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5 Smallcap Stocks with Aggressive Capex Plans

Oct 14, 2022

5 Smallcap Stocks with Aggressive Capex Plans

A company's capital expenditure (capex) plan is the cornerstone of its growth strategy.

Understanding how capex works and the benefits it can create for a company is critical for investors who want to build long-term wealth.

After this year's Budget showed a clear thrust on reviving India's capex, aggressive capex plans have become the new normal for many Indian companies.

If history is something to go by, India witnessed one of its strongest capex cycles in 2003-2007. And this is how the market rallied.

Those who capitalised on this opportunity made some of the biggest gains in a decade. With capex cycle picking up again, here are five smallcap companies with aggressive capex plans.

These smallcap companies are strong contenders of turning into midcaps in the long run.

#1 Data Patterns

Stocks involved in the defence & aerospace segment have been the talk of the town this year.

This year, the Indian markets and markets across the globe have been facing headwinds in the form of a global recession, interest rate concerns, geopolitical tensions, to name a few.

But defence stocks ignored all the noise and kept heading higher as sector outlook improved significantly. Most of Indian defence stocks have shown a positive return this year.

We all know the prominent names such as Hindustan Aeronautics (HAL), Bharat Dynamics, and Cochin Shipyard. Data Patterns, a newly listed company, has seen a tremendous rise in its share price.


Data Patterns is a vertically integrated defence and aerospace electronics solutions provider catering to the indigenous defence products industry.

The company has proven in-house design and development capabilities. It also has experience of more than three decades in defence and aerospace electronics.

Post listing, the company traded in a narrow range for a year and then started its upward trend. One of the factors behind the rally is the company's focus on capex.

Following Russia's invasion of Ukraine, it because clear for countries to buckle up and give an utmost importance on defence spending. A recent analysis of defence capex indicates that spending has increased in the past couple of years...and more so in 2022.

For Data Patterns, the capex guidance for financial year 2023 stands at Rs 600-700 m. The company is doubling existing manufacturing facility. This facility is expected to get operational in the third quarter of this year.

The company has strong revenue visibility with Rs 20 bn to 30 bn worth orders in the pipeline for the next three to four years.

Data Patterns also enjoys a debt free balance sheet and boasts of good financial performance.

Financial Snapshot

Rs m, standalone FY18 FY19 FY20 FY21 FY22
Revenues 567 606 1,561 2,240 3,109
Growth (%) 15% 7% 158% 43% 39%
Operating Profit 90 89 473 946 1,450
OMP (%) 16% 15% 30% 42% 47%
Net Profit 12 14 210 556 940
NPM (%) 2% 2% 13% 25% 30%
Total Debt 320 301 606 332 68
Debt to Equity (x) 0.30 0.28 0.39 0.16 0.01
Dividend payout (%) 27.3 24.6 1.6 0.6 19.3
Data Source: Ace Equity

#2 Borosil Renewables

Next on our list we have Borosil Renewables, one of India's popular renewable energy companies.

The company is engaged in the manufacturing of low iron solar glass for application in photovoltaic panels. It's the first and the only producer of solar glasses in India. The company's thinner fully tempered solar glass offers a niche product for glass modules.

On a daily basis, India's solar glass requirement is met through imports from China and Malaysia. Borosil Renewables, being the only solar glass manufacturing company, captures a huge chunk of this demand.

Owing to strong demand, Borosil Renewables is currently working on increasing its current capacity by 5x to 2,600 tonnes per day (450 tonnes per day in FY22). For this, it has laid out a capex plan of Rs 30 bn.

Initially, Borosil had announced a capex plan for about Rs 6.7 bn till the end of 2023. This was expected to increase its total capacity to about 1,000 tonnes per day by the end of 2023.

The cost for this capex is funded through a combination of QIP, internal accruals and term loans. With this, Borosil Renewables may see improved margins, but timely completion will be the key.

The company recently reported weak June quarter results, but its full year financials have shown improvement on most metrics.

