Capital Market looked at the business initiatives of companies in the quarter ended December 2018 and in the recent past. These covered projects concluded of late, being executed or on the drawing board. The exercise was undertaken to provide probable investment candidates. Filters can be added to arrive at stocks that suit investors' risk appetite and investment horizon.

The findings provided valuable insights. Many companies have gone for backward integration to improve profitability to ensure in-house supply of raw materials. Some have opted for value-added products or have climbed up the value chain. Modernization is another thrust area. To mitigate product concentration risk, companies have entered new segments. A pharmaceutical producer of bulk drugs has forayed into formulations or finished dosages. Several are looking at or establishing presence in new geographies to be closer to the select markets. Strengthening of marketing and distribution network is another area of focus of late.

Timelines for completion of projects along with capital outlays are important for companies working on multi-year projects Investors can periodically assess the performance by scrutinizing if there has been any time and cost overrun. Delays hurt operational and financial performances.

The Insolvency and Bankruptcy Code (IBC), 2016, presents a unique and probably once-in-a-life-time opportunity to companies aiming to expand to buy assets. The acquired capacities will need additional funding for various purposes such as up-gradation and working capital. Such incremental funding should be factored in by investors.

These companies are likely to issue equity to raise funds and also to moderate leverage to provide comfort to lenders and banks. One of the companies has raised funds through qualified institutional placement (QIP). The pricing of QIP is viewed as a medium- to long-term benchmark for the minority shareholders. Fresh issuance dilutes earnings of the existing shareholders. Thus, the quantum of shares offered should be taken into account. Some ramp up capacity in phases to avoid adding a significant burden on the balance sheet, profit-and-loss account and cash-flows.

Acquisitions generate high returns but come with high risks. Benefits of synergy take time to deliver the desired results. Worse, gains might not occur at all. Many companies opt for the organic or inorganic route only after taking a firm commitment from clients in the form of binding agreement. Such arrangements provide comfort to investors as there is certainty of incremental business.

Besides producing active pharmaceutical ingredients (APIs) for antiretroviral (ARV) and Hepatitis-C treatment, Laurus makes APIs for use in oncology and other therapeutic areas. The backward integration project to make key ARV APIs is going as per schedule and expected to improve the gross margins in the coming quarters. The recent foray into formulations is to scale up.

As much as Rs 428 crore has been spent in recent years to build the five-billion-tablet manufacturing capacity of finished dosage formulation (FDF). Capacity expansion of lamivudine, an ARV medication to prevent and treat HIV/AIDS, was completed in the December 2018 quarter. Now that a majority of the capital expenditure has already been incurred, the growth in the FDF and synthesis businesses is expected to improve the return ratios from the fiscal year ending March 2020 (FY2020).

JK Cement laid the foundation of a grinding unit of its first plant in Gujarat at Balasinor in February 2019. The 0.7-million-tonne per annum (mtpa), Rs 200-crore cement project will be spread over eight hectares. Once operational, the units will facilitate access to the Ahmedabad, Surat, Baroda and Rajkot markets.

The brown- and green-field capacity addition of 4.2 mtpa will cost Rs 1700 crore. Another grinding unit is expected to be set up at Aligarh in Uttar Pradesh with a capital outlay of Rs 250 crore. The remaining planned capital expenditure has been marked for capacity enhancement of the existing units in Rajasthan. The total capacity is expected to reach 15 mtpa in the next two years. The expansion will be funded through a mix of debt and equity.

Nearly Rs 500 crore was raised through a QIP in December 2018. Gross debt was Rs 2124 crore end December 2018 compared with Rs 2240 crore end FY 2018. However, net debt was much lower at Rs 1255 crore end December 2018 as against Rs 1678 crore end March 2018.

Supreme Industries is setting up two green-field projects. Of the two, operations at Giloth in Rajasthan are running smoothly. Construction and machinery installation work at the second site at Jadcherla in Telangana is going in full swing. Furniture and roto production is expected to go on stream before March 2019. Foam products are likely to come out in the first quarter of FY 2020. Also, capacities at 11 of the existing locations have been ramped up. All have gone into production, except the one at Khopoli in Maharashtra. Production of performance packaging film at Khopoli will begin in the first quarter of FY 2020.

The plastics product manufacturer expects to clock volume growth of more than 10% and value growth in excess of 15% in the current fiscal year. The product portfolio includes plastic piping system, packaging products, industrial products and consumer products.

Maharashtra Seamless paid Rs 477 crore to buy United Seamless Tubular Pvt Ltd through the corporate insolvency resolution process, under the IBC, 2016, approved by the Hyderabad Bench of the National Company Law Tribunal. United Seamless has capacity at Nalgonda in Telangana to manufacture 3.50 lakh tpa of hot roll seamless pipes.

