Interesting Indian Microcaps - Part 1

With median stock correction of more than 30%, lot of names especially in microcaps and smallcaps space are trading at extremely cheap valuations. Lot of them have potential to grow profits at 30-40% CAGR in next few years and have an addressable market to become 10 baggers from these levels. In recent interview, Mr. Vijay Kedia also pointed out that it might happen that now indices grow at steady pace but underlying stocks in microcaps and smallcaps space multiply manifolds.

This is why its time to build a basket of stocks which have the potential of such kind. We will discuss few of these names in this post. I will follow up with more such posts in upcoming days.

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Gala Precision Engineering

The company’s business is divided into three primary product verticals:

• Disc & Strip Springs (DSS): The company is a market leader in this segment in India and ranks third globally. These products, including wedge lock washers, are used in applications requiring high fatigue life and precision.

• Coil & Spiral Springs (CSS): These are supplied primarily to the domestic market, catering to the mobility sector (automotive and railways) and industrial applications.

• Special Fastening Solutions (SFS): This is a high-growth segment where the company manufactures high-tensile fasteners like studs, anchor bolts, and increasingly, nuts and bolts.

Customer and Market Strategy

• Customer Base: The company serves over 175 active customers across 25+ countries, including Original Equipment Manufacturers (OEMs), Tier-1 suppliers, and channel partners.

• High Client Stickiness: The business model relies heavily on repeat orders, with approximately 80% to 82% of business coming from existing customers and parts. Product development and validation cycles can take 9 to 12 months, creating high entry barriers and customer retention.

• Geographic Mix: Exports contribute approximately 35% to 40% of revenue, with a focus on Europe and the USA, while the domestic market accounts for the remaining 60%.

• Competitive Advantage: In the export market, Gala competes primarily with German and European producers, offering a price advantage of 15% to 18% while meeting stringent technical requirements. In India, it competes with players like Sundram Fasteners and Randack.

Manufacturing and Precision

• Built-to-Print: Approximately 70-75% of products are customized “built-to-print” per customer specifications, while 20-25% follow standard specifications (DIN standards).

• In-House Capabilities: The “precision” aspect is derived from in-house tool design and development (microns level accuracy), heat treatment, and surface engineering processes like shot peening, which are critical for product fatigue life.

Growth Triggers

1. Capacity Expansion (Chennai and Wada)

• New Chennai Facility: A dedicated plant for high-tensile fasteners (SFS) has been commissioned to cater to renewable, industrial, and railway sectors.

  • Ramp-up: The plant began commercial production in July 2025, with manufacturing loads increasing from INR 1 crore in July to a target of INR 5 crores by January 2026.

  • Revenue Potential: The facility is expected to reach a peak revenue capacity of INR 110–120 crores upon completion of Phase 2.

• Wada Expansion: Incremental CAPEX is being deployed at the existing Wada facility to debottleneck capacity, targeting a peak revenue potential of INR 325–350 crores.

• Total Capacity: The combined peak revenue potential of all facilities is estimated between INR 425 crores and INR 450 crores.

2. New Product Development (Bolts & Nuts)

• Market Opportunity: The company has strategically moved into manufacturing bolts and nuts, expanding beyond its traditional strength in studs. This opens an addressable global market estimated at USD 1 billion.

• Early Success: Gala has already secured pilot orders for these new products from industrial customers in the US and is developing supply chains for domestic industrial applications.

3. Sectoral Tailwinds

• Renewable Energy: The wind energy sector is a major driver, with domestic installation capacity growing by 50% in H1 FY26. The company holds a 15% domestic market share in SFS for wind turbines.

• Railways: The modernization of Indian Railways, including Vande Bharat and Metro projects, is fueling demand for coil springs and fasteners.

• Industrial & Off-Highway: Investments in infrastructure are driving demand for components used in construction and off-highway equipment.

4. Strategic Market Shifts

• Import Substitution: The company is actively capitalizing on opportunities to replace imported components in the Indian market by offering cost-effective technical solutions.

• Supply Chain Diversification: The “China Plus One” strategy is benefiting Indian fastener manufacturers, with global customers increasingly looking to source from India.

• Inorganic Growth: The management has indicated openness to inorganic growth opportunities within the precision engineering and fastener spaces to accelerate expansion.

