Best Small Cap Stocks with High Net Profit Margin: Investing in the Stock Market can be quite a tricky business. The number of ratios to analyze & compare with peers can be quite overwhelming, Isn’t it? So, if asked to choose one metric to pick out the few bad apples from the good ones, what would it be?
Our pick would be Net Profit Margins. These margins give us an idea as to what percentage of revenue the Company takes home. Although this might not be the best metric to use in stock picking, it is useful in screening & shortlisting Companies.
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Best Small Cap Stocks with High Net Profit Margin
So today we will look at the 5 Best Small Cap Stocks with Highest Net Profit Margins. We will understand what they do, especially focusing on their sources of revenue. Then we will look at their Expenses to understand what it is that they spend on & finally look at how much Net Profit they make & at what margins.
Tata Investment Corporation Ltd (TICL)
Tata Investment Corporation Limited (TICL), previously known as The Investment Corp of India is the NBFC wing of the Tata Group. TICL was promoted by Tata Sons Pvt. Ltd in 1937. It was set up as a Venture Capital fund to make Long Term Investments in small companies and turn them into successful ventures.
TICL has played a promotional role in the formation of famous Companies like Ceat Ltd, National Rayon Corp, and Associated Bearing Co. Ltd. All these companies are now listed on the Stock Exchanges.
Tata Sons, together with other Tata companies, holds approximately 73.38% of the paid-up capital of TICL. The Company is also a Co-promoter (owning 32%) of Tata AMC & a sponsor of the Tata Mutual Fund.
TICL currently manages a portfolio of 87 Companies worth Rs. 3000 Cr. collectively in terms of Book Value. As of March 31, 2023, these Companies had an approximate market value of Rs. 20,700 Cr.
TICL reported a revenue growth of 9.34%, increasing from Rs. 254 Cr in FY22 to Rs. 278 Cr in FY23. Dividend Income from its Investments contributed to 62.54% of the Company’s revenue. Net Gains from sale of Investments contributed to about 23.65% of revenue, while Interest Income contributed to 13.6%.
The Company has a very lean operating structure, with its biggest Operating Expense being Employee Benefit Expense, which costs 5.02% of revenue. This leads to the Company reporting a high Net Profit Margin of 90.8%. Net Profits of the Company increased by 17.38%, growing from Rs. 214 Cr in FY22 to Rs. 278 Cr in FY23.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹4,126.7 | Market Cap (Cr.) | ₹16,305.00 |
| EPS | ₹49.78 | Stock P/E | 50.2 |
| RoE | 1.28% | RoCE | 1.42% |
| Promoter Holding (%) | 73.40% | FII Holding (%) | 1.12% |
| Debt to Equity | 0.01 | Price to Book Value | 0.69 |
| Operating Profit Margin (%) | 90.40% | Net Profit Margin (%) | 90.80% |
Summit Securities
Summit Securities Limited, Formerly known as RPG Itochu Finance Ltd is an NBFC registered with the RBI. The Company was incorporated on 30th January 1997 as a publicly listed Company.
The Company underwent an amalgamation which led to the merger of Brabourne Enterprises Ltd, Octav Investments, and CHI Investments. All the Companies merged to form Summit Securities in 2009.
Summit Securities has an investment portfolio comprised of holdings in various listed and unlisted securities. As of March 31, 2023, it had assets worth Rs. 5612 Cr, which increased by 14.47% from Rs. 4903 Cr in FY23.
The Company’s biggest holdings are KEC International, which is worth Rs. 2303 Cr followed by Ceat which is worth Rs. 1883 Cr, and Zensar Technologies which is worth Rs. 1213 Cr. These three companies collectively contribute to about 96% of the total Investment value held by Summit Securities.
The Company made a revenue of Rs. 50 Cr in FY22 which saw a 32.74% drop from Rs. 75 Cr in FY22. The reason for the decrease came as a result of a 23.68% fall in Dividend Income, which contributes to 91.67% of Net Sales.
The fall in revenue led to Net Profit to fall by 27.09%, from Rs. 51 Cr in FY22 to Rs. 37 Cr in FY23. The rate of de-growth of profit remained slower than revenue as the Company was able to cut down on its Employee benefits & other expenses.