Apart from inorganic growth, the existing capacity of seamless pipes is continuously being ramped up. A 3.50-lakh tpa plant at Nagothane in Maharashtra and a two-lakh tpa plant at Mangaon in Maharashtra are expected to reach full capacity by June 2019. One of the country's largest manufacturers of seamless pipes had Rs 1300-crore orders end December 2018 as against a turnover of Rs 2150 crore.

Shree Cement commissioned the clinker section of the three-mtpa integrated cement plant at Kodla in the Kalaburagi, erstwhile Gulbarga, district of Karnataka in December 2018. With the cement mill section of the plant getting completed in June 2018, the integrated cement plant at Kodla is fully commissioned. The two split grinding units under construction, one of three-mtpa capacity in the Cuttack district of Odisha and the other of 2.50-mtpa capacity in the Saraikela Kharaswan district of Jharkhand, are on track to be completed in FY 2020. Debt of the integrated cement and power player increased to Rs 3402.9 crore end March 2018 compared with Rs 1292.5 crore a year ago.

JK Paper acquired Telangana-based Sirpur Paper Mills, with paper capacity of 1,40 lakh tpa, in CY 2018. Production mainly consists of writing and printing paper. Expansion at the continuous passive motion unit in Gujarat, currently underway, will enhance the packaging board capacity by 1.50 lakh tpa. After the completion of the project in the next two years, the overall capacity is expected to reach 7.50 lakh tpa, thereby occupying the slot of the second largest paper producer in the country.

The domestic market leader in branded copier paper and among the top producers of coated paper and packaging boards in the country privately placed non-convertible debentures, with face value of Rs 1 lakh each, aggregating to Rs 335 crore, in the December 2018 quarter.

Biocon subsidiary Syngene International and Merck KGaA signed an agreement in the December 2018 quarter to extend their ongoing collaboration for three years till CY 2022. Both have been working jointly on various discovery research projects in the areas of protein technology, molecular biology, cell science, antibody discovery and antibody drug conjugates supporting both small and large molecules. Also, a new laboratory infrastructure was commissioned for Baxter Inc, one of the four dedicated center clients. The collaboration with Baxter was recently extended till CY 2024.

As much as Rs 438 crore was invested in the nine months ended December 2018 in ongoing capital expenditure programs. As a result, net debt touched Rs 7 crore end December 2018 compared with net cash of Rs 320 crore at the beginning of FY 2019. Reversal to cash surplus is likely by end of FY 2019 following receipt of customer advances that normally come in January.

Of the US$ 200-million investment plan for the US market, the contract research organization committed US$ 27 million, bringing the total to US$ 135 million in the nine months ended December 2018. Of this, US$ 80 million will be spent on expansion of facilities in Bangalore and US$ 55 million on the upcoming commercial API manufacturing facility at Mangalore, Karnataka, that is scheduled to become operational by March 2020.

Eicher Motors has planned capital expenditure up to Rs 800 crore in FY 2019 to be spent on phase-2 of the Vallam Vadagal plant in Tamil Nadu, construction of technology centre, development of new products and expanding Royal Enfield; portfolio for global markets. Production of the new twin motorcycles, Interceptor 650 and Continental GT 650, started in November 2018. The dealer network increased from 761 to 878 in the nine months ended December 2018. A new exclusive stores format has been introduced in India and international markets.

Vintage Stores were opened in Chennai in Tamil Nadu, Bangalore in Karnataka, in Delhi, in Mumbai in Maharashtra, at Patna in Bihar, at Kanpur in Uttar Pradesh and at Indore in Madhya Pradesh. The first-of-the-kind initiative in the two-wheeler industry is to market pre-owned, refurbished and restored motorcycles. The debt-free company's market share in the segment of 150cc and above declined to 25% in the nine months ended December 2018 compared with 26.5% in the corresponding period of the previous year.

VE Commercial Vehicles (VECV), a joint venture (JV) with Volvo to manufacture trucks and buses, has multiple capital expenditure projects, with an outlay of Rs 500 crore, for FY 2019. VECV has proposed a new truck plant, with a capacity of 40,000 and scalable to one lakh units, at Bhopal in Madhya Pradesh. The JV has acquired 150 acres of land as part of a special fiscal package sanctioned by the state government. The plant, with capital outlay of around Rs 400 crore, is expected to start commercial production within 18-24 months.