TLDR: Gala can double its business in next 3 years based on capacity expansions and margins can expand with increase in scale.

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True Colors

True Colors Limited distinguishes itself not merely as a trader or a manufacturer, but an integrated “one-stop shop” for the digital textile printing industry. Unlike competitors who operate in isolated silos, True Colors covers the entire value chain:

• Trading (Machinery & Inks): They are authorized distributors for top-tier global brands like Konica Minolta (Japan) and Skyjet (China). They sell the industrial printers that serve as the foundation of the client’s business.

• Manufacturing (Sublimation Paper): They manufacture their own sublimation transfer paper, a critical consumable for polyester printing, in a facility that has recently doubled its capacity.

• Services (Digital Printing): For clients who prefer outsourcing, True Colors acts as a service bureau, printing designs directly onto fabric using their own machines and paper. This also serves as a testing ground for their own products.

The business split varies but in FY25 this was more like 40:30:30.

The company’s financial success is built on a “Razor and Blade” model.

• The Razor (Machines): The company aggressively sells digital printers, often at thin margins (trading margins), to capture market share. This was evident in H1 FY26 margins, where they installed 60 machines (compared to just 7 in the previous year), significantly expanding their installed base.

• The Blade (Consumables): Once a machine is installed, the customer becomes “married” to True Colors for the long term. To maintain warranty coverage and ensure consistent print quality (color tones), customers must purchase ink and paper exclusively from True Colors. This creates a high-margin (13–17% EBITDA), recurring revenue stream that continues for the machine’s lifespan .

• Strategic Trade-off: The company accepts lower margins on the initial machine sale (which currently drives ~55% of revenue) to lock in high-margin future revenue from consumables.

Growth Triggers

Several specific factors are converging to accelerate the company’s growth trajectory:

• Massive Industry Headroom:

  • The Indian textile market is undergoing a generational shift.

  • Currently, only 7-8% (200 crore meters) of India’s 2,500 crore meter textile market is printed digitally.

  • Management expects India to follow global trends seen in Europe (95% digital adoption) and China (800+ crore meters), potentially growing the domestic digital market to 600–800 crore meters in the next 3-5 years .

• Aggressive Capacity Expansion:

  • Paper: Production capacity has been doubled from 1 crore to 2 crore meters per month. Management projects this expansion could generate an additional ₹60 crores in annual revenue once fully utilized.

  • Printing: Printing service capacity has been expanded by 15% with the installation of new machinery.

• Policy & Fabric Shifts:

  • A surge in machine sales is being driven by the rising popularity of Viscose fabric (which requires high-value machines) and a government subsidy of up to 35%, which is encouraging customers to upgrade to larger, more expensive machines (e.g., ₹2 Cr models instead of ₹1 Cr) .

• New Market Entry (Pigment Inks):

  • The company has entered a strategic partnership with Spanish firm ITACA to distribute pigment inks.

  • This positions them to capture the emerging home furnishing and technical textile markets, which rely on pigment printing and are expected to boom in the coming decade .

• Operational Efficiency:

  • A new 1 MW rooftop solar plant is being commissioned, expected to generate ~30-40% of their daily energy needs, which will directly improve operating margins by reducing power costs.

TLDR: Management has set a conservative target of 30% year-on-year revenue growth for the current fiscal year (FY26) and the following year. TTM P/E is 12x.

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RACL Geartech

RACL Geartech has navigated a period of significant volatility, primarily driven by external macroeconomic factors and client-specific issues. However, the company has simultaneously laid the groundwork for a revival through strategic diversification, technological upgrades, and new business wins.

1. The KTM Crisis and Inventory Correction:

• A primary headwind was the financial distress faced by KTM, a major customer.

• The Austrian motorcycle manufacturer faced high unsold inventory, leading to a production stoppage that lasted approximately six to seven months. This resulted in a situation where RACL’s sales to KTM dropped to near zero from October to March in the previous fiscal period, causing inventory to pile up and significantly impacting consolidated revenue.

• Management estimated that without this, the company would have grown by 15-16% rather than remaining flat.

2. European Market Instability:

• RACL has historically been heavily dependent on the European market, which faced a “transition year” filled with challenges.

