Helping You Build Wealth With Honest Research
Since 1996. Try Now


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

India's Third Giant Leap

A Mega Opportunity for Indian Investors To Net Potentially
Massive Long-term Gains Starting with Our Top 3 Stocks

Watch Before 11.59pm

**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a daily newsletter from Equitymaster
covering exciting investing ideas and opportunities in India.


Top 5 Capex Stocks to Add to Your Watchlist

May 7, 2022

Top 5 Capex Stocks to Add to Your Watchlist

According to a recent statement released by the Reserve Bank of India, capacity utilisation (CU) in the manufacturing sector recovered to 72.4% in the December 2021 quarter from 68.3% in the September 2021 quarter.

This is expected to lead to a comeback of private capex as companies look to further improve utilisation, as demand picks up following an easing of the pandemic and geo-political tensions.

Investment activity may gain traction with improving business confidence, a pick-up in bank credit, and continuing support from government capex.

Here are five stocks that could benefit from or contribute to it.

#1 Larsen & Toubro (L&T)

First on the list is Larsen & Toubro, a multinational conglomerate company, with business interests in engineering, construction, manufacturing, technology and financial services.

The company is counted among the top five construction companies in the world.

In the post Covid-19 phase, private capex and infrastructure investments ares expected to be instrumental for the revival of economy.

L&T stands to benefit as its dominant position allows it to judiciously bid for projects across segments such as infrastructure (power, roads), urban infrastructure, defence manufacturing, and nuclear.

Besides these, L&T has participated in bids under PLI scheme for setting up manufacturing facilities for the national program on ACC battery storage in India. The scheme facilitates reduction of import dependencies on ACC batteries, and is expected to accelerate shift towards electric mobility

With the energy shift gaining traction, it has also partnered with ReNew Power to enter the developing green hydrogen market. This collaboration with ReNew is a big step forward in L&T's effort to develop a green energy portfolio.

The consolidated order book of the group stands at 3.4 tn as on December 2021, at record levels, with international orders having a share of 24%.

In the December 201 quarter, the company registered a 11% YoY increase in revenue for the December 2021 quarter. However, as it witnessed a decline in other income, net profit fell by 5% YoY.

For more details about L&T, check out the company factsheet.


#2 Tata Steel

Second on the list is Tata Steel, the second largest steel producing company in India after SAIL.

The company is one of the world's most geographically-diversified steel producers, with operations and commercial presence across the world.

It has an annual crude steel capacity of 34 MTPA (million tonnes per annum)

Tata Steel aims to create 10 MTPA of additional long product portfolio by 2030 , mainly driven by the NINL (Neelachal Ispat Nigam) acquisition and subsequent expansion. The capacity will also be augmented by setting up multiple EAF (Electric Arc Furnace) across locations.

The NINL share purchase agreement has been completed and transaction is expected to close in the June 2022 quarter. The capacity will be expanded to 10 MPTA from 1 MPTA.

The company is also looking to set up a 0.75 MTPA (EAF) in North India close to a scrap generating auto hub and will look at further modular expansions to South and West India.

The company is upbeat about domestic demand, even as commodity prices continue to be high.

It also believes that international demand will be strong due to the Covid-19 impact given the global infrastructure spend and the disruption of supply from Russia and Ukraine.

For the March 2021 quarter, Tata Steel reported a 38.6% YoY increase in revenue and a 46.8% YoY increase in net profit.

The company also announced a 10:1 stock split.

For more details on Tata Steel, check out the company factsheet.


#3 Alkyl Amines

Third on the list is Alkyl Amines, the market leader in the ethylamine segment and among the foremost manufactures of methylamine, diethyl hydroxylamine, and dimethylamine hydrochloride (DMA HCL) in India.

Apart from manufacturing basic aliphatic amines such as methylamines and ethylamines, Alkyl Amines has over the years also diversified into value-added products such as amine derivatives and speciality chemicals.

The demand for the company's products is steadily increasing in both India and abroad. For the year 2022, it plans to focus on increasing its market share of existing products.

The management has also guided that exports would play a major role in revenue growth going forward.

With a growing demand for its products, the board has recently approved an investment of approximately Rs 3.5 bn for increasing the capacity for aliphatic amines by 30-40% at its Kurkumbh and Patalganga sites in Maharashtra.

The capacity will be added in the next 15 to 18 months and will contribute significantly to the company's top line.

