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Top 5 stocks to watch out for high capex driven growth

Capex is crucial for companies' growth as it signifies investment in their future. (Photo: iStock)
Capex is crucial for companies' growth as it signifies investment in their future. (Photo: iStock)

Summary

  • These five companies are doing the maximum capex investment to drive future growth

Every company wants to expand its business either by increasing manufacturing capacity, adding new products to its portfolio, or upgrading machinery to reduce costs. The money it spends on this expansion is called capital expenditure or capex as popularly known.

Capex is crucial for companies' growth as it signifies investment in their future.

With that in mind, let’s look at the companies that spent the most in capex in FY23 and are also investing heavily for the years to come.

#1 Clean Science and Technology

First on the list is Clean Science and Technology, a leading chemical manufacturing company.

Incorporated in 2003, the company's operations are primarily focused on manufacturing critical speciality chemicals.

The company has three manufacturing facilities consisting of 16 plants with a total capacity of 44 thousand million tonnes per annum (MTPA).

During the year, the company invested 1.9 billion (bn) in capex, the highest since its inception, primarily to expand its manufacturing capacity by 2,000 MTPA in one of its plants.

It also set up production lines for two of its newly launched products in the existing manufacturing facility.

The company also developed new products by blending its existing products for different industrial applications.

In the last three years, Clean Science and Technology has spent around 4 bn in capex primarily to expand its manufacturing capabilities, enhance the yield, and for research and development (R&D) to develop new products.

In financial year 2024 so far, the company already incurred a capex of 900 million (m) for building manufacturing facilities for its new products.

It plans to invest a total of 3.8 bn in the current financial year for developing and manufacturing hindered amine light stabilisers (HALS) and new performance chemicals.

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Despite investing heavily in capex, the company has remained debt-free as it is funding its capex through internal cash accruals.

At the end of financial year 2023, the company had a cash of 3 bn in its books.

Coming to its financials, the company's revenue grew by 35.1% in the financial year 2023 due to volume growth. The net profit also grew by 29.2% year-on-year (YoY) due to low raw material costs and a better product mix.

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As the world is looking for alternatives to China to de-risk their supply chain, India is considered a reliable supplier of speciality chemicals.

This bodes well for Clean Science and Technology as it is focussing on import substitution and adding export customers across geographies by expanding its product portfolio and developing new products.

#2 Aether Industries

Second on the list is another chemical manufacturing company, Aether Industries.

The company manufactures speciality chemicals involving complex and differentiated chemistry.

The company also undertakes contract manufacturing for several multinational companies (MNCs).

It has three manufacturing sites across India with a total capacity of 22,736 MTPA. The first is a pilot plant, contract manufacturing and hydrogenation facility, and the second and third are large-scale manufacturing facilities where it produces its own products.

During the year, the company invested 7.1 bn in capex to acquire land for its fourth and fifth manufacturing plants.

It also spent big time on expanding its pilot and third manufacturing plant to add production lines for new products.

The company funded this expansion by raising 7.5 bn from Qualified Institutional Investors (QIP) against 8.02 m shares.

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Given that the chemicals industry is all set to grow due to government initiatives and China plus one strategy, Aether Industries has huge growth plans lined up.

The company is focussing on launching new products by leveraging its extensive R&D facilities. It has also entered into strategic alliances with global oil field services companies to supply its products. This will help the company generate significant revenue in the long term.

Coming to its financials, the revenue and net profit have grown by 11.8% and 19.7% in the financial year 2023. Healthy volume growth and low raw material costs have aided the growth.

The company became debt-free during the year as it utilised the funds it raised from the IPO (initial public offering) to pay off its debt.

Going forward, the company’s expansion plans will drive its revenue in the medium term.

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#3 Gujarat Themis Biosyn

Third on the list is Gujarat Themis Biosyn.

The company is engaged in manufacturing and selling active pharmaceutical ingredient (API) products through the fermentation process.

It has two products in its portfolio, Rifamycin S and Rifamycin O. Both are antibiotics used in the treatment of several diseases, including bacterial infections, leprosy, irritable bowel syndrome, and hepatic encephalopathy.

