Best Small Cap IT Stocks: Artificial Intelligence, Machine Learning & Cloud Platforms. These three words are used aggressively by one key sector. A sector that has been supporting the entire world with its intangible infrastructure. If you haven’t guessed it already? then we are talking about the Information Technology sector.

Today, let’s look up some of these undiscovered gems, that might have great monetary value to add to the market. We will be looking at the Best Small Cap IT Stocks with great earnings & stable double-digit Margins.

Best Small Cap IT Stocks in India

We will look into what they do and what industries they cater to. A lot of these Companies fill up India’s reserves bringing in Foreign dollars, so we will also look at the distribution of their foreign revenues. Stick around till the end to know more about these gems. 

Best Small Cap IT Stocks #1 – Computer Age Management Services (CAMS)

For any of us dabbling with Mutual Funds, we have been indirectly served by this Company. 

CAMS has been the financial infrastructure and services provider to Mutual Funds and other financial institutions for over 25 years. 

It is the leading Registrar & Transfer Agency (RTA) to India’s Mutual Fund Industry, catering to ~69% of the Average Assets under Management (AUM) as of June 2023. 

The Company runs its data centers on completely virtualized Hyper-Converged Infrastructure (HCI) and builds and hosts hundreds of Applications & APIs. Its BI platforms power Mutual Fund Industry Analytics. 

Apart from providing RTA services to the Mutual Fund Industry, CAMS also provides a host of other services via its subsidiaries: 

1. CAMS Investor Services: maintains KYC records of investors on a central database, thereby reducing the need to repeat KYC. 
2. CAMS Insurance Repository: It provides repository services for the insurance industry.
3. CAMSPay: Provides the technology and infrastructure to facilitate payments to Mutual Funds, Insurance Providers, and other NBFCs.
4. CAMSfinserv: It is an RBI Licensed account aggregator that streamlines the sharing of asset information online between Financial Information Users (FIUs) and Financial Information Providers (FIPs). 
5. Fintuple: It is a new-age startup that offers technology services such as digital client onboarding, eKYC, fund reports, and other digital solutions to AIF & PMS. 
6. Think Analytics India: It is a full-stack data science & AI-focused firm, focused on creative innovative solutions using AI/ML & mobile cloud computing. 

The Company grew its Net Sales by 8%, from Rs. 927 Cr in FY22 to Rs. 999 Cr in FY23. However, due to a steep rise in expenses, Net Profit de-grew by 1%, falling from 287 Cr in FY22 to Rs. 285 Cr in FY23. Employee Expenses & other operating expenses cost 35.86% & 11.24% of revenue respectively.

Best Small Cap IT Stocks #2 – Cigniti Technologies

Cigniti Technologies is a global IT Company that provides end-to-end Digital Transformation Services. The Company offers 4 key services: Quality Engineering, Digital Assurance and engineering, Advisory, and Transformation.

Focused on its Digital Transformation – IP & Platform Approach, the company has launched BlueSwan & Zastra. BlueSwan is a Digital Assurance Platform while Zastra focuses on providing Enterprise-grade annotation & collaboration platforms for Computer vision projects.

The Company was founded by Mr. C V Subramanyam in 1998. It was initially called Chakkilam Infotech back in the day. It was listed on Indian exchanges in 2004 and changed its name to Cigniti in 2012.

The Company has served over 4200+ customers, which include 60+ Fortune 500 Companies. These clients come from industries like Airlines, Banking, Communications, Logistics, and others. 

Cigniti has multiple strong partnerships with other IT companies like Microsoft, AWS, Oracle, Broadcom, Microfocus, UiPath, and a lot more. These partnerships allow Cigniti to source industry-specific data from other platforms.

Cigniti reported a revenue of Rs. 1662 Cr in FY23, which increased by 32% from Rs. 1255 Cr. During the same time, the Company was able to increase Net Profits by as much as 83%, from Rs. 92 Cr in FY22 to Rs. 168 Cr in FY23. 

Marginal reduction in costs as against revenue growth has resulted in high-profit growth. The Company has consistently brought down Employee Costs, from 68% of revenue in FY18 to 59% in FY23.

Best Small Cap IT Stocks #3 – Happiest Minds

Happiest Minds Technologies is yet another Digital Transformation enterprise on our list. The Company leverages Artificial Intelligence, Blockchain, Cloud, Digital Process Automation, Internet Of Things to create advanced platforms and other technologies for its clients.

