Investment Strategy: Growing big

Mid-cap companies embarked on growth through acquisitions as well as expansionsin the March 2011 quarter

 Investment in existing and new businesses is critical to growth and creation ofshareholder wealth. This means taking greater risks on a continuous basis and gettingrewarded for the risks taken. Funds or capital invested is a good measure of the quantumof risk undertaken by an organisation. The quest of mid-cap companies for growth reflectsin the notes to accounts that are published along with the financial results declared forthe period ended 31 March 2011.

The notes to accounts are a critical source of information for investors. First, theyprovide reliable information. Second, the off-the-track information is otherwise notavailable through other sources. The problem of getting information is particularlyrelevant for mid- and small-cap companies. Midcaps are those companies with marketcapitalisation between Rs 500 crore to Rs 10,000 crore.
   

Midcaps pursue growth opportunities in diverse ways. These companies also followinorganic ways to tap business opportunities.

A2Z Maintenance & Engineering Servicesacquired 100% equity stake in three companies and a controlling equity stake in anothertwo companies in the fiscal ended March 2011 (FY 2011). Even companies are not averse tooverseas acquisitions. Atul bought 50% equity stake in M. Dohmen SA, Switzerland, whichhas a turnaround of euro 56 million in January 2011. Similarly Ballarpur Industriespurchased 100% stake in Premier Tisues India, making it a wholly-owned subsidiary. GodrejProperties acquired 100% equity stake in Udhay-GK Realty Pvt Ltd for Rs 24.5 crore.

Among other ways, mid-cap firms mop up assets on slump-sale basis. Automotive Axlespurchased brake manufacturing facilities of Kalyani Global Engineering Pvt Ltd for Rs 14.5crore in January 2011.
   

Apart from financial investments, mid-cap companies have also disclosed regulatoryapprovals to explore new business opportunities. For example, ABG Shipyard receivedlicenses for design and construction of naval warship and naval support ship for the Dahejand Surat shipyards, both based in Gujarat. As per the company, it has delivered 16vessels since 2010-11, which is the highest by any yard.
   

A company announced revenue expenditure to capture greater market share. Abbott Indiacontinued with its efforts to expand field force. It increased advertisement and promotionefforts to increase its market share and build brand equity.

Companies have also provided updates on expansion plans through the notes to accounts.The implementation of Balkrishna Industries’s greenfield tyre plant at Bhuj, Gujarat,is progressing as per schedule. The company is expanding its capacity by 90,000 tonnes atan estimated capital outlay of Rs 1200 crore. The project is expected to be completed bythe second quarter of 2012-13.

Polyplex Corporation, Kesoram Industries, HEG and Jaypee Infratech have sharedinformation about the expected date of project completion. Companies have disclosed aboutproject ramp-up and stabilisation of new facilities. JSL Stainless’s Orissa phase IIproject is expected to be stabilised in 2011-12. JK Lakshmi Cement, which has commissionedseveral projects like power plant and kiln, expects full benefit of these projects to bevisible in terms of higher profitability in the current financial year.
   

In certain cases, capital investment proposed by companies is huge compared with theirbalance sheets. This indicates the willingness of entrepreneurs to take a higher risk andalso their business optimism. For instance, Bhansali Engineering Polymers has faced delaysin expansion plans. However, the delay proved a blessing in disguise as market conditionswere challenging. Thus, its installed capacities could have remained grosslyunderutilised. With market conditions turning favourable, the firm has revived itsexpansion plans and its board approved substantial increase in the manufacturing capacityof acrylonitrile butadiene styrene and styrene acrylonitrile to 1,25,000 tonnes by March2013 from 51,000 tonnes at a capital cost of Rs 300 crore.

Providing financial support to subsidiaries is another way to achieve business growth.Chambal Fertilisers & Chemicals has invested Rs 44.8 crore in its wholly-ownedsubsidiary, CFCL Overseas. It also pumped in Rs 3.5 crore in the equity capital of itswholly-owned subsidiary, Chambal Infrastructure Ventures. Similarly, CholamandalamInvestment & Finance Company has made additional equity investment of Rs 5 crore inits subsidiary, Cholamandalam Factoring.
   

Investment in subsidiaries could be significant. Great Eastern Shipping Company hasmade additional investments in its subsidiary, Greatship (India), in the form of Rs318.2-crore equity and Rs 181.8-crore cumulative convertible redeemable preference shares.Total investment in Greatship’s equity shares amounts to Rs 1170.2 crore and in thecumulative convertible redeemable preference shares Rs 445.8 crore. Greatship is intoshipping and offshore.
   

Everest Kanto Cylinder has formed a wholly-owned subsidiary, EKC Industries (Thailand)Company, in Thailand to expand its business operations globally. Thailand is promotingnatural gas vehicles in a big way and this could be a business opportunity for thecompany.

Following is the company-wise information extracted from the notes to accounts for theperiod ended 31 March 2011. The information should be treated as pointers and investorscould have to search for and extract further details to draw meaningful conclusions.

