These are the fastest-growing small-caps in the last four years

In the past few years, small- and mid-cap stocks have been growing faster than their large-cap peers. For instance, while the Nifty Smallcap 250 shot up 51% in the past year, the benchmark Nifty 50 rose 26%. But which are the companies in this space that are growing at a fast pace?Over the past four years, Apar Industries has emerged as the biggest small-cap stock with a market capitalisation of ₹40,695 crore. In the past three years, the stock has gone up 130% annually. Sales in the past four years are up 30%. Still, there are many who believe that the stock is undervalued.Apar manufactures and supplies conductors, cables, specialty oils, polymers and lubricants. The company was established in 1958. More than six decades later, it is a diversified conglomerate with an annual revenue of ₹16,153 crore. In FY24, about 45% of its revenues came from exports and the rest from domestic sales. Conductors account for 47% of its revenues. The growing demand for electricity in India is helping the company grow.“India’s energy consumption is expected to grow at an average annual rate of around 4-5% over the next five years. As the third-largest power consumer globally, India has accelerated its efforts to achieve the ambitious goal of ‘power for all’. With a keen eye on the growing global energy rate of 1.5-2% per year, we are leveraging and expanding our international horizons,” Apar stated in its annual report.It caters to the Indian Navy, Indian Railways, solar firms and the fibre-optic cable industry.Apar is one company that can leap from the small-cap space into the mid-cap zone in the coming few years. What sets the company apart is the quality of management. Managing director Kushal Desai understands the business and has a hands-on approach. He is the dream promoter for any small-cap fund manager.The promoter group sold close to a 3% stake last December. Institutional investors have increased their stake while retail investors have lowered their stake in the past year. The stock trades at a PE (price/earnings) of 48x, which is lower than other stocks in the same sector such as Thermax, BEML and Siemens. medium nocaptionhttps://youtu.be/bn4e3CdDIxo?si=KrrEWDm_LA3VUnUXA note of cautionInvestors in small-cap companies want to double their wealth in three to four years. But they have to be careful while choosing stocks because small-caps are illiquid and at times have dubious promoters. Also, in many cases, these are specialty businesses that require both technical as well as financial expertise to allocate capital. And since the business is small and yet to scale up, investors need to have a high risk-taking ability.What is even more interesting is that they operate in niche segments that are difficult to understand and require a certain kind of domain knowledge expertise.According to MicroCapClub founder Ian Cassle, people are the key. “It is mainly betting on the people. The smaller the company, the more important the management becomes. The mode of the business is actually the management team or the leader or founder of that business. So, what attracts us initially is the management team and the leadership,” Cassle said in The Acquirers Multiple podcast. Cassle has been a small- and micro-cap investor for the past 20 years.When ET Prime looked at the fastest-growing small-cap companies over the past four years, we found that most of these companies were either in the infrastructure, engineering, chemicals sectors or in the business of pipes. There are no consumer-facing businesses or banking and finance firms with the exception of Cholamandalam Financial Holdings.“Mid- and small-caps as a space are becoming more relevant for the next leg of economic growth. Nevertheless, valuations are expensive in some pockets. However, if you adopt a bottom-up stock-picking approach, certain themes and sectors have the potential to grow into large-cap companies in the future. These businesses will become increasingly relevant in the next 15 to 20 years,” Manish Lodha, fund manager (equity) at Mahindra Manulife Mutual Fund, said in an interview to Value Research.Small but bigWhat is also important to note is that small-cap companies are not forever companies. In most cases, when they have eye-popping valuations, investors should exit these stocks. Rarely do these companies grow into mid- or for that matter large-cap stocks.So, to a large extent, small-cap investors should be deep value investors but at the same time, they need to have a trader mentality to book profits and exit.Today, many of these companies have very high valuations. This may be unsustainable and that should ideally make investors more careful when they pick these stocks. medium113588573ET Prime looked at stocks in the Nifty Smallcap 250 index whose revenues had grown faster in the past four years. We removed companies that reported losses and ensured that they had a certain size in terms of revenue. This was to make sure that the companies have a high base. Below are our findings.NCC: Predominantly a construction-led company, NCC reported a robust three-year sales growth. The profit growth was 33% each year. The company has a low debt-to-market cap ratio and has a high beta with the benchmark Nifty 50.Another infrastructure company, Kalpataru Projects, also features on the list. However, unlike NCC, Kalpataru has lower sales and profit growth and has a slightly higher debt-to-market cap ratio. Still, it trades at a higher PE of 47x, while NCC trades at almost half of that at 27x. Both the stocks have moved up in the same range of 50-60% in the past three years annually.“NCC is a key beneficiary of the tailwind in the buildings, roads, water, mining and electrical segments. Given the strong order-book visibility and improving balance-sheet strength, it is poised for healthy growth ahead,” according to an ICICI Direct report in August.In May, NCC won a ₹1,300 crore tender for road construction in South Bombay.Redington: It is the largest company by revenue on the list. The company does not have promoter holding. Foreign portfolio investors (FPIs) are major shareholders at 57% followed by mutual funds and retail investors.In the past year, FPIs have reduced their stake in the company, while retail investors have increased their holdings to 12%. It is trading at a PE of 12x and has moved up only 10% annually in the past three years.Ceat and Amara Raja Energy and Mobility: These are two prominent stocks from the auto industry that have come up on the list. While Ceat is trading higher than the Nifty Auto index at 30x, Amara Raja is trading in line with the index’s PE at 24x. Both companies have reported a revenue growth of 20% annually in the past four years. Ceat has a debt-to-market cap ratio of 0.15 whereas the same for Amara Raja is 0.In a recent research report, Motilal Oswal wrote that even though Amara Raja’s venture into the lithium-ion sector is strategically sound, there are notable challenges. These include limited existing OEM (original equipment manufacturer) partnerships, years before new facilities become fully operational, low margin of lithium-ion manufacturing diluting returns, and the long-term viability of technology remaining uncertain despite the large capital investment.“We believe the stock trading at around 28x/24x FY25/26E EPS (earnings per share) appears fairly valued,” the report added.Nuvoco Vistas: A supplier of building materials like cement, the company is trading at a PE of 96x. It has given negative returns annually in the past three years at 10%. The company’s profits have not grown with the growth in revenue.“Nuvoco registered a poor performance, with its margin deteriorating on account of weak demand and a fall in price realisation. Going forward, the demand recovery is contingent on investments in infrastructure and housing. Short-term demand expectation, however, remains uncertain for the industry owing to continued downward pricing pressure,” stated a Geojit report in August.