Top 5 Smallcap Stocks that Could Be Massive Long-Term Winners

In the vast landscape of the stock market, the allure of identifying fundamentally strong small-cap stocks with the potential for substantial long-term growth is both thrilling and rewarding.

These under-the-radar gems have the capacity to evolve into remarkable success stories, generating significant returns for investors who recognise their promise early on.

This article will highlight the top five small-cap stocks which are showing promising signs of becoming massive long-term winners.

From innovative disruptors to emerging industry leaders, these stocks have caught the attention of astute investors seeking to capitalise on the future's opportunities.

#1 Dr Lal Pathlabs

The first stock on our list is Dr Lal Pathlabs.

The company is one of India's leading consumer healthcare brands in diagnostic services.

It has a country-wide network comprising of 36 NABL accredited Labs, supported by 277 clinical laboratories, 5,102 patient service centres and over 10,938 pickup points.

Currently, only 1% of Indian diagnostics labs are National Accreditation Board of Laboratories (NABL) or College of American Pathologists (CAP) accredited.

Only a few large national players like SRL, Dr Lal Pathlabs, Metropolis Healthcare, Thyrocare, Max Healthcare, and Apollo Clinic have accredited labs. Dr Lal Pathlabs has huge scope to grab a bigger share of the unorganised pie over the coming decades.

The company has a strong financial profile as well, supported by strong revenue growth, robust return ratios and comfortable debt.

Its revenue and net profit have grown at a CAGR of 15% over the last three years. The return on equity (RoE) and return on capital employed (RoCE) stand at 15% and 18.5% respectively. The company's debt to equity ratio is also low at 0.25x.

Going forward, the management plans to continue to build and drive growth through the organic expansion of labs and collection centers infrastructure. It will also use the inorganic expansion route and use technology to enhance customer experience.

On the organic front, the initiative of creation of Hub Labs has started yielding good results especially in northern part of India. This will also give the company the capability to go deeper in Tier-II and Tier-III towns in large states like UP, Bihar, etc.

It has also established India's first center of excellence for autoimmune diseases. This initiative combines the focus on super specialized testing including genomics.

#2 Tanla Platforms

The second stock on our list is Tanla Platforms.

The company is a global A2P (application to person) messaging platform provider enabling businesses to communicate with their customers and intended recipients.

It's also one of the largest communications platform-as-a-service (CPaaS) firms in the world, processing more than 800 billion (bn) interactions annually. CPaaS firms enable enterprises to send OTPs, transaction alerts, and flight status info to end-users.

Tanla Platforms has grown through a series of acquisitions. Some of its recent acquisitions include ValueFirst India, Karix Mobile, and Gamooga Softtech. The acquisitions have helped the company increase its customer base, expand internationally, cut costs, and improve its financials.

The company's revenue has grown at a CAGR of 33% in the last five years, while the net profit has grown at a CAGR of 93% during the same time.

As a result, the return ratios are robust. The RoE and RoCE are at 31.2% and 37.8% respectively.

The debt-to-equity ratio of the company is also negligible. The company does not have any external debt in the book apart from lease liability. Strong cash accruals with nominal debt levels have resulted in strong debt coverage indicators.

What do the company's long-term prospects look like?

Industry reports indicate a compound annual growth rate (CAGR) of 29% for the global CPaaS market between 2020 to 2025. To capitalise on this growing adoption, Tanla Platform plans to tap into this by offering innovative solutions for multichannel communication.

The management expects improved revenue in the enterprise segment. This will be driven by the addition of new communication channels and potential price hikes.

They also anticipate stable growth in its CPaaS product, 'Wisely', benefiting from favourable trends in digital interactions and easy-to-deploy models.

It's worth noting that in FY23, approximately 32% of platform revenue was contributed by Wisely, indicating its growing acceptance in the market.

In addition to revenue growth, Tanla also foresees an improvement in margins due to higher profitability and improved volumes in both the enterprise and platform business segments.

#3 Apar Industries

The third stock on our list is Apar Industries.

The company is the world's largest conductor manufacturer, third largest transformer oil manufacturer, and India's largest renewable cables manufacturer.

Due to its huge market size, the company enjoys a leadership position in the global markets too.

The company has a reputed clientele comprising large engineering, procurement, and construction (EPC) players, and major utilities like railways, defence, and marine. Good internal strengths combined with market opportunities has ensured steady growth for the company.

