Have you of late looked at stocks of small companies for investing?

Though they are rarely on the top of investors' priority list, they can give very good returns, provided they are chosen with care. Nine small-cap stocks more than doubled between January 1 and June 3. However, the benchmark, the BSE Sensex, rose 0. While small-cap stocks can give big gains , the losses, too, can be huge. For instance, nearly the entire value of Chromatic India and Sudar Industries was wiped out between January 1 and June 3.

PROS AND CONS Small-cap stocks are not tracked closely by market analysts and that is why the real value of good smallcap stocks can remain undiscovered for long. This makes investing in them risky. But the rewards of finding a hidden gem are huge too, for such a stock may become a midcap or even a large-cap stock over time, giving superlative returns. However, select small-cap stocks have given stellar returns.

Obviously, they will take a few years to grow and blossom. They can be good bets for the long term," says Gokul Raj P, executive director and head, investments, HBJ Capital Services.

If one buys a wrong stock, a prompt exit is difficult. Also, many small companies are young, with a very short track record. Hence, judging their performance is difficult.

How to choose small-cap stocks that offer good returns

This makes them risky. When times are tough, large companies sail through, but the smaller ones are at the receiving end," says Vishal Jajoo, senior research analyst, Nirmal Bang. FACTORS TO WATCH Small companies are struggling with high borrowing costs, low demand, power shortage, and high wages and commodity prices. Higher imports from China and currency volatility are also putting pressure on margins," says Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

Small-cap stocks are like trees that have just been planted. Now, let's look at some aspects that need to be looked at while buying small-caps stocks. Track record of promoters: The first thing one must check is for how long the promoters have been in the business and whether they are backed by a strong team.

However, retail investors have no option but to rely on research reports on this count. A high promoter stake shows his confidence in the business.

Mighty returns: Top 7 must have mid & small cap stocks in portfolio - dakoxok.web.fc2.com

You should also ask if the promoter plans to increase his stake. Attributes such as promoter holding, shares pledged, return on equity and debt-to-equity ratio should be considered carefully," says Jajoo of Nirmal Bang. A unique and robust business model augurs well for the company in the long run. If a small company is present in areas dominated by those with deep pockets, then chances are that it will close shop sooner than later.

Small firms are relatively weak in terms of governance, dividend policies and professionalism of the board. Vishal Jajoo Senior Research Analyst, Nirmal Bang Debt figures: High debt means the interest outgo is huge, which can be a big drag.

Experts say institutions avoid buying shares of small companies due to lack of liquidity. But if you come across a small company in which institutions have bought stakes, you need to take the stock seriously.

But be careful, as institutions can also take wrong calls. However, Gaurav Dua, head of research, ShareKhan, advises caution. The company has been registering strong growth over the last four years. For the year ended March , the company posted a net profit of Rs 46 crore as against Rs Identifying small-cap stocks is more of a bottom-up exercise being stock-specific rather than a sector-specific call.

It is strategically placed to repeat the performance over the next couple of years. The stock can touch Rs in the next few years," says Jajoo of Nirmal Bang. It is an emerging new-generation private sector bank with 94 branches and ATMs. Its unique selling proposition is the promoter background. The promoter, the Aga Khan Fund for Economic Development, is present in 16 countries and employs over 30, people.

The stock can touch Rs 60 in the next 12 to 18 months," says Siddharth Rajpurohit, senior research analyst, Tathastu Advisory. On June 3, it was at Rs Rajiv Mehta, assistant vice president, research, India Infoline, is also positive on the bank.

Net interest margins will remain healthy at 3. With its new plant in Dahej, it will be the world's first fully-integrated optical brightening agent manufacturer.

Mid-cap bets for long-term investors

The new unit can produce enhanced solar salts which are under research for use in solar panels. The stock can touch Rs in the next 12 months," says Rajpurohit of Tathastu Advisory. VA Tech is the largest player in the water management space and therefore will be a key beneficiary of the huge investments that are expected to be made to tide over the rising water scarcity.

Top Small Cap Companies | List of Top Small Cap Companies | Small Cap Stocks in India (Page 1)

Current valuations do not reflect the robust financials of the company. We think the stock can touch Rs in the next months," says Mehta of India Infoline. For the year ended March , the company posted a net profit of Rs The company's 1,strong dealer network gives it an edge over peers.

We think the stock can touch Rs in the next two years," says Gokul Raj P of HBJ. Sun Pharma Advanced Research Company: The company makes advanced pharmaceutical ingredients and generic drugs.

It reported a net profit of Rs 44 crore for the quarter ended March as compared to a loss of Rs The promoters hold Mathews of Geojit is upbeat on the company.

On June 4, it was at Rs NDTV reported better-than-expected numbers in the fourth quarter of It booked a consolidated net profit of Rs The reason for this sharp turnaround is cost-cutting and digitisation.

The latter helps in checking underreporting of subscriber numbers and enables broadcasters to command a premium on ad rates.

The stock can touch Rs ," says Mathews. For financial year ended March , the company posted a net profit of Rs The target price for the stock is Rs Small-cap stocks that can give good returns are difficult to find. Here's a little help. Gokul Raj P Executive Director and Head, Investments, HBJ Capital. Vishal Jajoo Senior Research Analyst, Nirmal Bang. Gaurav Dua Head of Research, ShareKhan.

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