• EV Adoption Struggles: The anticipated adoption of electric vehicles in Europe did not pick up as expected due to insufficient infrastructure, leading to consumer confusion and delayed purchasing decisions.

• Chinese Competition: European OEMs faced intense competition from Chinese manufacturers who emerged as leading global exporters, particularly in the EV segment, dumping vehicles at discounted rates,.

• High Costs: The energy crisis post-Ukraine conflict caused electricity prices in Germany to triple, severely impacting the cost competitiveness of European manufacturing.

3. Logistical and Geopolitical Disruptions:

• Geopolitical risks, specifically the Red Sea crisis, disrupted supply chains.

• Shipment times to Europe increased from 60 days to approximately 70–72 days.

• This forced European OEMs to stock extra inventory initially, followed by a period of destocking, which hit suppliers like RACL twice first through inflated demand and then through a sharp reduction in orders.

4. Financial Pressures:

• The company faced pressure on profitability due to high depreciation and finance costs.

• RACL invested in capacity and manpower in anticipation of budgeted growth (targeting ~₹500 crore revenue) which did not materialize immediately due to the aforementioned headwinds.

• Consequently, while operating cash flows improved, the bottom line (PBT) was impacted by the fixed costs of these investments.

Business Revival Triggers

1. Strategic Pivot to “Concept to Print” (Technological Collaboration):

• A major trigger for future value addition is the technical collaboration with ARRK Engineering GmbH, a German engineering services provider. This moves RACL from a build to print (manufacturing per customer drawings) to a “concept to print” model.

• This allows RACL to offer end-to-end solutions, including product design, simulation, and validation, moving them up the value chain from a component supplier to an engineering solutions provider.

2. New High-Value Business Nominations: RACL has secured prestigious projects that serve as future revenue pillars:

• BMW Electric Sports Car (Project Venus/Titan): RACL has secured nominations for drive train parts for a unique, high-performance electric car from BMW. Mass production is on track for August 2026.

• Domestic Premium Segment: The company received a nomination from one of India’s largest premium 2-wheeler manufacturers for transmission parts, marking a significant volume opportunity in the domestic market with SOP from July 2027.

• Steering Systems (Project Crystal): RACL is diversifying into chassis components by developing parts for electric power steering systems for a leading American passenger car OEM (pickup truck platform). This marks an entry into steering systems, a new product family.

3. KTM Revival and Restructuring:

• The outlook for KTM has improved significantly. Bajaj Auto has acquired a majority control of KTM AG and committed an investment of €800 million to stabilize finances.

• Production at KTM has restarted, and RACL has begun receiving confirmed delivery schedules, although the company maintains a cautious approach during the ramp-up phase,.

4. Diversification Beyond Automotive:

• To mitigate cyclical risks, RACL is expanding into non-automotive sectors:

  • Defence and Industrial: The company has successfully registered as a vendor with BHEL (Bharat Heavy Electricals Limited) for industrial and heavy equipment, opening doors for direct RFQs without tendering processes,.

  • Recreational Vehicles: The company received a nomination for a shift drum for ATVs from BRP Canada, a high-volume business (150,000 parts per annum) commencing in 2026.

5. Financial Strengthening:

• RACL has strengthened its balance sheet to support future growth.

  • Debt Reduction: Proceeds from a preferential allotment (~₹80 crore) were utilized to reduce long-term and short-term debt, improving the debt-to-equity ratio.

  • NSE Listing: The company successfully listed on the National Stock Exchange (NSE) to improve liquidity and visibility for investors.

6. Expansion of “Chassis” Portfolio:

• Moving beyond just gears, RACL is aggressively targeting the chassis component market (steering, wheel axles, suspension components).

• Technologies like Rear Wheel Steering (AKC) and Electro-Mechanical Roll Control (ERC) are being developed for premium clients like ZF and Porsche, positioning RACL as a technology partner for futuristic vehicle dynamics.

TLDR: Management has stated vision of ₹1000 Cr revenue in next 3-5 years over here. If these tailwinds start materialising, they should achieve it earlier than later.

