To Find High Growth Stocks, Look at Capex Plans. Here are 5 Companies to Watch Out For...

In the Union Budget 2023, the government increased its capital expenditure budget by 35% to boost economic growth. This sharp increase has encouraged companies to invest in capex to capture a slice of this growth.

Capital expenditure or capex is the money invested by the company to acquire, repair, maintain, and build physical assets to help the company grow its revenue and profits.

A company invests in capex with an intention to meet the rising demand for products and services. When the company captures this demand, it will witness a high growth in its revenue and profits.

This will further translate into increase in share price and higher returns for the investor.

Here's a list of five companies that have announced big capex plans for the next few years.

#1 Supreme Industries

Supreme Industries is one of the leading manufacturers of plastic products in India.

With a comprehensive product portfolio, it has a presence in several business segments. Some of its key business verticals are the plastic piping division, packaging products, and consumer and industrial products.

Supreme Industries has 25 manufacturing facilities across the country, handling over 350,000 tonnes of polymers annually.

In the financial year 2021, the company announced a capex of Rs 8.5 bn. It plans to establish three greenfield plants in India and expand existing plants' capacities.

This will increase the company's total capacity to 800,000 tonnes in the next two years.

Apart from capacity expansion, the company plans to increase the share of value-added products in its portfolio, which has a very high operating profit margin.

Supreme Industries is also widening its distribution reach in existing and new locations. Currently, it has a network of over 4,000 channel partners.

The company is also actively diversifying its product portfolio by focusing on technological innovation. It has added nearly 20 new products to its portfolio in the last three years.

All these encouraged the company to invest heavily in capex. Despite a heavy capex, Supreme Industries is a debt-free company with good financial performance.

In the last five years, the revenue grew at a compound annual growth rate of 10% driven by volume growth and higher price realisations. The net profit also grew at a CAGR of 11.3% during the same time.

Supreme Industries five-year average return on capital employed (RoCE) is 30.8%. Its price to earnings ratio (P/E) is 37.8x, which is slightly above the industry average of 28.7x.

Supreme Industries Financial Snapshot

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (Rs m)	48,407	56,273	55,225	63,721	77,928
Growth (%)		16.2%	-1.9%	15.4%	22.3%
Operating Profit (Rs m)	7,871	8,518	8,346	12,842	12,421
Operating Profit Margin (%)	16.3%	15.2%	15.1%	20.2%	16%
Net Profit (Rs m)	6,028	6,500	6,101	10,662	10,274
Net Profit Margin (%)	8.2%	7.7%	7.9%	13.1%	9.8%
Long Term Debt (Rs m)	14	11	9	6	0
Debt-to-Equity Ratio (x)	0	0	0	0	0
Dividend Payout Ratio (%)	38.40%	38%	40.80%	33.60%	39.90%

Source: Equitymaster

To know more about Supreme Industries checkout its factsheet and latest quarterly results.

#2 Ultratech Cement

Next on our list is Ultratech Cement.

The cement industry struggled with low demand, high costs, and low prices in the past few years.

These headwinds seem to ease as the government's infrastructure boost will bring back the demand. Moreover, with declining costs, and rising prices of cement, the sector seems to be back on investors' radar, and the price of cement stocks is rising.

The cement industry is cyclical mainly due to lower construction activity during monsoons. Hence cement prices fall during monsoon season.

However, as the monsoon ends, construction activity will be on the rise. Apart from this, a growing economy and increased government spending on infrastructure will boost demand for cement.

Ultratech Cement, being the largest cement company in the country, has huge capex plans ahead.

In June 2022, the company announced a capex of Rs 128 bn towards a capacity expansion of 22.6 metric tonnes per annum (MTPA) through greenfield and brownfield projects.

Currently, the company has a total capacity of 120 MTPA of grey cement and 1.5 MTPA of white cement spread across 23 manufacturing and 27 grinding units.

The company has already completed the first phase of expansion which it announced in 2020. With the latest capacity expansion, the company's total capacity will grow to 159.25 MTPA by 2025.

In the last six years, Ultratech Cement has been spending a lot on its capex. Its capex expenditure has grown at a CAGR (compound annual growth rate) of 27.5%.

Purchase of Fixed Assets (in Rs m)

2016-2017	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
12,609.4	19,380	17,263	15,732.6	18,031.4	54,191.8

Source: Ace Equity

Despite having debt on its books, it has delivered good financial results in the last five years. The company's debt-to-equity ratio stood at 0.1x in financial year 2022. However, it is expected to go up as the company is partly funding its capex through debt.

