20 smallcaps, midcaps with over 25% ROE on radar post Sebi order

Dalal Street is abuzz with scuttlebutt over ‘quality’ midcaps and smallcaps that can attract more inflows after markets regulator Sebi last week tweaked rules for multicap mutual funds, mandating them to invest across market-caps.

Data shows there are at least 20 stocks in the broader market which have been maintaining a healthy return on equity (ROE) of over 25 per cent each year since FY2016. Many of them have also managed to deliver a robust returns to investors during the same period.

A higher ROE is taken as the management’s ability to generate better income from equity.

Explaining the concept of higher return ratio, Abhishek Basumallick, Founder, Intelsense, said, “ROE is one of the most important parameters to look at the quality of a business. A company that continues to have a strong ROE on a consistent basis means it can generate significantly high return on capital over long periods of time under different circumstances.”

On the top of the chart, shares of Tasty Bite Eatable have risen 1,026 per cent between September 2015 till today. Among others on the list, Avanti Feeds is up 178 per cent, VST Industries 139 per cent, Hawkins Cookers 137 per cent, Sonata Software 131 per cent and Caplin Point Labs 92 per cent.

BSE benchmark Sensex has risen 51 per cent since September 16, 2015.

Brokerages are bullish on a couple of stocks from the list. Way2Wealth Brokers recently recommended an ‘accumulate on dips’ rating on Avanti Feeds as the company has a strong balance sheet and is in a leading position in the industry, which allows it to position itself well to capitalise on opportunities.

Likewise, Angel Broking is positive on Hawkins Cookers with a target price of Rs 5,992. The company operates in two segments, which include pressure cookers and cookware.

Going forward, Angel Broking expects Hawkins to report healthy sales and profit growth on the back of market share gains, rising penetration of cooking gas, strong brand name, wide distribution network and healthy demand for kitchen products.

Net profit of Hawkins jumped to Rs 72.49 crore in FY20 from Rs 40 crore in FY16. Bottomline of Tasty Bite Eatables, Avanti Feeds and Caplin Point have also increased between 100 per cent and 370 per cent since FY16

Fund managers say they will look for quality after the Sebi’s latest move. “Just because smallcap has to be bought, they (fund managers) are not going to buy penny stocks or ‘aira gaira’ stocks, they going to go for quality companies,” says Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund.

Market regulator Sebi last week mandated multicap funds to invest a minimum 75 per cent of total assets in equities with 25 per cent each in largecap, midcap and smallcap stocks.

Other stocks on the list included Page Industries, Sun TV Network, Tata Elxsi and Gulf Oil Lubricants, which have gained between 35 per cent and 50 per cent, while Sundaram-Clayton, Oracle Financial Services and Bajaj Consumer are down somewhere between 8 per cent and 60 per cent over last five years.

Basumallick says investors should never invest based on any one parameter. “The search for good companies can start at ROE and then one needs to understand how the company is able to generate such high ROE by doing a simple Dupont analysis, which is used to evaluate the component parts of the ratio,” he says.

With consistent ROE, Crompton Greaves Consumer, L&T Technology, Valiant Organics, Indian Energy Exchange, ICICI Securities, Fine Organics and Metropolis Healthcare have advanced up to 974 per cent since their listing during 2015-19.

Motilal Oswal is positive on Indian Energy Exchange (IEX) with price target of Rs 250, while ICICI Securities is bullish on L&T Technology.

Ekansh Mittal, Founder, Katalyst Wealth said, “A company is considered extremely good if it has been maintaining an ROE of over 25 per cent. However, it is important to ensure that it is able to manage the same without excessive leverage.”