Top 5 Smallcap Stocks to Watch Out for as India's 5G Revolution Begins

As the world becomes increasingly interconnected, the demand for fast, reliable, and low-latency communication has never been higher.

Everyday products and means of communication, whether visual, audio, or video, are all more reliant on high-speed, 24/7 internet connections.

To keep up with this ever-growing demand, operators around the world are rolling out fifth generation (5G) wireless technology, commonly known as 5G.

While 4G focused on delivering much faster mobile broadband services than 3G, 5G has proved to be even faster.

Moreover, 5G can natively support all spectrum types and bands (low, mid, high), a wide range of deployment models (from traditional macro-cells to hotspots), and new ways to interconnect.

India too has jumped on the bandwagon. The country now has the second largest 5G network in the world, on the back of the fastest 5G rollout with 300,000 sites set up in ten months.

The Department of Telecom is monitoring therollout of 5G networks in terms of districts. 5G networks have been rolled out in 717 districts across the country as of 7 July 2023.

So far, Reliance Jio and Bharti Airtel have aggressively rolled out the network while Vodafone Idea has been struggling to raise funds.

The company along with, Adani Data Networks has nudged the Department of Telecom, to extend the 16 August deadline for meeting the minimum rollout obligations for 5G.

This could have a huge opportunity cost as the use of 5G will be used extensively across various socioeconomic sectors including education, agriculture, health, power, urban management, mining, logistics, resource management, tourism, sports, security, e-governance etc.

While the obvious gainers from the rollout will betelecom companies, many other companies, especially smaller players, will benefit from it as well. This is because the network requires an entire ecosystem to flourish.

Small-cap stocks operating in the 5G space will give investors a chance to participate in the industry’s growth potential.

Read on to find out which smallcap companies have the ability to be game changers in the 5G space.

The first stock on our list is HFCL.

HFCL (Himachal Futuristic Communications Limited) is a diverse telecom infrastructure enabler with active interest spanning telecom infrastructure development, system integration, and manufacturing of high-end telecom equipment, optical fiber, and optic fiber cable (OFC).

The company has designed several new technology equipment products, including 5G products, which are scheduled to be launched during the current financial year.

It has also entered some crucial technology partnerships with Qualcomm, Microsoft, and Wipro for developing cutting-edge 5G products and solutions.

HFCL has an established track record with a strong association with Reliance Jio Infocomm (RJIL), being responsible for the execution of RJIL’s network expansion plans for the Northern region.

The company has been associated with RJIL since the start of network roll out and has been responsible for the network planning, design, and implementation for the northern region. It derived 43% of its revenue from RJIL in FY23.

Besides RJIL, the company has long-standing relationships with reputed corporate houses in both public & private sectors. It has also expanded its business and has become a leading material supplier and turnkey contractor for defence and railway communication projects.

It’s order book (consolidated) is strong at ₹55 bn as of 31 March 2023. It has orders under release of ₹15.2 bn totalling ₹70.1 bn.

In the past five years, the company’s revenue has grown at a CAGR (compounded annual growth rate) of 8% while net profit has grown at a CAGR of 12%.

Itsdebt-to-equity ratio stands at 0.25x. The debt will likely increase as it plans to avail term loans for the capex being planned by HFCL group.

The second stock on our list isSterlite Technologies.

The company, over the years, has grown, to become the largest optical fiber and optical fiber cables manufacturer in the country. It also has a sizeable presence overseas.

Sterlite has already launched cables and connectivity solutions for enabling 5G globally. It aims to play a significant role as operators start deploying these networks.

So far, the company has supported India’s 5G rollout with engagements worth ₹10 bn from telecom operators in FY23.

It has also partnered with companies such as Facebook as part of Evenstar program to build 5G macro radios. The optical fiber company will be shortly launching those products for global operators and India.

At IMC 2022, the company showcased its solutions that were specially designed for India’s 5G rollout. It unveiled 5G Cosmos, an optical solution to fiberise towers and small cells at scale.

It also showcased Gram Galaxy, a comprehensive solution to accelerate last mile rural connectivity and village digitalisation.

These integrated solutions took a 360-degree view of the rollout, spanning across network design, optical products, automation-led deployment.

Sterlite Technologies has seen revenue growth of 17% in the last five years. However, the company has seen a degrowth in net profit as expense have gone up.

Its debt-to-equity ratio is high at 1.8x as it has a stretched working capital cycle. However, this is expected to improve once the global services business (GSB) is carved out from STL.

The third stock on our list isITI Technologies.

The company is engaged in the manufacturing, trading and servicing of telecommunication equipment, and rendering other associated and ancillary services.

The company is a preferred contractor for Bharat Sanchar Nigam Limited (BSNL), Mahanagar Telephone Nigam Limited (MTNL), and the Indian Defence Services.