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Freshara Agro Exports

Freshara Agro Exports Limited is a vertically integrated “Seed to Shelf” agri-exporter specializing in pickled vegetables, primarily gherkins (80% of revenue). The company operates an efficient B2B model, acting as a “white-label” partner for global brands in over 40 countries. By controlling the entire lifecycle, from providing high-quality seeds to 4,000+ contract farmers in South India to processing the harvest in state-of-the-art facilities, Freshara ensures a consistent, pesticide-free supply that is largely insulated from localized weather disruptions.

The company is currently undergoing a massive scaling phase, moving from a production capacity of 50 MT/day to a target of 150 MT/day. This expansion is anchored by the strategic acquisition of Aceitunas Sarasa in Spain. This “asset-only” purchase allows Freshara to enter the premium global olive market without inheriting legacy liabilities. The strategic masterstroke lies in cost arbitrage: Freshara will shift expensive Spanish gherkin production to India while utilizing the Spanish facility to focus on olives and leveraging established European B2C brands to penetrate North American markets.

Growth Triggers

The bull case for Freshara rests on aggressive revenue scaling and margin optimization through geographic synergy.

• Revenue Growth: With the ramp-up of Unit 2 in India and the integration of the Spanish acquisition, management is eyeing a total revenue of ₹600 Crores by FY27 (up from an initial ₹450 Crore base target).

• The Spain Synergy: The acquisition adds an estimated ₹200 Crores to the top line. By moving gherkin production to India (lower cost) and selling under established Spanish labels (higher value), the company expects to significantly improve its competitive edge in Europe.

• Valuation Upside: If the company achieves its target of ₹60 Crores PAT (assuming 10% margins) by FY27, a conservative 20x P/E rerating could lead to a ₹1,200 Crore market cap. This represents a potential 3x upside from current levels, driven by its niche status as a high-growth agro-exporter.

I wrote more about the business in detail here

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Creative Graphics

Creative Graphics has fundamentally transformed from a niche service provider into a diversified industrial packaging player. Originally established as India’s largest manufacturer of flexographic printing plates, the high-tech “stamps” used by FMCG giants to print packaging, the company has successfully pivoted toward pharmaceutical packaging through its subsidiary, Wahren India,. This strategic shift, termed “Pharmula Unlocked,” has altered the company’s DNA: the high-volume Pharma Packaging segment (Alu-Alu foils) now contributes 60% of the group’s revenue, while the legacy Flexography business provides a high-margin (18%+) stability anchor.

You can understand terms like Alu-Alu more here

Growth Thesis

The growth thesis is built on three aggressive pillars: capacity expansion, product diversification, and export penetration.

• Aggressive Capacity Expansion:

  • The company is more than doubling its capabilities in the pharma segment. It is expanding its Cold Form (Alu-Alu) capacity from 8,000 MT to 20,000 MT per annum. The realisations here are around ₹400/kg and at 80% utilisation this could be ₹500-600 Cr business

  • They have bought distressed assets for PVDC and Tandem extrusion lines. This expansion allows Creative Graphics to offer a “full basket” of packaging solutions, moving from low-margin initial orders to high-value product mixes. Cumulatively these could add ~250-300 Cr revenue

  • The base business of flexography plates also has potential to grow at steady pace of 15-20%

• Strategic Cross-Selling: Management is leveraging its “one-stop-shop” capability to deepen relationships with top-tier clients (such as Zydus, Torrent, and ITC). By offering pre-media design, printing plates, and the physical packaging foil, they create sticky, integrated relationships with high retention rates,,.

• Global Ambitions: The company is reducing its India-centric risk by setting up its first international manufacturing facility in Oman, positioned as a gateway to the Middle East and African markets,. Management targets exports contributing 20% of total revenue by FY 2027, noting that export margins are expected to be 4–5% higher than domestic sales.

TLDR: It seems likely that business can do ₹700-800 Cr revenue in 2-3 years and margins can improve with scale.

I will be closely monitoring cash flows and balance sheet of all these names, as that would ultimately differentiate survivors from those merely benefiting from passing tailwind.

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Disclaimer: I am NOT a registered advisor or a financial adviser. Any information I share on my blog are provided for educational purposes only and do not constitute specific financial, trading or investment advice. I may or may not be invested at time of writing the blog or later on. The blog is intended to provide educational information only and does not attempt to give you advice that relates to your specific circumstances. You should discuss your specific requirements and situation with a qualified financial adviser.