Markets
5 Smallcap Stocks that Could Go Bust in 2023
Summary
- These small-cap stocks could go out of business soon.
The current year, so far, has been one of the most volatile years for investors. While there were big gainers from last Diwali to this Diwali, majority of stocks took a beating.
Starting from the third wave of the pandemic to the ongoing Russia-Ukraine war and high inflation, all have contributed to this volatility.
Even corporates, both big and small, that were recovering from the after effects of the first two waves of the pandemic, were hit by these uncertainties.
While many are on their path to recovery, some companies, especially a few smallcaps, are finding it difficult to cope.
These companies also have high debt, and heavy losses lessening their chance of survival.
Here is a list of five such small caps, that could go bust in 2023.
#1 Jaiprakash Associates
First on our list is Jaiprakash Associates, an Indian conglomerate.
Its business spans across engineering, construction, cement manufacturing, power, hospitality, and real estate development.
The company was one of the leading cement companies in the country, with an installed capacity of 10.58 metric tons.
However, mounting debt levels and low liquidity couldn’t help the company grow its cement business.
In the last three years, Jaiprakash Associates' revenue fell by a compound annual growth rate (CAGR) of 4.7% due to the pandemic. It also reported a net loss of ₹14 bn in the financial year 2022.
In the recent quarterly results, the revenue fell by 25.4% year-on-year (YoY), driven by a fall in cement revenues. The net loss doubled from ₹2 bn to ₹4 bn.
The company restructured its debt in 2017 due to high debt levels. However, despite the restructuring, there has been a delay in servicing its debt due to low liquidity.
As of 31 March 2022, its total debt stood at ₹190 bn, and its total debt-to-equity ratio is 220.9x.
During the financial year 2022, Jaiprakash Associates also defaulted principal and interest payments worth ₹28 bn.
However, the company is trying to reduce its debt. As a part of this, it plans to divest its cement business which will help reduce its debt.
It is to be seen how the company will turn around its business.
Jaiprakash Associates Financials
76,733
1,08,899
86,337
66,110
74,738
41.9%
-20.7%
-23.4%
13.1%
-19,273
-25,375
9,818
-6,673
-14,983
NM
NM
NM
NM
5.5
22.7
7.6
10
178.8
2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 Revenue ( ₹m) Revenue Growth (%) Net Profit ( ₹m) Net Profit Growth (%) Debt-to-equity ratio (x)
Source: Equitymaster
#2 Jyoti Structures
Second on our list is Jyoti Structures, a power transmission company.
It undertakes power transmission, distribution, and substation turnkey projects on a global scale.
Jyoti Structures is also among very few companies that have the capabilities to execute turnkey projects in the power transmission business.
But the company generated zero revenue in the financial year 2021 as it completely shut down its operations and filed for insolvency.
As of the financial year 2022, its total debt stood at ₹16 bn, and its total debt-to-equity ratio is 11.1x.
The company was acquired by Sharad Sanghi and became a 100% publicly listed company with zero promoter holding.
The company restarted its operations in the financial year 2022 and reported a net loss of ₹425 m and a net margin of -967%.
Despite an improvement in operating performance in the recent quarter, a high level of debt will increase outside obligations.
It is to be seen how the company will cope and sustain with such high debt levels. Improvement in operations and profitability can help Jyoti Structures turn around its business.
Jyoti Structures Financials
3,302
2,295
630
2
25,524
-30.5%
-72.5%
-99.7%
1,276,100%
-42,006
-17,850
-23,293
-17,588
-425
NM
NM
NM
NM
0
0
0
0
10.9
2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 Revenue ( ₹m) Revenue Growth (%) Net Profit ( ₹m) Net Profit Growth (%) Debt-to-equity ratio (x)
Source: Equitymaster
#3 Spencer's Retail
Next on our list is Spencer’s Retail, India’s first grocery and supermarket chain.
The company sells both brands and private labels in its store. It has a pan-India presence with over 191 retail stores in over 42 cities.
The pandemic affected the company’s business. A low footfall led to a fall in revenue and even the closure of a few stores.