ITI currently has executable projects worth more than ₹120 bn. Recently, it received an order from BSNL worth ₹40 bn.

Further, the company has been implementing projects such as BharatNet Phase I and Phase II.

It has also won three tenders, viz., MahaNet, GujNet, and West Bengal, under the BharatNet Phase II Project, worth ₹47.8 bn.

The company plans to manufacture equipment for the E and V band spectrum which are essential for 4G and 5G technologies. It has partnered with Tech Mahindra and Tata Consultancy Services (TCS) for the same.

BSNL has issued advance purchase orders (APOs) worth ₹157 bn to both TCS and ITI for 100,000 4G sites. ITI will deploy a fifth of the number requested.

BSNL is planning a rapid rollout of 5G-based telecom sites by August 2023. The 4G equipment deployed by it will be quickly enhanced to 5G, requiring a software upgrade.

ITI’s revenue and net profit have both seen a degrowth in the last five years. Further, due to increased material and other costs, the company’s margins have remained negative.

Additionally, ITI has working capital-intensive operations, dominated by high receivables along with legacy debtors pertaining to earlier years. This increases the company's dependence on bank borrowings to fund its working capital requirements, adversely impacting its liquidity profile.

However, the government of India continues to hold more than 90% of the entity as of 31 March 2023 and has been supporting ITI financially as part of its revival plan for sick units.

Under the revival plan, DOT (the Department of Telecommunication) has been constantly monitoring ITIL’s performance and infusing funds through unsecured loans and grants.

The company, in total, has received around ₹11.3 bn as a part of capex grants as of FY23.

The fourth stock on our list is Tejas Networks.

The company is a global research and development (R&D) driven telecom equipment company headquartered in India.

It designs, develops and manufactures high-performance optical and data networking products that are used by telecom service providers, utilities, government, and defense networks.

Tejas is an active player in shaping India's 5G strategy and also contributes to the global 5G standards through its work in TSDSI - India's telecom Standards.

In 5G, the company’s initial focus is on developing and commercialising world-class RAN (Radio Access Network) and Crosshaul products.

The company is partnering with leading system integration partners, core and OSS/BSS vendors both within and outside the Tata Group to deliver an end-to-end 5G stack.

With the software and SI (software integration) capabilities through Tata Consultancy Services (TCS), Tejas helps to bring in the hardware capabilities and also leverage the incentives through theproduction-linked incentive (PLI) scheme.

In the previous two decades, the firm has grown to become a significant high-tech player, specialising in optical networks, 4G and 5G telecom equipment, as well as switches and routers.

In May this year, the company received purchase orders from BSNL, along with the ITI and TCS for the deployment of 4G network across the country.

Tejas Networks is part of the TCS-led consortium. It will supply and service the Radio Access Network (RAN) equipment to BSNL.

In the last three years, the company’s revenue and net profit have grown at a CAGR of 33% and 23%, respectively. Despite its high working capital intensity, it continues to have no debt on its books.

The last stock on our list is Skipper.

The company is engaged in manufacturing and selling of transmission and distribution (T&D) structures and pipes & fittings. It also undertakes EPC infrastructure projects.

As industries increasingly adopt 5G for diverse applications, this company's specialised offerings position it for growth. The company is the largest player in the telecom tower segment. It expects better opportunities in the telecom space, with margins in line with the overall company margin.

In December 2022, it received an order worth ₹27.5 bn from Bharat Sanchar Nigam Limited (BSNL) for the rollout of its 4G network.

The order was for the supply and erection of ground-based telecom towers, infrastructure as a service provider (IaaSP) for supply, installation of Infrastructure Items and subsequent operation and maintenance (O&M) for five years.

The company said that the project will be executed using the homegrown 4G stack and will be funded through central government's USOF (Universal Service Obligation Fund), which has a strong cash reserve of ₹550 bn, meant for providing connectivity in rural and remote areas.

The same infrastructure will be used when BSNL will roll out its 5G network.

Skipper’s order book as of March 2023 stood at ₹455 bn and that company has orders booked fully for the next two years.

Through the BSNL order, it has diversified its order book to the non-transmission and distribution (T&D) segment, accounting for 62% in FY23, de-risking its exposure to the T&D segment.

Skipper’s revenue has grown at 13% CAGR in the last three years. The company’s debt to equity ratio stands at 0.64x.

Investing in small-cap stocks with a strong foothold in the 5G space presents a compelling opportunity for growth-focused investors.

The top five 5G small-cap stocks mentioned in this article demonstrate the potential to capitalise on the revolutionary impact of 5G technology across various industries.

However, investors must approach smallcap investing with careful consideration, acknowledging the higher risk and volatility associated with this segment.

By closely monitoring these promising 5G smallcap stocks and conducting thorough due diligence, investors can identify opportunities that align with their investment goals and stand to benefit from the unfolding 5G revolution.

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