Apar Industries' revenue has grown at a CAGR of 25% in the last three years, while net profit has grown at 68%. It also has healthy return ratios. The company's RoE stands at 32.3% while RoCE stands at 51.1%. It also a low debt to equity ratio of 0.17x.

Going forward, favourable demand prospects for transmission and distribution products in India and higher orders from abroad, are expected to drive growth.

Increasing global infrastructure spending, the China plus one strategy, adoption of renewable energy, and consolidation of suppliers, will boost the company's growth going forward.

Apar Industries has a strong competitive position in attractive growing markets coupled with lower costs and a strategically located manufacturing footprint.

The company has a favourable long-term demand outlook. This order flow guidance supported by favourable growth opportunities will provide healthy revenue growth visibility over the long term.

#4 Angel One

The fourth stock on our list is Angel One.

The company is a diversified financial services company. Its financial products and service offerings include broking services, research services, and investment advisory.

It also has a margin trading facility, loan against shares, distribution of third-party financial products and investor education.

The entire client base of the company is retail in nature and has no exposure to institutions.

The Angel group has maintained healthy pace of client additions in the last three years as a result of a significant bull run in the stock market. Improved financial awareness led to a 130% growth in demat account openings.

This increase in clients has translated to an increase in earnings. The company's revenue has grown at a CAGR of 59% in the last three years. The net profit has grown at a CAGR of 117%. The company's return ratios are also high with RoE and RoCE at 47.1% and 44%, respectively.

Despite the recent market volatility, the group continues to hold a strong market position as shown as third largest in terms of active client base and second largest in terms of incremental active client additions as on 31 March 2023.

The company has rebranded itself from 'Angel Broking' to 'Angel One' to transform from a single product, stock-broking, to a one-stop solution for wealth creation via a wide range of services.

Going forward, the company is exploring inorganic acquisitions and partnerships to enhance its existing and future offerings.

It's also building partnerships to distribute consumer credit products and is strengthening its affiliate channel strategy to provide a comprehensive range of financial products and services.

#5 Fine Organic Industries

The last stock on our list is Fine Organic Industries.

The company is a leading specialty chemical producer based in India. It specialises in the manufacturing and distribution of additives, surfactants, and polymers used in a wide range of industries, including food, plastics, and cosmetics.

It produces additives for coatings that act as anti-settling agents, emulsifiers, and thickening/anti-sagging agents.

Fine Organic Industries has been a direct beneficiary of the growing demand for specialty chemicals. The industry is particularly in a sweet spot as many global players are looking to reduce their reliance on China post-Covid-19.

On the back of this demand, the company's revenue has grown at a CAGR of 29% in the last three years while net profit has grown at 55%. This has resulted in high return ratios with RoE and RoCE at 49.4% and 65.3%, respectively. It also has negligible debt on its books.

Going forward, the company's growth is expected to be driven by the increasing demand for healthier products and changing consumer preferences toward processed and conveniently packaged foods.

Fine Organic has entered the green surfactants market, focusing on the home and personal care industry. This segment is projected to grow steadily and contribute to the company's overall growth in the oleochemicals sector.

While industry experts are of the view that going forward for the next couple of quarters, factors such as industry-wide inflation, sustainability concerns, supply chain disruptions, and demographic challenges, will dent the profit margins of specialty companies.

However, in the long term, the sector has promising prospects. India's specialty chemicals market is expected to grow to US$ 40 bn by 2025 from US$ 28 bn in 2018, as per a McKinsey study.

Asia is expected to drive 70% of the incremental specialty chemicals demand till the financial year 2025, primarily fuelled by disproportionate growth in China and India.

Snapshot of long term smallcap stocks from Equitymaster's stock screener

Here's a quick view at the above-mentioned companies based on some crucial financial parameters.

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

Why you should invest in smallcap stocks for the long term

Investing in small-cap stocks for the long term can offer a unique opportunity for investors seeking growth potential and diversification in their portfolio.

While small-cap stocks are often associated with higher volatility, they can yield substantial rewards over an extended investment horizon.

However, it's important to note that investing in small-cap stocks comes with increased risk due to their volatility and potentially limited resources.

Thorough research, due diligence, and a long-term perspective are essential. Not every small-cap stock will succeed, so diversification is crucial.

Conclusion

Investing in small-cap stocks for the long term can provide investors with opportunities for substantial growth, diversification, and exposure to emerging trends.

While the risks are higher, prudent research and a well-structured investment strategy can help investors harness the potential rewards of this segment of the market.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...