Capex plans or capacity utilisation rates do provide signals about a company's growth momentum, but other parameters should also be looked at before making an investment decision, say experts
A nascent recovery in the capital expenditure cycle was likely set in motion during the financial year 2019, but the recent liquidity crisis and the subsequent hit to risk appetite created doubts about a recovery, CLSA has said in a note.
The note highlighted that the annualised rate of capital expenditure or gross fixed capital formation (GFCF) as a percentage of GDP improved 1.5ppt from Jun-17 to Dec-18. But, the appetite for capex seemed to have dimmed in 2019, with recent corporate pronouncements citing weak demand conditions.
The global investment bank highlighted 18 companies that had either completed or launched new capital expenditure plans. The common theme seemed to be that they were beneficiaries of consolidation/organisation/disruption and select others were profiting from secular trends.
For example, DLF has restarted office expansion as it benefits from consolidation and also high demand in the tech sector.
CLSA also talked about several consumer discretionary companies that benefitted from the shift to an organised market place undertaking capital expenditure. These include Astral Poly, Supreme Industries, and Asian Paints.
Companies that have given information about their capex plans in annual reports include ACC, Ambuja, Asian Paints, Astral Poly, Bharat Forge, Britannia Industries, DLF, Eicher Motors, Hero MotoCorp, ITC, JSW Steel, M&M and Havells India Ltd.
Some large private spenders who are seeing higher capex include cement
(UltraTech, ACC, Ambuja Cement, Ramco Cements) and steel companies (Tata Steel and JSW Steel) as a clean-up through corporate bankruptcies has led to lower competition and a rise in utilisation rates.
Should you buy?
So, should one buy these stocks? Well, capex plans or capacity utilisation rates do give an idea about the growth momentum, but they should not be seen in isolation.
“Definitely, companies where capex plans are under execution and/or are in immediate pipeline do deserve a look from investors in terms of future growth, as these suggest managements outlook on the company's growth; although not necessarily high-digit growth but at least directional movement for next few years,” Narendra Solanki, Head Fundamental Research (Investment Services) - AVP Equity Research, Anand Rathi Shares & Stock Brokers, told Moneycontrol.
Some experts say that the companies that had announced their plans, apart from auto firms, would either keep them on hold or not undertake capital expenditure.
“Auto companies like M&M, Eicher, and Hero MotoCorp that have announced capex will go ahead with it on account of the government’s initiatives on the electric vehicle front. Apart from auto companies, other companies like Ambuja, ACC, ITC, Britannia, should not be looked at, as their profitability is not rising due to a lack of demand for their products,” Foram Parekh, a fundamental analyst at Indiabulls Ventures Ltd, told Moneycontrol.
“Though the government has a long-term vision of developing infrastructure, simultaneously, the PMO has also advised NHAI to stop projects which is a cause of worry for the infrastructure segment, thereby affecting the cement companies.”
Parekh said the only company worth investing in was Asian Paints. For two quarters in a row, the impact of capex was reflecting in the company’s volume growth even during a consumption slowdown period, she said.
Other parameters to watch
Tracking a company’s capex plan provides some information about its growth prospects. But, one must also look at the demand for the products, the source of capex and the past performance.
“Investors should study the past performance of the company over five years to gauge management’s ability to perform during slowdowns,” said Parekh. Valuations should also be given utmost importance along with returns ratios such as ROE, ROCE, which give a 360-degree view of a company’s performance, she said.
Parekh added that the working capital cycle was vital too. It gives a fair idea of how short-term working capital is being managed, which, in turn, tells about the cash flow of a company.
For a 360-degree view, one could also add data points like policy rates, real interest rates, cost of funds for capital expenditure and land cost as a percent of total project cost, say experts.
“As we are moving closer to the global economy, the competitiveness is increasing with which companies must increase their productivity and value addition in their businesses. Currently, Indian businesses spend 0.7 percent of GDP as R&D while for the U.S it is 2.8% and China it is 2.1% of GDP,” said Solanki of Anand Rathi Shares & Stock Brokers.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.