APL Apollo Tubes has been busy pursuing organic and inorganic growth opportunities. Up-gradation and modernization of galvanized tubes facilities affected volumes of the segment in Q3 and in the first nine months of FY 2019. However, modernization of the galvanizing plant is nearing completion. The contribution of the galvanized tubes segment is expected to go up in the coming quarters.

The manufacturer of mild steel black pipes, galvanized tubes, pro-galvanized tubes, structural electric resistance welded steel tubes and hollow sections, through wholly owned subsidiary Shri Lakshmi Metal Udyog (SLMUL), bought in the December 2018 quarter a 40.4% equity stake in Apollo Tricoat, at a price of Rs 120 per share for Rs 150 crore. The acquisition was valued 2x Apollo Tricoat's assets. The expected payback period is around two years. The buy will expand the product portfolio in the high-margin coated pipe segment and help to exploit synergies between the businesses of SLMUL and Apollo Tricoat. The open offer by SLMUL to the minority shareholders of Apollo Tricoat was completed in February 2019. Through the open offer and open market purchases, SLMUL acquired additional equity shares representing 11.14% of the capital of Apollo Tricoat.

Welspun India launched copper- and charcoal-infused products as part of its innovation portfolio in the December 2018 quarter. The capital expenditure plan for the flooring project is on track. Capital investment of Rs 563.4 crore was undertaken in the nine months ended December 2018. It included Rs 372.1 crore on flooring solutions comprising carpet tiles, broadloom carpets and area rugs and artificial grass. The capital outlay on the facility in Telangana is expected to be around Rs 900 crore for the entire FY 2019. The aim is to become a one-stop flooring solutions provider for the domestic and international markets. The unit, with expected investment of Rs 1100 crore, will have capacity of 27 million square meters per annum. Commercial production is expected to start during in the December 2019 quarter.

E-commerce in key developed markets constitutes 10-15% of the revenues of the home textiles segment and is expected to reach around 25% by FY 2023. With a distribution network in over 50 countries and manufacturing facilities in India, the largest exporter of home textile products from India is a supplier to 17 of the Top 30 global retailers. The objective is to emerge debt-free by FY 2022. Net debt increased to Rs 3139.2 crore as of December 2018 from Rs 3026.9 crore as of March 2018.

Granules India has guided for capital expenditure of Rs 140 crore for FY 2020 and Rs 40 to 50 crore in the subsequent years for maintenance. Granules Pharmaceutical Inc, a 100% subsidiary with manufacturing facility at Chantilly, US, is focused on advanced formulation development and is likely to spend US$ 10 million on capacity addition.

The Hyderabad-based pharmaceutical producer of APIs, formulation intermediates and finished dosages has projected around 20% compounded annual growth rate (CAGR) of sales and 25% CAGR of profit over the next three years. The anticipated ramp-up will be driven by scaling up the US business, commercializing key APIs in the oncology segment and optimum capacity utilization. About 10 abbreviated new drug applications are likely to be filed in the current fiscal. Four approvals are expected from the US Food and Drug Administration by June 2019 for marketing the drugs in the US market.

The focus of Britannia Industries continues on expanding the distribution reach in urban and rural markets and increasing presence and share in weak territories. The rural preferred dealer network increased to 17,900 end December 2018 from 14,400 end March 2018. The popular brands of one of the largest biscuit makers in the country include Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold. The product portfolio comprises biscuits, bread, cakes, rusk, and dairy products such as cheese, beverages, milk and yoghurt.

As part of the strategy to increase the share of premium products, Whole Wheat Vita MarieGold biscuits and Good Cashew Almond cookies were launched in the December 2018 quarter. To bridge the portfolio gaps in the cake business, Swiss rolls and layer cakes were introduced.

The priority in the coming quarters will be on plugging the vacuum in the bakery business and looking at adjacent macro snacking business opportunities. Additional cake and biscuit lines have been commissioned at Ranjangaon in Maharashtra. The green-field unit in Nepal, expected to be commissioned by March 2019, will boost local presence in the country.

Bajaj Finance's total customer franchise increased to 32.57 million end December 2018 from 24.81 million a year ago. The geographical presence increased to 1,736 locations end December 2018 from 1,332 end March 2018. The active distribution network point-of-sales reached 84,700 from 64,300. The network consists of urban and rural consumer durable stores, digital product stores, lifestyle retail stores, EMI card retail spend stores, Bajaj Auto dealers and sub dealers, rural authorized sales and services centers and direct sales agents.