Financial Snapshot of Borosil Renewables

Rs m, standalone FY18 FY19 FY20 FY21 FY22
Revenues 2,958 2,515 2,712 5,023 6,442
Growth (%) 11% -15% 8% 85% 28%
Operating Profit 758 766 400 2,027 2,650
OMP (%) 26% 30% 15% 40% 41%
Net Profit 464 463 5 896 1,658
NPM (%) 16% 18% 0% 18% 26%
Total Debt - 424 923 789 1,572
Debt to Equity (x) 0.00 0.13 0.29 0.13 0.2
Dividend payout (%) 12.5 13.0 0.0 0.0 0.0
Data Source: Ace Equity

Once a little-known stock, the company came to focus with the imposition of a five-year anti-dumping duty on imports from China in 2017.

However, this imposition expired in August 2022 and a proposal for extension was rejected. Hence going forward, Borosil Renewables is likely to see competition in an already competitive market.

#3 Dwarikesh Sugar Industries

Next on our list we have Dwarikesh Sugar Industries.

Just like defence stocks, the performance of sugar stocks has been exceptional. The entire sector is witnessing a structural change, thanks to the ethanol blending factor and other government initiatives.

Dwarikesh Sugar's MD Vijay Banka recently said the domestic sugar industry used to be cyclical as they used to have two years of surplus, two years of deficit, and one normal year.

However, the scenario has changed now and due to successive increase in cane prices and the introduction of new and better varieties, farmers have been able to increase the yield.

Coming back to ethanol, the government has preponed the target of 20% ethanol blending to 2025. This has increased the demand for ethanol.

The market is obviously seeing this move as a big positive for the sector. Not only is the ethanol offtake going to be huge, but it's also going to be a recurring source of revenues for sugar companies for a long time to come.

That is why sugar companies are increasing their capacity by setting up additional ethanol manufacturing capacities. Dwarikesh Sugar is taking charge and in a big way at that.

The company is spending around Rs 900-1,100 m per annum over the next two years to set up distillery capacity and enhance the crushing capacity.

One way to find out how much the company is spending on capex is by looking at its cash flow statement to find how much it is spending on fixed assets.

Purchase of Fixed Assets

2022 2021 2020 2019 2018 2017
1,753.0 195.0 1,119.0 480.0 416.0 55.0
Data Source: Ace Equity
Figures in Rs m

As far as financials go, the company reported stellar numbers for financial year 2022 which reduced borrowings and also helped improve other metrics.

Also, as far as debt is concerned, Dwarikesh Sugar's long-term loans are subsidised loans. It has loans from the state government at 5% interest rate and has a distillery loan which is subsidised from central government.

Financial Snapshot of Dwarikesh Sugar

Rs m, standalone FY18 FY19 FY20 FY21 FY22
Revenues 14,299 10,841 13,361 18,388 19,741
Growth (%) 20% -24% 23% 38% 7%
Operating Profit 1,600 1,652 1,415 2,084 2,940
OMP (%) 11% 15% 11% 11% 15%
Net Profit 1,014 951 735 915 1,552
NPM (%) 7% 9% 5% 5% 8%
Total Debt 3,423 6,556 8,430 6,070 5,219
Debt to Equity (x) 0.94 1.41 1.74 1.05 0.78
Dividend payout (%) 0.0 0.0 0.0 25.7 24.3
Data Source: Ace Equity

To know more, check out Dwarikesh Sugar's financial factsheet.

#4 Shreyas Shipping & Logistics

Next on our list we have a market leader in domestic coastal container shipping - Shreyas Shipping & Logistics. The company is a dominant force to reckon with and is one of the leading shipping companies in India.

Over the years, the company has diversified into logistics, transportation, warehousing, and distribution services.

Being part of the Transworld group comes with synergies as in the past, the group has provided financial support to Shreyas Shipping.

For the next three years, the company has undertaken a huge capex plan worth Rs 3 bn for new vessel purchases and dry-docking expenses. This capex is partly debt-funded.

Purchase of Fixed Assets

2022 2021 2020 2019 2018 2017
2843.00 110.00 267.00 703.00 1519.00 634.00
Data Source: Ace Equity

This capex comes at a time when India's container-manufacturing industry is seeing signs of revival owing to China plus one strategy.

But the challenges are plenty as China controls the world's container manufacturing market.

Also, there's not much traction for containers in India. The demand for containers is from smaller rail operators and coastal shipping operators with very small requirements.

