The party on D-Street began on September 11, as the Nifty 50 made history and hit 20,000 for the first time ever. It crossed that level today, closing at 20070. Strong investments by domestic funds and retail investors have driven the rally, even as FIIs turned net sellers in September.

New Delhi was gleaming this month after the city got a $120 million facelift, with new murals, fountains and statues installed ahead of the G20 summit. The success of the summit has added to the optimism. 

A new economic corridor that links India with the Middle East and Europe, was announced at the summit. It includes an extensive rail and shipping network that will enable faster transportation of goods and services. 

But while India is making its presence felt on the global stage, analysts are concerned about its market valuations, especially in the small and midcap segments. According to Bloomberg, the Nifty Smallcap 100 and Nifty Midcap 100 are trading ahead of their five-year average PE valuations. 

Nifty smallcap outperforms benchmark since June 2023

The Nifty Smallcap is at its most overbought level since 2014, considering its 14-week relative strength index. Anish Tawakley, head of research at ICICI MF, observed that the relentless smallcap buying has made largecaps a better bet, “We are more comfortable with large-cap valuations. People are getting very optimistic in the small and mid-cap space around relatively weak business models.” 

Higher mutual fund investments have played a major part in this rally.

Smallcap funds remain popular among mutual fund investors

Although many stocks in the small-cap universe have already run up, there is still steam left in a few. In this week’s Analyticks:

• Rough diamonds?: Six undervalued smallcaps with promising futures
• Screener: Smallcaps with ‘Buy’ consensus from analysts and positive Forecaster growth

Let’s get into it.

Hidden gems: Six promising smallcaps with healthy valuations

With the smallcap sector hotter than ever, it's time to ask: where should you invest? With experts worrying about high valuations in smallcap stocks, we looked for companies whose growth and future outlook made them stand out.

We found six stocks from the BSE SmallCap index with strong TTM growth, trading at lower than their industry valuation. These stocks are priced lower than their 5-year average PE , and analysts are bullish on their future growth.

AIA Engineering: Strong demand puts spending plans into high gear 

This capital goods player has seen close to 30% revenue growth on a trailing 12-month basis, thanks to robust realisations and strong demand in the mining sector. Its EBITDA margins rose sharply in Q1FY24 due to lower freight costs. AIA Engineering is trading at a 25% discount to the industry PE ratio. 

The company is adding to its grinding media capacity in the current fiscal year. It also plans to upgrade its plants and invest in warehouses and renewable energy systems. Overall, its planned capex for the next two years is 56% higher than in FY22 and FY23. 

AIA Engineering’s management has guided for a volume growth of around 10% in FY24. It is bullish on the demand trends in North and Latin America. Analysts see the company’s revenue growing at 10% CAGR in the next two years. 

AIA Engineering to accelerate investments, revenue to rise in double-digits

Mahanagar Gas: Record margins are fuelling profits 

This city gas distributor has delivered a top-line growth of over 45% on a TTM basis. In Q1FY24, its margins rose to record levels due to lower gas costs. Commenting on this, Ashu Shinghal, the Managing Director at MGL, said, “With APM gas prices capped at $6.50 per MMBTU for two years, we are seeing very stable gas costs.”

MGL’s margins have improved in the past four quarters

Currently, MGL is trading at a discount of over 30% compared to its 5-year average PE ratio. Analysts see sales volumes improving as the company passes on the benefits of lower costs to its customers. The recent acquisition of Unison’s three geographical areas will also boost volumes. 

MGL’s margins may normalise in the upcoming quarters, but will stay considerably higher than the all-time rock bottom levels of FY23. Hence, analysts see MGL’s profits rising by over 20% YoY in FY24. 

MGL may see robust profit growth on higher margins

Safari Industries: Riding on the travel industry boom

This luggage maker has seen a revenue jump of over 50% YoY on a TTM basis. Safari Industries is trading at a 25% discount to the industry. The company has also outperformed its peer VIP Industries, in both growth and returns.

Safari Industries has outperformed VIP on all counts

Safari’s EBITDA margins have risen steadily over the past six quarters, on lower input costs and an increase for in-house manufacturing. Just last month, the company added new production capacity of 1.25 lakh units. Traditionally a mass category player, Safari has also entered the premium market with its new ‘Urban Jungle’ brand. 