Wholly owned subsidiary Bajaj Financial Securities is set to start business by offering a full product suite from dematerialization and broking services to loan against securities (Las). The thrust is on growing the profit pool of the Las business. The credit card business in partnership with RBL Bank is over 24 months old and has recorded good volume growth, revolve metrics and portfolio credit quality. The business had 8.45 lakh cards in force (Cif) end December 2018 and is well positioned to cross the 10-lakh Cif milestone by April 2019.

JSW Steel is one of the largest integrated steel producers in the country, with an installed capacity of 18 mtpa. There are plans to scale up in the domestic and oversea markets. Multiple capital expenditure projects were completed in the December 2018 quarter. These consisted of the commissioning battery A (0.75 mtpa) of coke oven plant at Dolvi in Maharashtra in November 2018 and trial runs of the battery B (0.75 mtpa); completion and beginning of trial runs of the tin plate line, with a capacity of 0.25 mtpa, at Tarapur in Maharashtra; and undertaking trial runs of the initial phases of the pipe conveyor project at Vijayanagar in Karnataka to transport iron ore.

All the other key projects such as doubling the crude steel capacity to 10 mtpa at Dolvi, revamping and up-grading capacity of BF-3 and expanding capacity of the customer relation complex-1 at Vijayanagar, modernization-cum-capacity enhancement of the downstream facilities of JSW Steel Coated Products, a subsidiary, and initiation of cost-savings are progressing as per schedule. The project to augment the direct reduction iron capacity to 10.66 mtpa from 10 mtpa at Dolvi is under review pending receipt of requisite environmental clearances.

Tata Steel is among the top global steel producers, with an annual crude steel capacity of 33 mtpa. Bhushan Steel, now renamed as Tata Steel BSL, was bought in CY 2018. Consolidated India crude steel production capacity has reached 18.6 mtpa. The Kalinganagar phase II expansion project in Odisha is on schedule. Work has started on the cold-rolling complex to enrich the product-mix and optimize cash-flows. Also, the foundation work for setting up a pickling line and a tandem cold mill is at an advanced stage. The acquisition process of Usha Martin's steel business, carried out through subsidiary Tata Sponge Iron, is expected to close by March 2019.

Efforts are on with Thyssenkrupp AG of Germany to secure the required regulatory approvals for the proposed equal JV in Europe. The European Commission's phase II merger control review is underway. The partners have announced the executive leadership of the planned JV.

Definitive agreements have been signed to divest 70% equity stake in the South-East Asia operating companies for US$ 327 million. The funds will be used for deleveraging. The transaction is expected to be completed in the first quarter of FY 2020. Thereafter, consolidated gross debt will come down by around US$ 500 million. The remaining 26.62% equity share capital of TRL Krosaki, an Odisha-based company, has been divested for Rs 305 crore. The proceeds will be used for deleveraging. The deal is as per the stated strategic priorities of divestment of non-core assets. Consolidated debt was at Rs 92147 crore, with a debt-to-equity ratio of 1.94 times, end March 2018.

Grasim Industries acquired the chlor-alkali business of KPR Industries (India) by way of a slump-sale for cash consideration of Rs 253 crore in February 2019. The transaction, funded through internal accruals, is subject to regulatory approvals. KPR will utilize the funds for full and final settlement with the lenders. The acquired business consists of the under-constructed 200-tonne-per-day chlor-alkali project at Balabhadrapuram in Andhra Pradesh. Assets and identified liabilities associated with the chlor-alkali business will be taken over. Once operational, the project along with other ongoing expansion plans will enhance the caustic soda capacity to 1.22 mtpa.

The brown-field capacity expansion of 219 kilo tpa of the viscose plant at Vilayat in Gujarat is going as per schedule. The basic and detailed engineering work stands completed. Long lead items have been ordered. Construction of the specialty fiber line at Kharach in Gujarat is over and is scheduled for commissioning in the March 2019 quarter.

Overall, standalone capital expenditure of Rs 7627 crore is under execution to increase capacities of the viscose and chemical businesses, mainly caustic soda. The expenditure will be incurred over FY 2019 to FY 2021. The plans will be majorly funded by internal accruals. Cash profit of Rs 2700 crore was generated in the nine months ended December 2018.

Vardhman Textiles is running at almost full capacity and is executing multiple capacity expansion plans. The aim is to increase the share of revenues from fabrics. The fabric capacity is being ramped up to 180 million meters from 140 million meter. The capacity is expected to go into production from Q2 of FY 2020. Also, one lakh spindles are to be added. Of these, 30,000 are expected to become operational in March 2019. The remaining will start by June 2019. The aggregate capital expenditure of Rs 1400 crore will be spread over the next two years. Capital expenditure of Rs 300 crore was incurred in FY 2018. The share of standalone revenues from fabrics is expected to reach 40% of the overall revenues in FY 2020 as against 35% in FY 2018.

