In the ever-evolving landscape of investment, mutual funds are often viewed as a barometer for market trends. Their teams of analysts meticulously study companies, and when they discreetly begin to acquire shares, it frequently signals that noteworthy developments are underway. Recently, two small-cap stocks have piqued the interest of several renowned mutual funds, delivering nearly 80% returns to investors. Such impressive growth is hard to ignore and naturally draws attention from potential investors.

However, diving into popular stocks can be a double-edged sword, especially in the small-cap sector, where stocks can surge quickly but may also plummet just as fast. It’s essential to understand the factors fueling this rise before getting swept up in the excitement.

What’s Fuelling the Optimism?

So, what factors are contributing to this surge in interest? Let’s explore the details surrounding these two standout companies.

Gravita India: A Recycling Powerhouse

Founded in 1992, Gravita India has emerged as one of the country’s leading recycling firms. The company specializes in various recycling segments, including lead-acid batteries, aluminum, plastics, and rubber scrap, and is now branching into lithium-ion, steel, and paper recycling.

Gravita’s operations involve smelting lead battery scrap to produce secondary lead metal, which is then transformed into a range of value-added products like lead alloys, oxides, sheets, and powders. The company has established strong partnerships with major manufacturers such as Exide, Polycab, and Hitachi.

With a footprint that spans 10 recycling plants in regions including Andhra Pradesh, Jammu & Kashmir, and several countries in Africa, Gravita boasts a total capacity of approximately 310,000 metric tonnes across its various recycling facilities. The strategic locations near ports and industrial centers enhance distribution efficiency and lower transportation costs, allowing for more competitive pricing.

Gravita has benefited significantly from the growing trend towards organized recycling. Over the past four years, its revenue has surged at a 24% CAGR, reaching ₹31.6 billion, with 62% sourced from Indian operations. Notably, 45% of this revenue stems from value-added products.

The company has enjoyed a robust net profit growth of 64% CAGR, totaling ₹2.4 billion, with domestic operations contributing 73% of profits. Gravita’s Return on Capital Employed (RoCE) has impressively climbed from 16% in FY20 to 25% in FY24.

In the first nine months of FY25, Gravita continued its upward trajectory, with revenue rising 23% to ₹28 billion and net profit climbing 26% to ₹2.2 billion. The company aims to secure its position among the top five global recycling firms by 2026, with plans to expand its geographical reach and product offerings, particularly in lithium-ion recycling.

To support its growth ambitions, Gravita recently raised ₹10 billion through a qualified institutional placement, attracting interest from notable institutional investors like Goldman Sachs. The funds are expected to aid in debt repayment and future expansion initiatives.

Amber Enterprises: Dominating the AC Market

Amber Enterprises stands as the premier contract manufacturer of air conditioners in India, commanding a 27% market share as of FY24. With 30 manufacturing facilities across nine states, Amber serves a diverse clientele, including major brands like Voltas, LG, and Daikin.

The company operates through three primary divisions: consumer durables, Electronics Manufacturing Services (EMS), and Railway Subsystems & Mobility Division. The consumer durables segment leads the way, contributing 75% of revenue, with a notable 28% growth over the past three years, culminating in ₹50 billion in FY24.

However, the segment faced challenges in FY24, with a 7% sales decline attributed to brands shifting to in-house assembly and unseasonal weather affecting demand. Despite this, Amber improved its operating margins from 6% to 7.1%.

To counteract shifts in consumer demand, Amber has diversified into non-RAC applications, including washing machines and smart meters, aligning with India’s burgeoning electronics manufacturing landscape. The EMS division has also thrived, growing at a 40% CAGR to ₹12.4 billion, driven by new customer acquisitions and an expanding product range.

On the railway front, Amber’s revenue surged by 34% CAGR, reaching ₹4.8 billion, bolstered by collaborations with Indian Railways and a focus on defense applications. This strategic partnership aims to facilitate entry into international markets and capture a significant share of railway component manufacturing.

Despite a slowdown in FY24, Amber’s performance rebounded in the first nine months of FY25, with revenue soaring 59% and net profit skyrocketing 228% to ₹1.3 billion. The company trades at a P/E ratio of 97, reflecting strong interest from institutional investors, with DII holdings rising from 15.8% to 19.4% in just one year.

Conclusion: Strong Foundations for Future Growth

Both Gravita India and Amber Enterprises are navigating promising trajectories within their respective industries. Gravita is making strides in formalizing the recycling sector with ambitious growth plans and a focus on high-margin products. Meanwhile, Amber is adapting to market fluctuations by diversifying its operations beyond air conditioning into EMS and railway sectors.

Investors may find Gravita’s growth potential appealing, while Amber’s ongoing recovery could signal a lucrative opportunity as it positions itself for future success. As always, potential investors should conduct thorough research and consult with advisors before making investment decisions.

For more insights on promising stocks, check out our articles on emerging market trends and investment strategies to stay ahead in the financial landscape.