When mutual funds begin to accumulate shares in a company, it often signals that they have identified potential that others may overlook. Recently, two small-cap firms have drawn considerable attention from both mutual funds and foreign institutional investors (FIIs), with their stock prices nearly doubling over the past year. While this surge is enticing, particularly with institutional backing, it’s essential to analyze the underlying factors driving this growth and whether it can be sustained.

Anup Engineering: A Market Leader in Process Equipment

Founded in 1962, Anup Engineering has carved a niche in the design and production of process equipment, including heat exchangers, pressure vessels, and reactors. Their products play a crucial role across various sectors such as refineries, petrochemicals, and pharmaceuticals.

Strong Client Relationships and Revenue Growth

Anup Engineering has established robust partnerships with prominent clients, such as Reliance Industries and Indian Oil, thanks to their commitment to quality and timely delivery. This has allowed the company to diversify its clientele in domestic and international markets.

• Revenue Breakdown:
  • Heat exchangers: 70%
  • Pressure vessels: 13%
  • Towers and reactors: 9%

For the fiscal year 2023, Anup reported an impressive 40% revenue growth, which continued into FY24 with a 34% increase, bringing total revenue to ₹5.50 billion. This growth was driven by effective order execution and a new manufacturing facility.

Profit Margins and Future Prospects

The company’s EBITDA margin rose to 23%, leading to a remarkable 101% increase in net profit, now at ₹1 billion. The momentum has continued into the first nine months of FY25, with a revenue increase of 28% to ₹5 billion, propelled by a 68% surge in heat exchanger sales.

With a solid order book valued at ₹8.3 billion and ongoing capital investments, Anup Engineering is well-positioned for sustained growth. The new manufacturing unit, expected to be operational by October 2025, will alleviate current capacity constraints and contribute to revenue generation.

Strategic Acquisition and Market Position

In June 2024, Anup Engineering’s acquisition of Mable Engineering further enhanced its portfolio and market reach, potentially adding 10-12% to its overall revenues. The company is also poised to benefit from increased capital expenditures in key industries, particularly with the rising interest in blue hydrogen.

From a valuation standpoint, Anup’s stock has garnered significant investor interest, with FII holdings rising from 1.2% to 4.6% in just one year. Despite a P/E ratio of 47, significantly above its six-year median of 17, the company’s growth trajectory remains compelling.

LT Foods: Dominating the Basmati Rice Market

LT Foods stands as the second-largest player in India’s branded Basmati rice sector, holding approximately 31% of the market. It leads the U.S. market with over 50% of sales, while also making significant inroads in Indonesia, Northern Europe, and Australia.

Diverse Revenue Streams

In FY24, LT Foods generated around 30% of its revenue from India and 40% from the U.S., with the remaining income derived from Europe and the Middle East. Their flagship brand, Daawat, remains a household name.

• Revenue Breakdown:
  • Basmati rice: 87%
  • Organic food: 10%

In FY24, LT Foods achieved a revenue increase of 12%, totaling ₹78 billion. This growth was bolstered by a 54% upswing in Middle Eastern sales and a 6% volume increase across the board.

Financial Performance and Strategic Growth

The company’s EBITDA margin expanded to 12.6%, leading to a 41% rise in profit after tax, reaching ₹5.9 billion. As of 9MFY25, revenue rose 14% to ₹65 billion, sustaining margins despite flat net profit growth due to lower contributions from joint ventures.

LT Foods is targeting new markets, having recently expanded operations into Tanzania, Namibia, and several others. They are also diversifying their product lines, focusing on premium offerings to enhance margins and revenue.

Future Trends and Market Positioning

Anticipating a 35% CAGR in the ready-to-eat segment over the next five years, LT Foods is strategically investing in marketing to bolster brand recognition and capture market share. The company’s market share in India has surged to 30%, up from 14% in FY16.

Currently trading at a P/E of 20, nearly double its ten-year median of 9, LT Foods has attracted increasing interest from institutional investors, with FII holdings climbing from 5.9% to 9.8%.

Conclusion: Evaluating Growth and Risks

Both Anup Engineering and LT Foods are witnessing substantial institutional interest, driven by strong growth metrics and favorable industry trends. While Anup is capitalizing on increased expenditures in key sectors, LT Foods is benefitting from a shift towards premium products. However, prospective investors should remain cautious of elevated valuations as they consider these opportunities.

This analysis serves as a starting point for understanding the growth potential of these stocks. For further insights and detailed investment strategies, consider consulting a financial advisor.