5 smallcap stocks that could crash in 2023

From the third wave of the pandemic to the ongoing Russo-Ukraine war and high inflation, all have contributed to this instability.

Even corporates big and small, which were reeling from the effects of the first two waves of the pandemic, were hit by these uncertainties.

While many companies are on the path of recovery, some companies, especially some smallcap companies, are facing difficulties.

These huge debt on companiesAnd heavy losses reduce their chances of survival.

Here is a list of five small caps that may be closed 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 MT.

However, rising debt levels and low liquidity did not help the company grow its cement business.

In the last three years, revenue of Jaiprakash Associates fell at a compound annual growth rate (CAGR) of 4.7% due to the pandemic. It also reported a net loss of 14 billion in the fiscal year 2022.

In the recent quarterly results, revenue declined 25.4% year-on-year (YoY) due to decline in cement revenue. double the net loss from 2 billion 4 billion

The company restructured its debt in 2017 due to high debt levels. However, despite the restructuring, its debt repayment has been delayed due to low liquidity.

As of 31 March 2022, its total debt was 190 billion, and its total debt-to-equity ratio is 220.9x.

During the financial year 2022, Jaiprakash Associates also defaulted on principal and interest payments 28 billion

However, the company is trying to reduce its debt. As a part of this, it is planning to sell its cement business which will help in reducing its debt.

It remains to be seen how the company turns its business around.

Jaiprakash Associates Financials
	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
revenue ( M)	76,733	1,08,899	86,337	66,110	74,738
Growth in Revenue (%)		41.9%	-20.7%	-23.4%	13.1%
Net Profit ( M)	-19,273	-25,375	9,818	-6,673	-14,983
Net Profit Growth (%)		nautical miles away	nautical miles away	nautical miles away	nautical miles away
Debt-to-Equity Ratio (x)	5.5	22.7	7.6	10	178.8

Source: Equitymaster

#2 Light Structures

Second on our list is Jyothi Structures, a power transmission company.

It undertakes power transmission, distribution and substation turnkey projects globally.

Jyothi Structures is also one of the very few companies that has the capability to execute turnkey projects in the power transmission business.

But the company earned zero revenue in FY 2021 as it completely shut down its operations and filed for bankruptcy.

By FY 2022, its total debt was 16 billion, 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 425m and a net margin of -967%.

Despite the improvement in operating performance in the recent quarter, higher levels of debt will lead to increased external obligations.

It remains to be seen how the company will cope and sustain such high debt levels. Improvements in operations and profitability can help Jyothi Structures transform its business.

Jyothi Structures Financials
	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
revenue ( M)	3,302	2,295	630	2	25,524
Growth in Revenue (%)		-30.5%	-72.5%	-99.7%	1,276,100%
Net Profit ( M)	-42006	-17,850	-23,293	-17,588	-425
Net Profit Growth (%)		nautical miles away	nautical miles away	nautical miles away	nautical miles away
Debt-to-Equity Ratio (x)	0	0	0	0	10.9

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 branded and private labels in its stores. It has a pan-India presence with over 191 retail stores in over 42 cities.

The pandemic affected the business of the company. Revenue declined due to low footfall and even some stores were closed.

Over the past three years, Spencer Retail’s revenue declined 3.2% (CAGR) due to the pandemic and competition from local supermarket chains. The company also recorded a net loss of more than 1 billion in the last three consecutive years.

It had to resort to debt to continue its operations. Its total debt in the financial year 2022 was 36 billion, while its debt-to-equity ratio came in at 5.9x.

While the company plans to launch more stores in existing clusters and improve its share of non-food revenue, a high debt, accumulated losses and increased competition in retail will limit its growth.

Spencer’s Retail Financials
	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
revenue ( M)	9,459	20,048	24,377	22,662	22,056
Growth in Revenue (%)		111.9%	21.6%	-7%	-2.7%
Net Profit ( M)	-141	24	-1,308	-1,639	-1,215
Net Profit Growth (%)		nautical miles away	nautical miles away	nautical miles away	nautical miles away
Debt-to-Equity Ratio (x)	0	0	0.3	0.4	2.1

Source: Equitymaster

#4 Kesoram Industries

Kesoram Industries, part of the BK Birla Group, is at number four on our list.

The company mainly manufactures cement under the brand name ‘Birla Shakti Cement’. It has two cement manufacturing plants with a total manufacturing capacity of 10.75 mt.

It also manufactures rayon and chemicals and has an installed capacity of 6,500 mt.

Over the past five years, the company’s revenue declined 1.4% due to a decline in revenue from its tire segment. In the financial year 2022, it reported a net loss of 773 m due to high finance cost.

The company reported the debt of 17 billion in fiscal 2022. Its debt-to-equity ratio came in at 3.4x. The interest coverage ratio also remained low at 0.8x.

Promoter holding was reduced from 56% to 43% in FY 2022. In addition, he pledged 40% of the shares in December 2021 to pay off his debt.

Despite the improvement in revenue, higher debt and high promoter pledge Reflects deteriorating financial performance of the company.

In its most recent quarterly results, although revenue grew 6.5% annually, its net loss expanded, and it reported a net loss margin of 6.3%.

Kesoram Industries Financials
	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
revenue ( M)	39,100	29,649	26,860	27,252	36,425
Growth in Revenue (%)		-24.2%	-9.4%	1.5%	33.7%
Net Profit ( M)	-5,776	-1,004	-1,875	1,401	-773
Net Profit Growth (%)		nautical miles away	nautical miles away	nautical miles away	nautical miles away
Debt-to-Equity Ratio (x)	6.2	19.1	-14.5	9.8	3.4

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 prime properties over 100 m sq ft under its name.

The company’s revenue in the last three years has come down marginally due to the pandemic. It also reported a net profit in the financial year 2022.

However, the growing debt of the company is a matter of concern. In the financial year 2022, its debt was 19 billion, up 36% over the previous year and has a total debt-to-equity ratio of 2.23x.

In addition, the promoters of the company own 58% of the shares, and 51% are pledged.

With the revival of the real estate industry, the company expects an increase in its sales. However, a higher debt will continue to drive up its interest cost, affecting its profitability.

DB Realty Financial
	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
revenue ( M)	2,880	4,732	2,864	1,338	2,843
Growth in Revenue (%)		64.3%	-39.5%	-53.3%	112.5%
Net Profit ( M)	-2,843	-2,247	-4,350	-1,669	218
Net Profit Growth (%)		nautical miles away	nautical miles away	nautical miles away	nautical miles away
Debt-to-Equity Ratio (x)	0.5	0.6	0.8	1.1	1.3

Source: Equitymaster

Investment takeaway…

The companies mentioned above are on the verge of going out of business.

Why so?

Falling sales, accumulated losses, high debt, and originator mortgages are all red flags.

When you’re investing in a company, look for these red flags. These are all warning bells that indicate that you should stay away from companies.

If you find such red flags in companies you’ve already invested in, it’s time to reconsider your investments.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com