While the markets and investor circles were abuzz with the news of FIIs selling their holdings in market giants, these investors quietly picked up substantial stakes in lesser-known companies, including penny stocks, which they generally avoid. One of these companies saw its FII holding jump more than 15x, according to exchange filings for the September quarter.
Let’s look at these underdogs that attracted interest from FIIs amid the massive selloff.
#1 Gujarat Toolroom Ltd
Gujarat Toolroom Ltd specialises in building multi-cavity moulds for medical disposables, pharmaceuticals, food and beverage packaging, caps and closures, writing instruments and more.
With a market cap of ₹225 crore, this company has grabbed the interest of foreign investors such as Zeta Global Funds (OEIC) PCC Limited and Eminence Global Fund PCC. Both of these bought a 13.58% stake in the company, according to exchange filings for the September quarter. The overall FII holding in the company is now 27.15%. It was 0% as of the June quarter.
The FIIs’ investment in the company is interesting, because it did not have any significant business and did not report revenue for several years, barring FY23. The reasons for this sudden interest could be that the company, which is almost debt-free, reported staggering numbers for FY24 as compared to FY23.
Sales jumped from ₹2 crore in FY23 to ₹555 crore in FY24 – an almost 28,000% jump. Net profit increased 7,200% from ₹1 crore to ₹73 crore and Ebitda grew 3,700% from ₹2 crore to ₹76 crore. Since we have the numbers only for one year, the standard CAGR calculations don’t apply, so we have given the absolute percentage.
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Now, this jump could be due to a combination of the money raised from a rights issue in July and an order from Reliance Industries worth ₹31 crore to supply construction material to its Jamnagar facility. In October the company raised ₹50 crore via a qualified institutional placement, through which Zeta Global Funds and Eminence Global Fund entered stock.
The stock price has shot up from ₹0.50 to ₹14 in the past five years – a 2,700% jump.
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As for the valuation, it’s trading at a price-to-earnings (PE) ratio of 1.91, which is the lowest among its peers. The industry average is 46.4.
One thing worth noting is that even though the company has seen solid growth and has a dividend yield of more than 7% according to Screener.in, it has not been paying any dividends.
#2 SpiceJet Ltd
Up next is one of the most widely known low-cost airlines in India. SpiceJet operates the highest number of Ude Desh ka Aam Naagrik (UDAN) flights in India. In all it operates around 250 daily flights to 48 destinations within India and overseas. The fifth-largest player in the domestic aviation industry with a market share of around 5.5%, the company has a market cap of ₹7,886 crore.
The following foreign investors recently picked up stakes in the company, according to exchange filings for the September quarter.
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The overall FII holding is 22.9%, up from 1.81% in the June quarter.
This sudden interest in SpiceJet could be attributed to some recent developments. In March, the company settled with Export Development Canada (EDC), gaining ownership of 13 Q400 aircraft. It also secured a Q400 from Nordic Aviation Capital (NAC), settling all past liabilities. These agreements will save SpiceJet more than ₹1,200 crore.
The company also mutually settled a ₹250-crore dispute with Celestial Aviation, a subsidiary of AerCap, avoiding litigation. It also resolved a ₹413-crore dispute with Echelon Ireland Madison One Ltd amicably.
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The company’s financial performance, however, looks a bit worrying. Sales fell from ₹9,113 crore in FY19 to ₹7,050 crore in FY24 – a 23% drop. The company has also made losses for the past five years, and closed FY24 with a loss of ₹409 crore. After being Ebitda positive in FY20 and FY21, SpiceJet has seen three years of negative Ebitda. It closed FY24 with Ebitda of negative ₹642 crore.
The stock is down to ₹61.4 from ₹106 five years ago – a drop of 42%.
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According to the company’s investor presentation for September, the lower numbers are due to a combination of reasons, including the reduction of its operational fleet from 74 in 2019 to 28 in 2024. As many as 36 of the company’s aircraft have grounded on account of pending dues and fund issues. This, clubbed with high cost of working capital, escalating fixed costs and rentals at airports caused the company to have big outstanding liabilities.
As the company has been in losses of late, the stock doesn’t have a PE ratio.
#3 Sera Investments & Finance India Ltd
This non-banking financial company is mainly involved in stock market trading, providing loans and leases. With a market cap of ₹269 crore and an overall FII holding of 14.7%, it has grabbed the interest of foreign investors such as Eriska Investment Fund Limited, which bought a 9.87% stake, and Zeal Global Opportunities Fund, which bought a 4.81% stake, according to exchange filings for the September quarter.
No domestic institutional investor or Indian super-investor has a stake in the stock. The promoter holding has fallen from 70% in December 2023 to 56% in September 2024.
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Sales rose from ₹1 crore in FY19 to ₹23 crore in FY24 at CAGR of 113%. Net profit increased at a CAGR of 189% from ₹0 in FY19 to ₹18 crore in FY24. Ebitda improved from ₹0 in FY19 to ₹21 crore in FY24, marking a significant turnaround in operational performance.
The stock has grown at a CAGR of 35% over five years, from ₹9 in December 2019 to ₹41.4 on 6 December 2024.
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The stock is trading at a PE ratio of 16, well below the industry median of 24.9. The company’s 10-year median PE is 13.15 while the industry median for the same period is about 19.
According to a Moody’s Ratings report, the Indian economy will grow 6.6% in FY25 and 6.2% in FY26. It has said strong economic conditions will help NBFCs preserve their asset quality even as rising interest rates increase the debt burden of their customers.
Penny wise, pound foolish?
Penny stocks often lack the transparency and corporate governance standards to which larger, established companies adhere. This makes it difficult to accurately assess a company’s financial health, future prospects, and management quality. Penny stocks give most investors the jitters, which makes FIIs’ bets on these companies all the more interesting.
Although two of them have shown some solid financials, and one of them is clearing up dues and resolving debts, they should still be considered highly risky investments. You could consider adding these companies to your watch list and see how they play out in the near and long term.
For more such analysis, read Profit Pulse.
Note: We have relied on data from Screener.in, Trendlyne.com and Tijorifinance.com throughout this article. Only in cases where the data was not available have we used an alternative, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
Suhel Khan has been a passionate follower of the markets for over a decade. During this period, He was an integral part of a leading Equity Research organisation based in Mumbai as the Head of Sales & Marketing. Presently, he is spending most of his time dissecting the investments and strategies of the Super Investors of India.
Disclosure: The writer and his dependants do not hold the stocks discussed in this article.