For the December 2021 quarter, Alkyl Amines' revenue rose 16.3% while net profit declined by 45.7%. The company's input costs soared which impacted the company's profitability.

For more details about the company, check out the company factsheet.


#4 Laurus Labs

Fourth on the list is Laurus Labs, a leading API manufacturer.

The company has recently proposed a capex of Rs 15-17 bn spread over the next two years i.e. until 2023 to further increase its capacities.

Of the said capex, 25% will be invested in expanding formulation capacities, whereas 50% will be invested in expanding API capacities. The remaining 25% will be invested in increasing capacities to meet the company's contract manufacturing business requirements.

The company has seven manufacturing facilities in Visakhapatnam (Andhra Pradesh), one API facility in Bibinagar (near Hyderabad), and a Kilo Lab at its R&D centre in Hyderabad.

At its Vishakhapatnam facilities, it manufactures drug substances whereas at the API facility it manufactures both drug products and drug substances.

The company plans to get a 25%-plus global market share in 15 API products, up from the 7 products, where it has a 25% share at present.

Add to that the focus on oncology APIs, where it expects better margins.

For the March 2022 quarter, Laurus Labs reported a marginal increase in revenue and a 23% YoY decline in net profit.

The management remains confident of achieving US$1 bn in revenue in the financial year 2023 from US$ 660 m in 2022. The growth is likely to be evenly spread between synthesis/formulation and the API segment.

For more details about the company, check out the company factsheet.


#5 Tata Chemicals

Last on the list is Tata Chemicals.

The company is one of the largest chemical companies in India with interests in crop protection and specialty chemicals.

With expansion plans that include lithium-ion cells for electric vehicles (EV), chemicals, nutritionals and agri-sciences, the company's revenues are set to skyrocket.

The management of the company has announced plans to spend Rs 24 bn in expansion, of which Rs 8 bn has been already spent. The balance will be spent over the next two years.

It has planned for Phase II capacity expansion of soda ash (300 kilo tonnes) and bicarb (70 kt) and specialty silica capacity by 50 kt.

This is expected to generate a revenue of Rs 14 bn, with an EBIT of Rs 6 bn by the financial year 2025.

Tata Chemical's utilization levels have been on the rise in recent months. With operations now back to pre-Covid-19 levels, performance is expected to improve with pick-up seen in demand for soda ash and other products.

For the March 2022 quarter, the company reported a 32% YoY increase in revenue. Its net profit zoomed over a 1,500% YoY to 4.7 bn.

The management said that the performance was due to higher volumes, realisations, and favorable market conditions.

For more details about Tata Chemicals, check out the company factsheet.


Did Budget 2022 set the revival of capex in motion?

Note that the higher allocation in Budget 2022, Rs 7.5 tn to be precise, works out to 19% of the total expenditure of Rs 39.5 tn. That's massive.

The last time the share of capex touched a similar figure was when it came in at 19.3% for the financial year 2005.

The economic survey released a day before the budget did highlight that capex had earlier been affected by restrictions and labour availability. This has changed now as restrictions eased in the second half of the financial year 2021 and the momentum has continued in fiscal 2022 too.

Many companies have planned huge capex plans over the next three years starting 2022. This just shows that there will be a strong recovery.

Research Analyst at Equitymaster, Aditya Vora believes the Budget 2022 shows the clear thrust on reviving private sector capex.

This is a strong push for the capital goods sector thus benefitting old economy like cement and steel. As per Aditya, private capex could be the next trigger for the economy.

Here's what he wrote in a recent editorial:

  • Outlay for capital expenditure was raised by 35% from Rs 5.5 trillion to Rs 7.5 trillion. Out of the Rs 7.5 trillion capex, 25% is for roads and highways while defence will get 21%.

    What does this mean for the markets?

    To put it simply, the 2003-2008 period for capital goods and infrastructure is ahead of us.

    If the last couple of years was about public capex done by the government, the next couple of years are likely to be led by private capex.

    You can play the private capex cycle indirectly by investing in steel and cement companies.

    Think of the additional cement and steel required to build roads, highways, hospitals, and buildings.

    While the tide will be towards tech stocks and new age IPOs, I believe companies in the infrastructure, capital goods should be looked at.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Equitymaster requests your view! Post a comment on "Top 5 Capex Stocks to Add to Your Watchlist". Click here!