The company has one manufacturing facility in India with a capacity to manufacture 10,000 kilograms (KG) of Rifamycin S per month and 6,000 KG of Rifamycin O per month.

In the financial year 2023, the company invested 440 m to build a warehouse at its existing manufacturing plant.

It also plans to invest 2 bn to build a fermentation block, API block, R&D lab, wastewater treatment system, and solvent yard.

The new R&D block will be utilised to develop and test new products and test additional applications of existing products.

It plans to invest 400 m more in the financial year 2024 in its R&D facility.

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In the financial year 2023, the revenue and net profit of the company has grown by 30.4% and 33%, respectively, on account of healthy volume growth.

Its return on equity (RoE) and return on capital employed (RoCE) stood at 38.9% and 52.1%, respectively.

The company is also debt-free as it uses internal accruals to fund its capex.

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Being one of the few companies using the fermentation process to produce APIs, the company created a niche for itself.

Going forward, its plan to develop new products through the same process will drive its revenue and net profit in the medium term.

#4 Devyani International

Next on the list is Devyani International.

It is the largest franchisee of Yum Brands in India and one of the largest operators of chain quick service restaurants (QSR) in India.

The company is a part of RJ Corporation, which is a powerhouse of thriving brands such as KFC, Pizza Hut, Varun beverages, and Cream Bell.

In the financial year 2023, the company invested 28 bn in capex for the expansion and restructuring of its business.

The company is moving towards a leaner business model with a shift towards delivery and small store formats. In line with this plan, Devyani International shut down larger and non-performing stores across India.

It is now concentrating on expanding its stores across India, which are primarily concentrated in a few cities in north and south India.

At present, the company has 543 KFC stores, 510 Pizza Hut stores, and 112 Costa Coffee stores. In the financial year 2023, it opened 292 stores across all its brands, taking the store count to 1,243 stores in India.

It aims at taking the store count to 2000 by 2026. The company is also planning to improve its store revenue across all its brands by introducing new items to its menu.

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In the financial year 2023, the company revenue earned the highest-ever revenue, which has grown by 43.9% on account of an increase in the number of stores. The net profit also grew by 69.2% YoY.

The company's debt-to-equity ratio has decreased drastically from 4.7x to 0.1x in the last five years as the company is deleveraging its balance sheet.

Take a look at the company’s financial performance in the last five years.

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Going forward, increasing store count and high demand for fast food will drive its revenue and net profit in the medium term.

#5 Camlin Fine Sciences

Last on the list is Camlin Fine Sciences.

The company is engaged in the manufacturing of speciality chemicals. It has four key businesses, namely shelf life solutions, aroma ingredients, health and wellness and performance chemicals.

Camlin Fine Sciences has nine manufacturing facilities with a total capacity of 61,000 MTPA, of which 31,000 MTPA is in India.

During the financial year 2023, the company invested 6.8 bn in capex for debottlenecking of its manufacturing plant in Dahej Diphenol. This helped the company improve its capacity from 10,000 MTPA to 15,000 MTPA.

It is also setting up a 6,000 MTPA to manufacture raw materials and derivatives of Vanillin.

The company is also focussing on developing new products across all its business verticals and improving the efficiency of its manufacturing products.

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The company's revenue has grown by 16.5% in the financial year 2023. The net profit declined by 34% in the current fiscal mainly due to a provision made by the company.

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Going forward, the company's expansion plans will drive its revenue in the medium term.

Other companies investing heavily in capex

Here's a list of some other companies investing heavily in capex.

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Should you invest in companies with high capex?

When a company invests in capex, it means the management is positive about its growth.

Hence, companies investing heavily in capex are considered to have high growth prospects.

However, heavy investment in capex can put a strain on the company’s finances if it is funded through debt. Moreover, the capex takes a lot of time to generate returns.

Hence, it is important that you do your due diligence and check the fundamentals of the company before investing in it.

Happy Investing!

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

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