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If salt loses its saltiness what will you season it with? –Luke 14:34

27 Feb 2019

STOCK MARKET--What are the best small cap stocks to invest in for long term in the present market conditions after the correction?

Recently, I was catching up with two friends over breakfast at a nearby restaurant. One of them is a serious long-term value investor.
When I asked him about how he feels about the ongoing market correction, he made an honest confession, "The value of my (stock) portfolio has slashed down significantly. Sometimes I have a strong impulse to liquidate the portfolio and enter again when the bloodbath is over."
To which, I replied, "How will we know when the market correction is over? Will Mr Market send us a WhatsApp message announcing - The correction is over. Please buy stocks now."
He laughed, "That's exactly the reason I'm not giving in to the panic and nervousness. In fact, I believe this is a good time to accumulate equities for the long run."
I responded, "Yes, I agree. Valuations are starting to look reasonable. But that doesn't mean stocks cannot fall further. It's not going to be easy for sure. In any case, who said investing is an easy game?"

So yes, dear readers, we are in a zone of heightened uncertainty. And markets hate uncertainty. So, do expect the ride to rough and edgy. It's going to be a test of your patience. But also understand that the best buying opportunities arise when others are dumping them in panic. In today's Chart of the Day I'll show you why it makes sense to accumulate equities during market crashes.
Last time, I showed you that the total market capitalisation of all listed companies on the BSE had hit an all-time high of Rs 159.3 lakh crore (1 lakh crore = 1 trillion) on 31 August 2018.
3 Best Small Cap Stocks To Buy In India
As we usher in 2019, it is time to look at small caps, after having collapsed in 2018. Picking the best small cap stocks is never easy in a falling market. However, we have picked some very good ones, which can generate good returns in the medium to long term. Take a look at some of the best small cap stocks that can be purchased. We wish to inform readers, that the markets in the next few months are likely to be exceedingly volatile ahead of the general elections and small cap stocks could be even more volatile than the indices. So, buy into them, if you have a penchant for risk.
IndiaBulls Real Estate
From a holding period of 2-3 years, Indiabulls Real Estate shares could be a solid pick. The company has some massive developmental and office rental portfolio, which could fetch superb annuity revenue and solid sales revenue in the next few years.
Its development portfolio under construction is valued at a staggering Rs 28,857 crores. Under its office portfolio annuity revenue that is completed and owned is to the tune of Rs 109 crores and under construction expected annuity is Rs 511 crores.
Under its JV with Blackstone, the expected annuity revenue is around at Rs 4,600 crores by 2022, expecting a 95 per cent occupancy.
IndiaBulls Real Estate reported a reasonably good set of numbers for the quarter ending Sept 30, 2018. The company reported an EPS of Rs 1.68, as against Rs 1.30 in the corresponding period of last year.
The net profits also surged to Rs 75.9 crores from Rs 61.6 crores in the corresponding period of last year.
IndiaBulls Real Estate: Huge value
The Equity Value of Development Portfolio is estimated at a staggering Rs 17,134 crores. The Equity Value of Owned Office Rental Portfolio is placed at Rs 5,908 crores and the equity Value of 50% in JV Portfolio with Blackstone is at Rs 2,250 crores. Interestingly, the equity Value of Land Bank, estimated @ 1.5 crores per acre aggregates Rs 1,569 Crores.
As against this, the company has a total net debt of only Rs 4,803 crores.
The company also recently announced a buyback of shares and accordingly, the equity capital of the company will stand reduced.
From a 2-3 year perspective, the shares of Indiabulls Real Estate is an excellent buy. We believe the shares can easily double from the current value. The shares are available at a p/e of just around 7 times, one year forward p/e. The price to book is also around 0.6 times, which is pretty attractive.
South Indian Bank
South Indian Bank reported a good set of numbers for the quarter ended Dec 31, 2018, that surprised the street.
The current and savings account of the bank has also been showing a robust growth in the last few years.
The net profits at the bank jumped to Rs 83.85 crores, from Rs 70.13 crores in the previous quarter.
The bank is now going ahead with a strategy of powering growth. It is setting efficient branches & processing centers for faster processing of loans. A new retail banking department to focus on retail loan & liability/investment products is being constituted. There would also be a special cell to monitor non performing assets.
South Indian Bank: Reasonably valued
The bank would also lay an emphasis on retail presence. A retail hub in Kochi would focus on steps to increase focus on housing finance, with a dedicated officers for marketing retail loans.
So far in the Sept quarter the number of Mortgage loans sanctioned was to the tune of 1,982 Nos. It is likely that we will see a renewed thrust on housing finance in the days to come.
South Indian Bank shares at the Rs 13.20, is trading at a p/e of just 6 times, one year forward earnings. The dividend yield on the stock is also a decent 3 per cent. We believe that the worst for banking stocks may now be over, which makes the stock of South Indian Bank a great pick.
Buy the stock for long term gains.
REC is a government of India undertaking, which is largely into power finance. This company share can be considered more of a midcap stock and not a small cap stock, but, we thought it appropriate to recommend the stock.
PFC would be buying the government of India's stake in the company. In any case, it could benefit both the companies in the longer term because of the synergies. One does recall the "buyout" of the government's stake in HPCL, by ONGC. Initially, there was some reaction, but, the stock prices have now settled down.
The interesting part of both these companies is the dividend yields. Let us dwell a little on the dividend yields.
Super dividend yields of REC
REC declared a dividend of 9.15 per share last year. On a stock price of Rs 123, the dividend yield itself works to a healthy 7.05 per cent. We do not anticipate any reduction in the dividends in the coming years.
The company has performed reasonably well and NPAs are not really something one should worry about, given the huge exposure to the public sector.
It is unlikely that we will see any great damage to the share price in the coming days, as the dividend yield should protect against any large scale price damage. Dividends at the company are likely to be declared in Feb 2019 and we have to see if dividends would be declared later this month.
Recently, Power Finance Corporation has acquired the government of India's stake in the company. A good small cap stock to buy for the long term.

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