Unlocking the Growth Potential: SME Stocks with High Institutional Interest

Institutional investors, including mutual funds and foreign portfolio investors, are often seen as strong indicators of a company’s long-term potential. Their investments typically follow thorough research and analysis, making them highly selective in their choices. When these major players invest in small and medium-sized enterprises (SMEs), it suggests they see substantial growth potential and stability in the future of these companies.

Institutional investments not only increase a stock’s visibility but also enhance its liquidity, drawing attention from other market participants. For SMEs, the involvement of large institutional investors can be a powerful signal of confidence, but it also adds complexity to market dynamics, especially in volatile periods.

In this article, we’ll take a closer look at three SME stocks with significant institutional holding, focusing on their performance, industry presence, and potential for future growth.

1. Sona Machinery: A Leader in Agro-Processing Equipment

Sona Machinery is a prominent player in the agro-processing equipment manufacturing sector, serving industries such as rice milling, flour milling, and seed processing. With over 50 countries in its client base, spanning Asia, Africa, and South America, the company is well-positioned in both domestic and international markets.

As of June 2024, institutional ownership in Sona Machinery stood at 6.2%, with alternate investment funds holding 3.4% and foreign portfolio investors (FPIs) holding 2.7%. This level of institutional interest reflects confidence in the company’s growth trajectory, particularly as it benefits from India’s Pradhan Mantri Kisan SAMPADA Yojana (PMKSY). The Indian government has allocated ₹4,600 crore under this scheme until FY26, aiming to develop mega food parks and agro-processing infrastructure, which Sona Machinery is capitalizing on.

For the fiscal year 2024 (FY24), Sona Machinery reported revenues of ₹950 million, with an operating profit of ₹150 million, reflecting year-on-year (YoY) growth of 15% and 20%, respectively. This strong financial performance is expected to continue, with the company planning capital expenditures (capex) to leverage government incentives aimed at enhancing agro-processing infrastructure.

With the global focus on agro-processing and mechanization increasing, Sona Machinery aims to achieve double-digit growth in the coming years by expanding its market reach in both mature and emerging markets. Its strategic position in this growing sector makes it an attractive choice for investors.

2. Pratham EPC Projects Ltd.: A Rising Star in Infrastructure

Pratham EPC Projects is a key player in the engineering, procurement, and construction (EPC) space, focusing on power, oil & gas, and urban development sectors. With a geographical reach that includes India, Southeast Asia, and the Middle East, the company is well-placed to benefit from infrastructure growth in these regions.

Institutional holding in Pratham EPC stood at 8.3% as of June 2024, with foreign portfolio investors accounting for 8.11%. The company’s promoters hold a 73% stake, with the remainder held by the retail public and insurance companies, who own a modest 0.1%.

For FY24, Pratham EPC reported its highest-ever consolidated revenue of ₹690 million, with an operating profit margin of 21%. The company’s net profit surged to ₹100 million, supported by improved project execution and cost management. Looking forward, Pratham EPC is set to benefit from a strong project pipeline in power and urban development sectors, both in India and abroad.

The company’s expansion into international markets is highlighted by the establishment of Pratham International Contracting LLC in Abu Dhabi. This wholly owned subsidiary will focus on hydrocarbon infrastructure, particularly pipeline installation and maintenance in oil and gas fields. With robust margins and promising growth prospects, Pratham EPC is well-positioned to achieve continued success in the coming years.

3. Basilic Fly Studio: Innovator in VFX and Animation

Basilic Fly Studio is a fast-growing player in the animation and visual effects (VFX) industry, offering services to film production houses, gaming companies, and digital content creators across the globe. The company has built a reputation for delivering high-quality VFX, with a client base that spans the US, Europe, and Asia.

As of June 2024, institutional holding in Basilic Fly Studio stood at 1.3%, with the majority of this stake held by foreign portfolio investors. The company’s promoters own 59.9%, while the rest is held by individual investors.

Basilic Fly Studio has demonstrated impressive growth, with FY24 sales rising by 42.8% and net profit increasing by 27.7% YoY to ₹360 million. The company has completed over 10,000 projects, including movies, TV series, and commercials, and works with over 300 clients.

A key recent development for Basilic Fly Studio was the launch of Lightrunner Studio in the UK, which has enhanced its ability to deliver high end VFX for feature films, television, and advertising. With the increasing demand for VFX and animation in entertainment, Basilic Fly Studio is poised to maintain its above-industry-average growth rate and expand its footprint in global markets.

Other SME Stocks with High Institutional Ownership

Beyond Sona Machinery, Pratham EPC Projects, and Basilic Fly Studio, several other SMEs are attracting significant institutional interest:

• Esconet Technologies is making waves in the IT services sector, focusing on innovative software solutions across multiple industries.

• Beta Drugs has seen rising demand for its pharmaceutical products, particularly in the generics market, reflecting a solid growth trajectory.

• Hi-Green Carbon is capitalizing on the growing need for sustainable energy solutions, offering green energy products that meet rising environmental demands.

• Oriana Power is another player in renewable energy, working to support India’s transition to sustainable power sources.

• Kotyark Industries Ltd. is a manufacturing company that has garnered attention for its quality production and expanding market reach.

Key Takeaways for Investors

Investing in SME stocks with high institutional ownership can offer significant opportunities, but it also comes with risks. Institutional investors are drawn to companies with solid fundamentals and growth potential, but their involvement can introduce volatility, especially if they decide to divest their holdings.

As always, investors should conduct thorough research, examining each company’s financial performance, industry trends, and competitive positioning. While high institutional ownership can enhance credibility and market visibility, it’s crucial to approach these stocks with a well-rounded understanding of the underlying risks and opportunities.

In conclusion, the SME sector offers a diverse range of investment opportunities driven by innovation, sustainability, and strategic growth. Investors who navigate this space with care can potentially benefit from the long-term value that these companies promise.