Headquartered in  India, the Company has a presence in the US, UK, Canada, Australia, and the Middle East. It is a comparatively smaller Company on our list having been established only in 2012. It currently has 237 active clients, of which 55 of them are part of the Fortune 2000. 

The Company earns a majority of its revenue from building cloud infrastructure (46.9%). This is followed by Saas development or Software as a Service. It brings in another 20.1%. Security, AI, IoT, and others contribute to another 33% of revenue.

Given below is a breakdown of Happiest Mind’s Revenue streams:

Although the Company has a diversified business in terms of industries catered to, the Company’s Top client alone brings in 13% of Revenue. Top 10 clients bring in ~42% of revenue. This increases the risk of revenue contribution. The Company must scale the business & sign new customers to reduce exposure.

Happiest Minds reported a Net revenue of Rs. 1450 Cr, which increased by 28% from Rs. 1131 Cr in FY22. Net Profits of the Company remained at the same rate of 27%, growing from Rs. 181 Cr in FY22 to Rs. 231 Cr in FY23.

Best Small Cap IT Stocks #4 – Zensar Technologies

Zensar Technologies Ltd, An RPG Group Company led under the helm of billionaire Harsh Goenka. Headquartered in Pune, the Company has a workforce of 10,500+ customers who serve over 145 global clients. 

With over 37 offices worldwide, the Company derives ~71% of its revenue from North America, the UK & Europe bringing another 18.1% of the revenue, followed by South Africa which brings in 11.2%.

Unlike other Companies on our list, Zensar is concentrated on catering to three industries. These are Hi-Tech and Manufacturing, Banking, Financial Services and Insurance, and Consumer Services. 

The Services offered by the Company are given below:

The Company’s business can be divided into two specific segments

1. Digital and Application Services: These include services like Custom Applications Management, Maintenance Support, Modernization, and Testing Services. This is the core business for the Company which makes up for 83.36% of its revenue.
2. Digital Foundation Services: These include building Infrastructure Management Services, Digital Workplace, and building platforms for Automation and Machine Learning. This segment makes up for the remaining 18.64% of the Revenue.

Zensar made a revenue of Rs. 4951 Cr in FY23, which increased by 13% from Rs. 4382 Cr in FY22. During this period, the Company’s Net Profits fell by 22%, falling from Rs. 422 Cr in FY22 to Rs. 328 Cr in FY23. 

The fall in Net Profits came as a result of a fall in Operating Margins which fell by 400Bps from the previous year. When we take a deep look at the financials, we find out that Employees have increased from 61% of their revenue to 64% of their revenue.

Best Small Cap IT Stocks #5 – Affle (India)

Affle is a global Technology Company that builds platforms to transform ads into recommendations. These platforms help businesses identify, engage & acquire customers making these platforms an effective tool for scaling revenue.

The Parent Company of Affle (India) was founded in Singapore in 2005. The Company began by launching a mobile media platform that provided browser-type functions over SMS. This was followed by a cross-messaging platform Pinch, which it built in 2010. 

Over the years, the Company has evolved with technology building multiple platforms to help businesses address their market better. The Company has built platforms like Appnext, Jampp, MAAS, FaaS, Mediasmart, mTraction Enterprise, RevX, Vizury, and You.APPI.

The Company has established its presence in SouthEast Asia (SEA), Middle East Africa (MEA), North America, Jakarta, Japan, Korea & Australia. Affle earned 32.9% of its FY23 revenue from India, while the remaining was collectively earned by its entire International Business Combined.

Affle (India) reported a strong year scaling revenue by 29%, from Rs. 1153 Cr in FY22 to Rs. 1488 Cr in FY23. During the same period, Net Profits increased by 14%, from Rs. 215 Cr in FY22 to Rs. 245 Cr in FY23.

However, the stock currently trades at a PE of 60x, which is significantly high for a company that has an earnings growth of just 14%. 

List of Best Small Cap IT Stocks in India

The list below puts together the 10 Best Small Cap IT Stocks

Conclusion

The IT sector will continue to remain the backbone of the global economy, and India with its vast expertise & talent will continue to extend its decade-long dominance in the sector. However, giants like TCS and Infosys already have their value realized and might continue on a slow stable growth trajectory. However, it’s these small-cap stocks that under the right management can scale up to command a significant piece of the IT Pie. So this is why we thought to help you discover these stocks in their early stages. 

So which stock do you think has the highest potential? Would you have added any other stock to our list? Let us know in the comments below.

Written by Nasir Hussain

By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks also get updated with stock market news, and make well-informed investment decisions.