At present, Shreyas Shipping has limited capacity. But this will change by 2025.

Financial Snapshot for Shreyas Shipping

Rs m, standalone FY18 FY19 FY20 FY21 FY22
Revenues 5,406 6,248 6,125 5,600 5,358
Growth (%) -25% 16% -2% -9% -4%
Operating Profit 1,151 727 465 683 2,368
OMP (%) 21% 12% 8% 12% 44%
Net Profit 920 298 (661) 443 2,111
NPM (%) 17% 5% -11% 8% 39%
Total Debt 2,623 2,992 2,660 2,025 2,353
Debt to Equity (x) 0.62 0.67 0.72 0.48 0.37
Dividend payout (%) 3.6 8.9 0.0 9.9 2.6
Data Source: Ace Equity

While revenues have more or less stayed around same level for the past couple of years, the company has seen sharp improvement in operating profit and margins.

Foreign investors have also shown some interest in Shreyas Shipping. They have added exposure for the past five consecutive quarters.

To know more, check out Shreyas Shipping's latest shareholding pattern.

#5 Godawari Power & Ispat

Last on our list we have Godawari Power & Ispat.

The company is engaged in the business of mining of iron ore and manufacturing of iron ore pellets, sponge iron, steel billets, wire rods, and ferro alloys with generation of electricity.

Before we get to the capex part, take a look at the company's financial performance, especially for 2022.

Financial Snapshot

Rs m, standalone FY18 FY19 FY20 FY21 FY22
Revenues 25,274 33,216 32,885 39,576 53,992
Growth (%) 40% 31% -1% 20% 36%
Operating Profit 6,056 7,952 6,289 11,404 18,935
OMP (%) 24% 24% 19% 29% 35%
Net Profit 2,076 2,521 1,668 6,385 14,667
NPM (%) 8% 8% 5% 16% 27%
Total Debt 21,237 18,856 16,967 8,965 4,285
Debt to Equity (x) 2.30 1.61 1.23 0.44 0.13
Dividend payout (%) 0.0 0.0 0.0 9.9 9.9
Data Source: Ace Equity

As can be seen, the company's net profit more than doubled in 2022 while operating margins also saw a steep rise.

A close look at the company's financials will tell you it's a smallcap stock with bluechip heritage.

Now take a look at the company's share price performance in 2022.


Shocking, isn't it?

The company may have delivered robust performance, but its share price is falling in 2022. This is due to imposition of export duty on iron ore and also due to overall sectoral effect.

Good news is the company has undertaken a massive capex plan to set up a greenfield integrated steel plant with capacity of 1.5-2 million tons of flat products.

Although the capex is expected to be completed in the next 3-5 years, the company has initiated the process for land acquisition and other regulatory clearances.

The financial snapshot above shows that Godawari Power has substantially reduced debt over the past five years. It intends to keep it that way and the management has committed to fund capex from internal accruals and maintain debt free status.

Apart from the greenfield steel project, Godawari Power also has another capex of Rs 5,000 m for the current year for setting up captive solar power plant, capex in the mining and replacement of old turbines with new turbines to improve the plant efficiency.

Expansion Plans


Equitymaster's smallcap guru on the capex theme

Richa Agarwal, editor of smallcap recommendation service Hidden Treasure, believes capex could lay the foundation of next bull run, and could offer multibagger stocks.

In fact, capex is her favourite investing theme. Here's what she wrote in a recent editorial:

  • In this year's budget, the government hiked its capex by 35% to Rs 7.5 tn. The PLI schemes have been set in motion. This alone could have huge multiplier effect for private sector capex.

    From a bottom-up perspective, corporate balance sheets are cleaner with debt-to-equity ratio looking good. The operating cash flows are higher too. The banks have a cleaner balance sheets as well and are geared up to lend more.

    The capacity utilisation of corporate India is up from 68% to 74%. The sectors at the forefront of this capex revival include road, rail, port in, cement, logistics, oil and gas, renewables, power sector, defense, auto, pharma, chemicals, and textiles and more.

    So, to be on the right side of this capex bet, I would focus on companies that are suppliers to the entire industry and not to one specific company.

She also recorded a video in July this year laying down the businesses that could potentially benefit from this opportunity.

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