Ultratech Cement's revenue has grown at a CAGR of 11.6% in the last five years mainly driven by volume growth led by capacity expansion. The net profit also grew at 20.4% CAGR despite rising costs of inputs.

Its five-year average RoCE is 13.4%, and its P/E ratio is 28x which is similar to the cement industry average.

Ultratech Cement Financial Snapshot

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (Rs m)	306,734	420,723	430,810	454,723	531,066
Growth (%)		37.2%	2.4%	5.6%	16.8%
Operating Profit (Rs m)	57,986	72,331	92,472	113,072	115,144
Operating Profit Margin (%)	19.3%	17.4%	21.8%	25.3%	21.9%
Net Profit (Rs m)	33,016	34,679	51,840	78,555	83,627
Net Profit Margin (%)	7.4%	5.8%	13.6%	11.9%	13.6%
Long Term Debt (Rs m)	158,635	206,504	173,675	135,485	53,030
Debt-to-Equity Ratio (x)	0.6	0.7	0.4	0.3	0.1
Dividend Payout Ratio (%)	13%	13.2%	6.5%	20.1%	15.3%

Source: Equitymaster

To know more about Ultratech Cement, checkout its factsheet and latest quarterly results.

#3 JSW Steel

Third on our list is JSW Steel, the flagship steel company of the JSW Group.

It is one of the country's largest steel producers and the largest exporter of steel. The company has a total steel production of 28.5 MTPA spread across 14 manufacturing facilities in India.

It aims to increase the capacity to 37 MTPA by 2025. JSW Steel announced a capex of Rs 487 bn for the next three years, of which Rs 200 bn is for the financial year 2023.

With the government's push towards infrastructure, the company has been at the forefront of taking advantage of the growing demand for steel.

The company has been actively working on increasing its capacity and almost doubled it in the last six years. It also has a lower capital expansion cost than its peers.

Apart from capacity expansion, JSW Steel has been concentrating on increasing its share of value-added products.

It also aims to increase its sales by expanding its retail base. It has opened new stores in untapped markets and increased its reach by adding new distributors in existing markets.

All these efforts have paid off, as the company's financial results in the past few years were outstanding.

In the last five years, the company's revenue has grown at a CAGR of 15.9% driven by capacity addition and rising steel prices. The net profit also jumped by 27% (CAGR) during the same time.

Its five-year average RoCE is 19% and its shares are trading at a P/E of 7.5x, similar to the industry average of 7.8x. JSW Steel's debt-to-equity ratio for the financial year stood at 0.9x.

JSW Steel Financial Snapshot

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (Rs m)	708,220	849,610	738,720	805,350	1,479,020
Growth (%)		20.0%	-13.1%	9.0%	83.6%
Operating Profit (Rs m)	145,300	189,520	110,680	199,540	382,660
Operating Profit Margin (%)	20.6%	22.4%	15.1%	25%	26.1%
Net Profit (Rs m)	60,710	75,540	40,090	78,720	200,210
Net Profit Margin (%)	8.6%	8.9%	5.5%	9.9%	13.7%
Long Term Debt (Rs m)	317,230	296,560	446,730	497,310	579,290
Debt-to-Equity Ratio (x)	1.1	0.9	1.2	1.1	0.9
Dividend Payout Ratio (%)	12.7%	13%	12%	19.9%	20.8%

Source: Equitymaster

Going forward, high demand for steel due to infrastructure push and low cost of raw materials due to captive iron ore mines will drive the revenue and margins for JSW Steel.

To know more about JSW Steel, checkout its factsheet and latest quarterly results.

#4 Coal India

Fourth on our list is the largest coal-producing company in India, Coal India.

With so much importance being given to renewable energy, people thought phasing out coal from the electricity sector was easy.

But after the renewable energy sources couldn't meet the demand during winter, people understood it was difficult to phase out coal.

Even though the share of renewable energy is increasing at a high rate, the industrial uses of coal cannot be replaced in the cement and steel sectors.

Therefore, coal is here to stay.

Before we look at the capex of Coal India, take a look at its financials.

Coal India Financial Snapshot

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (Rs m)	455,455	581,302	569,315	499,250	615,556
Growth (%)		27.6%	-2.1%	-12.3%	23.3%
Operating Profit (Rs m)	87,317	249,648	215,801	183,835	246,700
Operating Profit Margin (%)	21.8%	47.8%	42.7%	40%	42.8%
Net Profit (Rs m)	70,380	174,664	167,015	127,051	173,870
Net Profit Margin (%)	17.6%	33.4%	33.1%	27.7%	30.2%
Long Term Debt (Rs m)	10,544	14,723	19,934	26,881	33,018
Debt-to-Equity Ratio (x)	0.1	0.1	0.1	0.1	0.1
Dividend Payout Ratio (%)	145.5%	46.2%	44.3%	77.6%	60.3%

Source: Equitymaster

Like all other companies, Coal India has been affected by the pandemic. Despite that, it bounced back strong in the financial year 2022 and achieved revenue and profit growth of 23.3% year-on-year (YoY) and 36.8%, respectively.