In the last three years, Spencer Retail’s revenue fell by 3.2% (CAGR) due to the pandemic and competition from local supermarket chains. The company also reported a net loss of over ₹1 bn continuously in the last three years.
It had to resort to debt to continue its operations. Its total debt in the financial year 2022 stood at ₹36 bn, while its debt-to-equity ratio came in at 5.9x.
Though the company plans to launch more stores in existing clusters, and improve the share of non-food revenue, a high debt, accumulating losses, and increasing competition in the retail space will restrict its growth.
Spencer's Retail Financials
9,459
20,048
24,377
22,662
22,056
111.9%
21.6%
-7%
-2.7%
-141
24
-1,308
-1,639
-1,215
NM
NM
NM
NM
0
0
0.3
0.4
2.1
2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 Revenue ( ₹m) Revenue Growth (%) Net Profit ( ₹m) Net Profit Growth (%) Debt-to-equity ratio (x)
Source: Equitymaster
#4 Kesoram Industries
Kesoram Industries, part of the B K Birla Group, is fourth on our list.
The company primarily manufactures cement under the brand name ‘Birla Shakti Cement’. It has two cement manufacturing plants with a total manufacturing capacity of 10.75 m tons.
It also manufactures rayon and chemicals and has an installed capacity of 6,500 m tons.
In the last five years, the company’s revenue fell by 1.4% due to fall in revenue from its tyre segment. In the financial year 2022, it reported a net loss of ₹773 m due to high finance costs.
The company reported a debt of ₹17 bn in financial 2022. Its debt-to-equity ratio came in at 3.4x. The interest coverage ratio also stood low at 0.8x.
The promoter holding was reduced from 56% to 43% in the financial year 2022. Moreover, they pledged 40% of the shares in December 2021 to pay their debt.
Despite improving revenues, high debt and high promoter pledging indicate the company's deteriorating financial performance.
In the recent quarterly results, though the revenue improved by 6.5% YoY, its net loss expanded, and it reported a net loss margin of 6.3%.
Kesoram Industries Financials
39,100
29,649
26,860
27,252
36,425
-24.2%
-9.4%
1.5%
33.7%
-5,776
-1,004
-1,875
1,401
-773
NM
NM
NM
NM
6.2
19.1
-14.5
9.8
3.4
2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 Revenue ( ₹m) Revenue Growth (%) Net Profit ( ₹m) Net Profit Growth (%) Debt-to-equity ratio (x)
Source: Equitymaster
#5 DB Realty
Last on our list is a real estate company, DB Realty.
The company’s primary business includes the construction and development of real estate properties. It builds and develops residential, commercial, retail, and mass housing projects.
It has a portfolio of over 100 m square feet of prime property under its name.
The company's revenue in the last three years has reduced marginally due to the pandemic. It also reported a net profit in the financial year 2022.
However, the company's growing debt is a cause of concern. In the financial year 2022, its debt stood at ₹19 bn, up by 36% from the previous year and its total debt to equity ratio is 2.23x.
Moreover, the company’s promoters hold 58% shares, and 51% are pledged.
With the real estate industry reviving, the company expects its sales to increase. However, a high debt will keep increasing its interest cost, affecting its profitability.
DB Realty Financials
2,880
4,732
2,864
1,338
2,843
64.3%
-39.5%
-53.3%
112.5%
-2,843
-2,247
-4,350
-1,669
218
NM
NM
NM
NM
0.5
0.6
0.8
1.1
1.3
2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 Revenue ( ₹m) Revenue Growth (%) Net Profit ( ₹m) Net Profit Growth (%) Debt-to-equity ratio (x)
Source: Equitymaster
Investment Takeaway…
The companies mentioned above are on the verge of going out of business.
Why is that?
Falling sales, accumulating losses, high debt, and promoter pledges are all red flags.
When you are investing in any company, look for these red flags. All these are warning bells indicating that you must stay away from companies.
If you find such red flags in the companies that you have already invested in, then it's time you rethink your investments.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