Due to its corporate structure as an investment company, Summit Securities can maintain Net Profit margins as high as 73.3%. However, the Company has a terrible ROE & ROCE of 0.77% & 0.98% respectively.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹1,293.8 | Market Cap (Cr.) | ₹1,408.56 |
| EPS | ₹34.00 | Stock P/E | 21.4 |
| RoE | 0.77% | RoCE | 0.98% |
| Promoter Holding (%) | 74.60% | FII Holding (%) | 0.57% |
| Debt to Equity | 0 | Price to Book Value | 0.15 |
| Operating Profit Margin (%) | 94.60% | Net Profit Margin (%) | 73.47% |
Indian Energy Exchange (IEX)
Indian Energy Exchange is India’s only energy marketplace, that provides a nationwide automated trading platform. The platform allows the physical delivery of electricity, renewables, and certificates. In FY23, IEX touched trading volumes of 96.8 Billion Units
IEX has a robust ecosystem of 7,500+ participants across 28 States and 8 Union Territories. These comprise 60+ distribution utilities, 600+ conventional generators 1,800+ RE generators, and obligated entities.
It also has a strong base of 4600+ commercial and industrial consumers representing industries such as metal, food processing, textile, cement, ceramic, chemicals, automobiles, information technology industries, institutional, housing, real estate, and commercial entities.
Apart from owning India’s only energy exchange, IEX has diversified into setting up the Indian Gas Exchange (IGX), to create India’s first automated exchange to facilitate trading & delivery of Natural Gas. As of FY23, IGX facilitated the trading of over 50 Million British Thermal Units.
The Company also recently ventured into cross-border electricity trade expanding its power market beyond India, creating an integrated South Asian Power Market.
IEX reported Revenue from Operations of Rs. 401 Cr in FY23, a de-growth of 7% from Rs. 431 Cr in FY22. The fall in revenue came as a result of a 5% drop in overall trading volumes at IEX. Net sales for FY23 were around 474 Cr, which included Other Income of 73 Cr.
The Company’s Net Profits decreased by 0.92%, from Rs. 309 Cr in FY22 to Rs. 306 Cr in FY23. This puts the Company 3rd on the list with a consolidated Net Profit Margin of 64.52%.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹147.4 | Market Cap (Cr.) | ₹12,831 |
| EPS | ₹3.42 | Stock P/E | 38 |
| RoE | 40.72% | RoCE | 52.39% |
| Promoter Holding (%) | 0.00% | FII Holding (%) | 14.10% |
| Debt to Equity | 0.01 | Price to Book Value | 13.9 |
| Operating Profit Margin (%) | 83.40% | Net Profit Margin (%) | 76.31% |
Pilani Investment & Industries Corporation
Pilani is an Investment Corporation based out of Kolkata, West Bengal. The Company is also a NBFC registered with RBI. PICL has a majority of its investments in the Aditya Birla Group.
The Investment Company has Assets worth Rs. 10,274 Cr as of March 31, 2023. Out of these, the Company has its biggest holdings in the following four:
- Grasim – Rs. 4035 Cr (39.27%)
- Ultratech Cement – Rs. 2660 Cr (25.89%)
- Century Textiles – 1387 Cr (12.52%)
- Hindalco – Rs. 1210 Cr (11.78%)
The market value of PICL’s stake in these Companies along with how they compare to the Company’s total Investment book are given above.
PICL made a revenue of Rs. 280 Cr in FY23, which increased by 8.46% from Rs. 258 Cr in FY22. 80.57% of revenue came in the form of Interest Income, which increased by 8.98%. Dividend Income brought in 18.37% of the revenue.
During the year, the Company grew its Net Profits by 22%, from Rs. 201 Cr in FY22 to Rs. 246 Cr in FY23. Finance cost was the biggest expense of the Company eating up 23.24% of its revenue.