Ramco Cements incurred capital expenditure of Rs 767 crore on capacity expansion at various locations in the nine months ended December 2018. Eight manufacturing units including integrated cement plants and grinding units have aggregate cement production capacity of 17 mtpa.

The producer of ready-mix concrete and dry mortar products and operator of one of the largest wind farms in the country plans to expand capacity to 22.75 mtpa. Of this, two mtpa of capacity will come up in the east (West Bengal and Odisha) and 4.25 mtpa in the south (Andhra Pradesh). The total capital expenditure for these projects is expected to be around Rs 3430 crore. The planned capacities are expected to go commercial in FY 2021 and will largely be financed through internal accruals. The debt-to-equity ratio remained moderate at 0.32 times, with total debt of Rs 1120.6 crore, end FY 2018.

Apollo Hospitals Enterprise's operating beds increased to 7,214 end December 2018 compared with 7,111 beds a year ago. The country's largest hospital chain is establishing a 150-bed proton therapy centre in Chennai, with a capital outlay of Rs 300 crore. The centre is likely to start in FY 2020. Also, there are plans to open a 400-bed hospital at Byculla in Mumbai in FY 2023. The project cost is yet to be finalized.

As many as 308 stores were added
and 57 closed, with a net addition of 251 stores, taking the total count to 3,272,
end December 2018.

The Navi Mumbai hospital turned profitable at the operating profit level in the December 2018 quarter. The operating profit margins of matured hospitals are expected to touch 23% in the next few quarters from 21.7% at present. The aim is to aggressively reduce debt in FY 2020 and FY 2021. The debt-to-equity ratio was 1 times end March 2018.

Indian Hotels Company, South Asia's largest hospitality provider, managed to retain the iconic Taj Mahal in New Delhi, renewed a long-term agreement for the landmark hotel Taj Lake Palace at Udaipur in Rajasthan and won the bid for The Connaught in Lutyens' Delhi. Taj Lake Palace plans to add 80 rooms. Agreements have been reached with 20 hotels, providing a room inventory of over 2,500, in key cities such as London, Dubai, Makkah, New Delhi and Kathmandu. The three hotels added in the December 2018 quarter include Taj in Lucknow, Uttar Pradesh, Vivanta at Bhubaneswar in Odisha and Ginger at Nashik in Maharashtra.

Heritage hotel Taj Connemara reopened in Chennai after undergoing extensive renovation and redesign. Renovations and up-gradations have been completed at hotels located in Goa, in Kolkata in West Bengal, at Hyderabad in Telangana, at Varanasi and Lucknow in Uttar Pradesh and in London in the UK. Economy or budget hotel brand Ginger underwent a major repositioning. The brand's new look in the lean luxe segment was unveiled at Ginger Panjim, Goa. The second hotel at Udaipur, Taj Aravali Resort & Spa, opened in the December 2018 quarter.

A contract to manage two hotels in Goa was signed in the quarter, adding 506 rooms to the pipeline. The 207-key Cidade de Goa will form part of the brand SeleQtions portfolio in April 2019. The additional 299 rooms under construction in the same complex under the Taj brand will open in the coming quarters.

Conclusion

Funding-mix is crucial for expansion plans. Too much of debt can backfire over the medium to long term, particularly if the balance sheet is already leveraged. Many times, companies talk about net debt, that is, total debt minus liquid investments, in an attempt to draw rosy picture. Cash is required to run day-to-day operations of an enterprise and might not be available for repayment of debt.

In the initial years, capital expenditure tends to hamper the return ratios such as return on equity and return on capital employed. Also, fresh capacities tend to hurt the operating and net profit margins till the time capacity utilization reaches higher levels. The break-even point envisaged at the planning stage could remain elusive for a prolonged period, putting burden on balance sheets of companies.

Expansion carries risk that come with navigating in unchartered territories. The outcome might not be as envisaged. Apart from long-term commitment of funds, working capital requirement can increase. A company might be saddled with excess capacity if competition too has been enhancing capability. Glut in output in the market place is likely to put the margins under pressure. Changes in technology and tastes are other overhangs.

Risk-averse investors should carefully analyze companies with aggressive debt-sponsored expansion plans or those whose quantum of investment is in excess of net worth or the balance-sheet size. Industry dynamics and outlook need to be closely studied apart from assessment of past track record of timely execution of capital expenditure projects.

Businesses should gallop on a continual basis to generate shareholder wealth. However, scaling up should be based on realistic assumptions. Companies should be explored for investment keeping these ground rules in mind.