Top 5 Small-Cap Stocks Gaining Mutual Fund Attention in Q1 2024

The concept of “Atmanirbhar Bharat,” introduced by the Indian government in May 2020, has permeated various segments of the country, including the stock market. Over time, the Indian stock market has been progressively moving towards self-reliance, with domestic investors playing a more prominent role.

As of June 30, 2024, the shareholding of domestic investors in Indian markets reached an all-time high of 25.8%. Meanwhile, foreign investors’ holdings have dropped to their lowest level in 12 years. In the coming quarters, it is expected that Domestic Institutional Investors (DIIs) will surpass Foreign Institutional Investors (FIIs) in terms of market influence.

Historically, FIIs have been the largest non-promoter shareholders in the Indian market, significantly impacting the market’s overall direction with their investment decisions. However, DIIs, along with retail investors and high net worth individuals (HNIs), have recently played a crucial counterbalancing role, with their shareholding reaching an all-time high. The share of DIIs increased to 16.2% in the last quarter of FY24, up from 16%. Conversely, FIIs withdrew ₹76.9 billion from the Indian stock market, reducing their share to 17.3% from 17.7%

This shift has led to the smallest-ever gap between FII and DII holdings, with the difference now standing at just 6.6%. In this article, we will explore five small-cap companies where mutual funds increased their stake in the first quarter of FY25.

1. Sterlite Technologies Limited

Sterlite Technologies Limited (STL) was established in July 2001 after the demerger of the telecom division of Sterlite Industries Ltd (SIL). STL further expanded into the power transmission cables business in 2006 after acquiring SIL’s transmission line business. Over the years, STL has grown to become India’s largest manufacturer of optical fiber and optical fiber cables, with a significant presence in international markets.

As of Q4 FY24, STL’s order book stood at ₹102 billion, up from ₹98 billion in the previous quarter. Despite a consolidated loss of ₹0.82 billion in Q4 FY24 due to a dip in its optical networking business, mutual funds significantly increased their holdings in STL, rising from 0.1% in the previous quarter to 8.5% in Q1 FY25. The company’s outlook remains positive, driven by opportunities in 5G, fiber-to-the-home, and data center build-outs.

2. Sharda Motor Industries

Sharda Motor Industries, a leading manufacturer and assembler of auto components, has carved a niche for itself in the Indian automotive sector. The company’s product range includes exhaust systems, catalytic converters, suspension systems, sheet metal components, and plastic parts. With a 30% market share in emission control systems and a 10% share in control arms for passenger vehicles, Sharda Motors is a key player in the industry.

The company, which is debt-free and holds a cash surplus of ₹9 billion, plans to expand further by setting up a new facility in Pune with an investment of ₹0.5 billion. Mutual funds increased their holdings in Sharda Motor Industries from zero in the previous quarter to 7.9% in Q1 FY25. This investment coincided with a significant 39.1% year-on-year increase in net profit to ₹0.7 billion in the first quarter of FY25.

3. Sudarshan Chemical Industries

Sudarshan Chemical Industries is a global leader in the pigments industry, manufacturing a wide range of organic and inorganic pigments. With a 35% market share, it is the third-largest pigment manufacturer globally. HDFC Mutual Fund’s recent acquisition of a 1.4% stake in Sudarshan Chemicals, following a previous stake increase, reflects the mutual fund’s confidence in the company’s growth prospects.

Sudarshan’s strategic position in the market has been bolstered by the recent bankruptcy of Heubach, the world’s largest pigment manufacturer. This development has opened up significant opportunities for Sudarshan to increase its market share. Despite a 88.9% drop in quarterly net profit to ₹294.3 million in June 2024, the company’s EBITDA grew by 13.5% year-on-year, indicating a resilient operational performance.

4. Prudent Corporate Advisory Services

Incorporated in 2003, Prudent Corporate Advisory Services Limited is a key player in the retail wealth management sector. The company offers a wide range of financial products, including mutual funds, insurance solutions, and stock broking services. Prudent’s open-source distribution model has enabled it to grow its asset under management (AUM) substantially.

In Q1 FY25, Prudent reported a 51% year-on-year increase in revenue, reaching ₹2.4 billion, while net profit grew by 57% to ₹0.44 billion. The company achieved a significant milestone in July 2024 by reaching an AUM of ₹100 billion. Mutual fund holdings in Prudent have surged, driven by the company’s impressive growth trajectory in the mutual fund distribution space.

5. Sansera Engineering Limited

Sansera Engineering Ltd is a precision engineering company supplying components to the automotive and non-automotive sectors. The company’s clientele includes leading automakers such as Bajaj, Harley Davidson, Hero, and Yamaha. Sansera’s order book for FY24 stands at ₹15.9 billion, with projects scheduled for completion over the next three years.

Sansera reported a 10.8% year-on-year increase in net profit to ₹0.5 billion in Q1 FY25, with revenue from operations rising by 12.7% to ₹7.4 billion. Mutual funds have increased their stake in Sansera Engineering, recognizing the company’s strong growth prospects in both domestic and international markets.

In conclusion, The performance of Domestic Institutional Investors (DIIs) plays a pivotal role in maintaining liquidity in the Indian stock market. As DIIs continue to increase their shareholding, their influence on the market is growing, providing a counterbalance to the fluctuating presence of Foreign Institutional Investors (FIIs).

In an emerging economy like India, the interplay between FIIs and DIIs is crucial for maintaining a healthy stock market environment. This dynamic fosters a robust financial ecosystem that is essential for attracting growth opportunities and sustaining economic development.

Disclaimer: This article is for informational purposes only and should not be considered as a stock recommendation.