According to the consensus estimates of analysts, Safari Industries’ revenue may rise at a CAGR of over 20% in the next two years. This is thanks to more people travelling for leisure, and ongoing growth in business travel. 

Safari may clock topline growth of over 20% in the next two years 

Triveni Engineering: Sweet returns through distillery expansion 

This sugar and ethanol maker’s revenue has risen by nearly 25% YoY on a TTM basis. Triveni Engineering’s distillery segment, which is ethanol sales, has seen impressive growth in the past years. Oil marketing companies are also raising prices under their ethanol blending programmes. 

Triveni’s distillery sales volumes have consistently risen 

Triveni Engineering plans to invest Rs 700 crore across its businesses in FY24. It is also expanding its distillery capacity over the next two years. The rising prices of sugar are helping the company’s sales realisations, and analysts see a profit CAGR of over 25% in FY23-25.

Triveni is ramping up distillery capacity, to post robust profit growth

However, one risk for Triveni is a  possible ban on sugar exports, which could affect its profitability. Last year, the company exported 1.9 lakh tonnes of sugar at record prices. The industry body and the government may take the final call on an export ban by October 2023. 

HG Infra: Pre-election spending to build up order book 

This construction major has posted a 23% growth in standalone revenue on a TTM basis. A specialist in road and highway projects, HG Infra Engineering’s order book grew by over 50% in FY23. This provides good revenue visibility. 

The Centre has sped up its capex ahead of the upcoming elections, in the hope of wowing voters. Reports suggest that the Roads Ministry plans to spend 90% of its budget by December itself. This bodes well for order inflows to HG Infra. The company expects to receive orders worth Rs 7,000-8,000 crore in FY24. A strong line-up of projects from the NHAI and Indian Railways is also anticipated. 

According to consensus estimates of analysts, HG Infra’s revenue and profits may rise at a CAGR of over 15% in the next two years. 

HG Infra’s robust FY23 order book projects 15%+ CAGR growth

Blue Star: Strength in B2B business may boost revenue

This consumer durable maker has clocked a revenue growth of 18% on a TTM basis. Blue Star is trading at a discount of over 30% compared to its 5-year average PE, despite the stock gaining 38% over the past year. Its performance in Q1FY24 was supported by its projects and commercial air conditioning business.

Commenting on the demand scenario, Nikhil Sohoni, the CFO at Blue Star, said, “With continued investments in the infrastructure sector, we expect strong demand for our B2B products. While the summer season impacted the room AC category, we hope that the demand will revive in the festive season”. 

Blue Star may register over 15% revenue CAGR between FY23 and FY25

To meet demand, Blue Star is increasing its production capacity for both room and commercial AC units at Sri City. Analysts forecast that the company’s revenue will grow by over 15% CAGR in the next two years. Profits will also grow faster as the benefits of operating leverage kick in. 

Screener: Smallcaps with buy consensus from analysts, and positive growth forecasts in the upcoming quarter and year

Craftsman Automation set for highest revenue growth in Q2FY24 and FY24

Following the recent market rally, investor appetite for growth stocks is surging. This screener shows stocks from the BSE Small Cap index that had robust growth in Q1FY24, with positive revenue and net profit growth forecasts for Q2FY24 and FY24. These stocks also have a ‘Buy’ consensus from analysts, according to Trendlyne’s Forecaster. Note that this is a growth-focused screener and does not check for valuation.

Major stocks that appear in the screener are Craftsman Automation, CreditAccess Grameen, Equitas Small Finance Bank, APL Apollo Tubes, CE Info Systems and Cyient.

Craftsman Automation’s revenue is projected to grow by 51% YoY in Q2FY24. Its annual revenue is expected to rise by 44.2% in FY24. ICICI Securities anticipates accelerated revenue growth on the back of its acquisitions, higher sales of utility vehicles and a revival in the production of two-wheelers.

CreditAccess’ revenue is expected to grow by 47.8% and 34.2% in Q2FY24 and FY24, according to Trendlyne’s Forecasters. Geojit BNP Paribas expects the lender to sustain its revenue growth, led by improved loan disbursements and customer additions.

Equitas Small Finance Bank’s Q2FY24 revenue is set to expand by 26%, according to the Forecaster. According to BNP Paribas, the bank’s revenue growth will be aided by an increase in loan disbursements in the microfinance, consumer vehicles and affordable housing segments, combined with new product launches.

You can find some popular screeners here.