This is a good time to add Small Caps

This may be a very good time to add Small Cap stocks to your portfolio.

Let me substantiate the logic and reasoning for this.

If we list out equity-oriented investments in order of Safer to Riskier (and generally Lower to Higher return), they are:

  1. Sensex/ Nifty / ETFs /Large cap Mutual Funds
  2. Mid Cap and Mid cap oriented MFs
  3. Small Cap and Small Cap MFs

Taking this further, there is a pattern to valuations of Large, Mid and Small caps.

  1. Generally, Large Caps will have higher valuations than Mid Caps, whose valuation again is higher than Small Caps. This is because Large Caps are stable, have higher liquidity, and fall lesser in bad times. Large investors (FIIs/ DIIs) prefer this safer characteristic. However, Large Caps also rise lesser in good times.
  2. In bullish times, the Large Caps tend to rise to higher valuations first. Once this happens, the Institutional investors stop investing in them, and the action moves to mid and  small caps.
  3. Typically Mid and Small caps ‘catch up’ with large caps with a time lag.

This can be observed in the graph below, which captures NIFTY and NIFTY MIDCAP valuations over a 6 year period. (The period of 2005 to 2007 seems to be an exception as Midcap PE is higher than Large Cap PE).

Indices patternTable 1 – NIFTY and NIFTY MIDCAP

  • Further, this cycle has repeated in the last 6 months, where the Sensex/ Nifty fell about 15%, but small and mid caps fell further.
  • Now the cycle is reversing. I expect that as the larger indices recover their levels, the beaten down mid and small caps will rapidly recover.

In particular, there are some solid stocks in these categories, available at low valuations

Hanung Toys and Textiles

  • Export oriented Manufacturer of Toys and Textiles
  • Excellent client roster
  • EPS growth has been 57% CAGR, but recent fall has resulted in P/E of 4.0
  • See price Trend chart

Hanung Toys and TextilesTable 2: Hanung Toys and Textiles

Mundra Port and SEZ

  • Largest private port in India. Recently crossed 50MT of cargo handling
  • Significant business from Coal, Petroleum and passenger cars.
  • SEZ includes 14000 + acres land, under development, for an extended port complex industrial area. This will fuel future port operations growth
  • Growth data: Revenues 28% pa; Cash from Operations 51% pa; EPS 48% pa
  • Debt equity is at 0.91, reducing every year
  • Share recently crossed its 200 DMA, at 150 levels. Positive for investors
  • See Price Trend Chart

Mundra Port and SEZTable 3: Mundra Port and SEZ

IRB Infrastructure

  • Largest domestic Roads and Highways portfolio – as a builder and operator
  • Is experienced in this since 12+ years. Operates 9.3% of Golden Quadrilateral
  • Has over 8000 crores of orders on hand. Debt equity is 1.59, not high for an infra focused firm. Good cash flow from Road Tolls.
  • See price Trend chart

IRB InfrastructureTable 4: IRB Infrastructure

KEC International

  • A top player in the Power Transmission Engineering Procurement Construction (EPC) space in India. Also executes in 20 other countries.
  • Of late, has extended offerings to Cables, Railways, Telecom, etc in related spaces.
  • Order book of 8000 crores ties up 18-24 months of revenues visibility
  • Recently acquired a US based firm. Debt equity is at 1.6, but has good cash flow from operations
  • See Price Trend chart

KEC InternationalTable 5: KEC International

Yes Bank – see report (click on link)

Binani Industries

  • Holding company (with 95%) of Binani Cements, which is getting delisted.
  • Binani Cement is a 1800 crore turnover (2010) cement firm with a market Cap of 1650 crores.
  • It has over 8 MT cement capacity, with ongoing expansion to 15 MT in  3 years. Excellent growth and profit prospects. DE is 1.46 times, and falling
  • Binani Industries itself is other than cement, into Zinc, Glass Fiber, composites, etc. Market cap currently of this firm is Rs 620 crores.
  • Once the demerger of Binani Cement into Binani Industries is complete, the latter’s valuation should reflect the cement business, and the market price should appreciate considerably.
  • No Price Trend here, but I believe the stock is seriously underpriced

Diamond Power Infrastructure

  • The company is an 848 crores turnover firm (2010 revenues).
  • In the business of: manufacture of Power Transmission equipment (cables, conductors, wires and distribution transformers) and turnkey services provider (EPC).
  • As an EPC player, has the advantage of in house manufacture of high proportion of equipments
  • Has seen growth of 86% pa of revenues, and 65% pa of profits over the last 4 years. This may may slow going forward, but even so this is a very attractive growth phase for the firm.
  • Recent equity dilution has allowed capital infusion, so DE ratio has dropped to 0.7, and cash is available for funding growth plans.
  • See Price Trend chart

diamond power infrastructureTable 6: Diamond Power Infrastructure

BGR Energy

  • An EPC and power plant services company that specialized in balance of Plant (BOP) services, for Power, Oil and Gas industries.
  • It has strengthened it’s portfolio with recent JVs and strategic alliances
  • At 3000 crores of 2010 revenues, it is not really a small company
  • Over the last 4 years, it has seen growth of 58% in revenues and 72% in profits
  • The recent bad media reports on BGR energy were overplayed, and this is an opportunity for investors to enter into the stock
  • See Price Trend chart

bgr energy systemsTable 7: BGR Energy Systems


  • Investors must note that small caps in general display high volatility compared to the overall market.
  • High growth rates of small firms typically slow down as they become  mid-sized
  • Economic slow down can affect such stocks more seriously than large caps
  • Investors are advised to establish targets and exit criteria for investments in Small Caps


These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at

Also see:
Performancing Metrics
Performancing Metrics


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