This was mainly driven by the high production and volume growth. The robust financial performance is also reflected in the company's performance on bourses.

Coal India's shares zoomed almost 44.8% in the last year.

The company's five year average RoCE is 64.4% and its P/E ratio is 5.8x, which is lower than the industry average of 12.2x. it's debt-to-equity ratio for financial year 2022 stood at 0.1.

Coal India incurred a capex of Rs 155 bn in the financial year 2022 and planned a capex of Rs 165 bn for the financial year 2023.

Most of the funds will be used to enhance coal production in the country. Apart from this, it is upgrading the coal transportation facilities in its mines.

The company plans to complete 35 first-mile connectivity (FMC) projects by March 2023, which will help dispatch 415 m tonnes of coal annually.

These FMC projects will help the company transport coal in an eco-friendly and efficient manner and help reduce dust and logistics costs.

Going forward, the monopoly status of Coal India will drive its revenues, and its efforts to reduce costs will drive its margins in the medium term.

To know more about Coal India, checkout its factsheet and latest quarterly results.

#5 Seamec

Last on our list is Seamec, an off-shore and bulk carrier charter business.

It owns and operates the largest fleet of diving support vessels (DSV) in India and the Middle East. The company majorly caters to the oil and gas industry.

Some of its operations include the inspection of underwater structures and firefighting services.

The company caters to its clients through a turnkey or day-rate basis. Some of its clients include L&T Hydrocarbon Engineering, ONGC, and NPCC.

Seamec also ventured into engineering, procurement and construction (EPC) infrastructure through a joint venture company.

During the financial year 2022, the company incurred a capex of Rs 1.9 bn as it added two new vessels to its fleet.

Though Seamec has not announced any capex explicitly for the financial year 2023, its ageing fleet might require the company to acquire new vessels for its fleet.

Purchase of Fixed Assets (in Rs m)
Purchase of Fixed Assets

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
784.7	196.7	385.3	150.6	540.7	1,988

Source: Ace Equity

As seen in the table above, the company has been investing heavily in capex to increase its fleet and capture the demand for oil and gas.

Despite being a small-cap company, it managed to fund its capex through limited debt.

Post-Covid, the company turned around its business and achieved revenue growth of 33.7% for the financial year 2022. This was against a de-growth of 28.6% the previous year mainly due to lower Covid restrictions.

However, the profit margins contracted due to high inflation.

The RoCE for the company averaged at 14.2% for the last five years, and its P/E ratio stood at 27.5x, against a industry P/E of 6.6x.

Seamec has minimal debt on its books. Its debt-to-equity ratio in financial year 2022 stands at 0.1x.

Seamec Financial Snapshot

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (Rs m)	2,134	3,433	4,140	2,958	3,956
Growth (%)		60.9%	20.6%	-28.6%	33.7%
Operating Profit (Rs m)	332	1,120	1,691	1,295	1,298
Operating Profit Margin (%)	17.2%	35.7%	44%	50.4%	37.1%
Net Profit (Rs m)	10	819	1,332	988	837
Net Profit Margin (%)	0.5%	26.1%	34.7%	38.5%	23.9%
Long Term Debt (Rs m)	0	379	504	354	717
Debt-to-Equity Ratio (x)	0	0.1	0.1	0.1	0.1

Source: Equitymaster

Going forward, long-term contracts with its clients will drive revenue in the medium term, and diversification into the EPC business will help maintain its margins.

To know more about Seamec, checkout its factsheet and latest quarterly results.

Should you invest in companies with high capex?

Tracking a company's capex gives us an idea about its growth prospects and the management's outlook on its growth.

A high capex indicates that the company is positive about its growth.

However, you must also look at the demand for the company's products and services, how the capex is funded and its past performance.

If the company funds its entire capex through a huge debt, it is clearly a red flag.

Apart from this, do not forget to check the fundamentals and valuations of the company before considering it for investment.

A fundamentally strong company promises long-term growth.

Since you are interested in high capex stocks, checkout top 5 capex stocks, top 5 infrastructure stocks, and smallcap stocks with aggressive capex plans.

Happy Investing!

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...