The Company maintains an Operating Margin of 75.7% & Net Profit Margin of 58.13%. However, the return on Equity remains as low as 8.76%.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹3,050 | Market Cap (Cr.) | ₹3,264.87 |
| EPS | ₹222.11 | Stock P/E | 13.9 |
| RoE | 8.76% | RoCE | 2.26% |
| Promoter Holding (%) | 57.60% | FII Holding (%) | 0.53% |
| Debt to Equity | 0.07 | Price to Book Value | 0.21 |
| Operating Profit Margin (%) | 75.70% | Net Profit Margin (%) | 55.96% |
NESCO
NESCO is an Indian conglomerate diversified across the fields of Engineering, Real Estate, Hospitality, and events. The Company began its journey way back in 1939 when founder Shri JV Patel set up the Standard Engineering Company (SEC).
In 1956, Burjorji Pestonji & Son acquired the Company which led to it being renamed as New Standard Engineering. The Company later ventured into the realty business. In 1992, it established India’s largest private Exhibition Center, the Bombay Exhibition Center (BEC) in 1992. In 2001, the Company finally rebranded itself to Nesco, the name it holds today.
NESCO earned a revenue of Rs. 609 Cr in FY23, which increased by 59.32% from Rs. 382 Cr in FY22. This was due to an 8x jump in rental income from BEC. Net Profits of the Company rose at a similar rate of 53.63%, increasing from Rs. 189 Cr in FY22 to Rs. 290 Cr in FY23.
NESCO today earns its fair share of revenue from revenue from its IT Park & BEC. Together, they contribute to about 74% of the Company’s Net Sales. The Engineering division makes up a meager 7.64% of the Company’s revenue.
The Company can maintain an Operating margin of 69.45% and Net Profit Margin of 47.7%. NESCO can maintain such high margins as a result of its business model. The Company has turned into a Cash Cow, reaping rewards from its previous investments & investing minimal amounts to fuel its growth.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹859.65 | Market Cap (Cr.) | ₹5,954.22 |
| EPS | ₹41.25 | Stock P/E | 17.2 |
| RoE | 14.79% | RoCE | 21.8% |
| Promoter Holding (%) | 68.50% | FII Holding (%) | 2.79% |
| Debt to Equity | 0 | Price to Book Value | 2.62 |
| Operating Profit Margin (%) | 69.45% | Net Profit Margin (%) | 53.23% |
List of Small Cap Stocks with High Net Profit Margin
The list below puts together 10 Small Cap Stocks with High Net Profit Margins.
| Name | CMP | Mkt Cap | NPM (%) |
|---|---|---|---|
| Tata Investment Corp | ₹4,135 | ₹20,701 | 90.80% |
| Summit Securities | ₹1,294.5 | ₹1,408.56 | 73.47% |
| Indian Energy Exchange | ₹147.15 | ₹12,831 | 76.31% |
| Pilani Investment | ₹3,050 | ₹3,264.87 | 55.96% |
| NESCO | ₹858.25 | ₹5,954.22 | 53.3% |
| Aptus Value Housing Finance | ₹327.8 | ₹16,180 | 46.00% |
| Great Eastern Shipping Company | ₹991.4 | ₹13,783 | 45.25% |
| CE Info Systems | ₹2,004.5 | ₹10,871 | 38.20% |
| Gujarat Themis Biosyn | ₹193.3 | ₹1,322.11 | 38.90% |
| Deep Industries | ₹254.00 | ₹1,623.00 | 36.71% |
Conclusion
As we conclude our article on Best Small Cap Stocks with High Net Profit Margin, The Companies that we covered in today’s list are mostly core investment Companies. They have held stakes in other companies for the long term earning them a good sum in the form of dividends & interest income. Most of their spending is towards their employees which is quite literally pocket change compared to what the Company makes.
If any investor plans to invest in these companies it becomes important to check their portfolio & how their investments have held up historically. Investing in these is no different than investing in a Mutual fund or a readymade basket of stocks.
As for the last Company on our list, it is more like investing in an Investment Trust. The Company owns the assets that will generate steady income in the form of rental yield. The maintenance of these assets is also less resulting in these high margins.
Hence, we think for a passive investor this small-cap list does make a good pick, but you should keep a watch on revenue growth. Any revenue growth will proportionately scale up Profits as well. So, which is your favorite pick from this list of stock? Did you want us to cover any other small-cap? Let us know in the comments below.
Written by Nasir Hussain
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