen from the chart above, the company saw a spike post April 2022 as it reported growth on all fronts in its April-June 2022 quarterly numbers.

It has an edge owing to low-cost manufacturing and diversified product portfolio. It's also debt free and has reported high return ratios of around 30-40% over the years.

The recent quarterly numbers are really encouraging and have set the stage for 2023.

In September 2022 quarter, the company reported highest ever EBITDA and profit margins.

In its annual report, the company mentioned that it is increasing production capacity on the back of strong demand. This should bode well for 2023.

The road ahead for smallcap stocks

As things stand now, the bigger opportunity lies in the smallcap space.

We recently covered a detailed editorial explaining why…you can check it out here: Smallcaps vs Midcaps.

However, you need to be careful in the selection process.

Here's what Richa Agarwal, editor of premium smallcap recommendation service Hidden Treasure, wrote in a recent editorial:

The upside in well selected smallcap stocks could be much higher.

Investors should keep in mind that that there has been consolidation in the smallcap space, with stronger players gaining the edge over less competent peers, who have either disappeared, or are shrinking.

The balance sheets for stocks in smallcap index looks much cleaner now.

And the cash flow from operations has never looked this good in last 5 years.

After a long lull, the capex revival is here with banks having cleaner balance sheets and relatively easier access to credit to strong players in the smallcap space at benign interest rates.

So while I'm positive about this space, there are a few things you must ensure to be on the winning side in smallcaps.

You must focus on smallcap companies that are not just showing earnings revival, but are backed by solid balance sheets as well.

You could further enhance your probability of success by betting on market leaders and backed by promoters with an established track record of execution.

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

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