A2Z Maintenance & Engineering Services acquired 100% stake in Chavan RishiInternational, Mansi Bijlee, Rice Mills Pvt Ltd and Mirage Bijlee Pvt Ltd; 90% stake inMadhya Bijlee Pvt Ltd; and 51% stake in Star Transformers Pvt Ltd.

ABG Shipyard delivered 16 vessels since 2010-11 — the highest delivery by anyyard. It received licences for design and construction of naval warship and naval supportship for the Surat and Dahej shipyards, which have opened the door for new opportunities.

Abbott India continues to make significant strategic investments to expand itsfield force to improve market coverage. The company also continues to increase advertisingand promotion efforts to capture market share and increase brand equity, and patient andcustomer awareness. These initiatives are impacting the near term profitability.

In view of the commencement of commercial operations of the free trade warehousing zoneat Panvel near Mumbai in 2010-11, financial results of Arshiya International forthe quarter and year end March 2011 are not comparable.

As a brownfield expansion, Asahi India Glass has commissioned production oflaminated windshields at its existing plant at Taloja near Mumbai.
  Atul acquired in January 2011 50% equity shares of M. Dohmen SA, Switzerland, asynthetic dyes company providing integrated solutions especially for automotive andpolyamide and wool applications, with a turnover of around euro 56 million.
  Automotive Axles purchased in January 2011 brake manufacturing facilities ofKalyani Global Engineering Pvt Ltd at Mysore in Karnataka for Rs 1456.6 lakh including Rs2.2 crore towards building, plant and machinery. Sales included Rs 51.9 crore related tobreak business and, hence, not comparable with the previous year.
  Implementation of Balkrishna Industries’s greenfield tyre plant at Bhuj inGujarat is progressing as per schedule.
  Ballarpur Industries acquired 100% stake in Premier Tisues India, making it awholly-owned subsidiary. Consolidated results for the quarter ended March 2011 includedfinancial results of Premier Tisues for the period 9 March 11 to 31 March 2011.
  Bhansali Engineering Polymers’s board approved the proposal to enhanceoverall manufacturing capacity of acrylonitrile butadiene styrene and styreneacrylonitrile from 51,000 tonnes per annum (tpa) to 1,25,000 tpa by March 2013 at its AbuRoad in Rajasthan and Satnoor units at Chhindwara in Madhya Pradesh at a cost of Rs 300crore.
  Bhushan Steel commissioned its hot striped mills and allied plants at Orrisa in theMarch 2011quarter.
  Binani Cement’s various projects including cement expansion in India, China,and a new project in Mauritius are progressing by and large as per the schedule.
  In 2010-11, Biocon SA entered into a strategic agreement with Pfizer, Ireland,for worldwide commercialisation of biosimilar insulin products. Biocon SA will beresponsible for the clinical development and supply of these biosimilar insulin products.
  Birla Corporation’s second unit of waste heat recovery system of 7.5 MW wascommissioned at one of its plants at Sahna in Madhya Pradesh in Feburary 2011.
   

BOC India commissioned a new 70- tonne per day (tpd) plant at Taloja in the March2011 quarter.
   

 Centrum Capital invested US$ 3.25 lakh in Commonwealth Centrum Advisors, a 50:50joint venture (JV) between the company and Commonwealth Finance Corporation. The companyhas converted its 50% JV, CerrtrumDirect, into a wholly-owned subsidiary by acquiring thebalance 50% stake of its JV partner Future Capital Holdings for Rs 100 crore. It paid Rs65 crone in cash and balance of Rs 715 crore in the form of fresh equity shares of thecompany.

 Chambal Fertilisers & Chemicals invested Rs 44.8 crore in its wholly-ownedsubsidiary, CFCL Overseas, in 2010-11. Further, the company invested Rs 3.5 crore in theequity capital of its wholly-owned subsidiary, Chambal Infrastructure Ventures.
   

Cholamandalam Investment & Finance Company made additional equity investment ofRs 5 crore in its subsidiary, Cholamandalam Factoring, in the March 2011 quarter.
   

Core Projects & Technologies: Core Education & Consulting Solutions (UK),the UK-based subsidiary of Core Projects & Technologies, acquired 100% stake in ITMMark Education, UK, in May 2011

  DB Corp’s printing facilities at some locations in Jharkhand and Jammu &Kashmir commenced commercial operations in 2010-11. The results for the year includedexpenses charged to the profit and loss account. These were incurred as one-timepre-launch activities in Jharkhand and Jammu & Kashmir. Further, the company alsoincurred expenses on one-time pre-launch activities for its proposed launch in Maharashtrain the March 2011 quarter. These have been charged to the P&L account. Through itssubsidiary Delta Hospitality and Leisure Pvt Ltd, Delta Corp acquired a majority stake inMarvel Resorts Pvt Ltd.

Dewan Housing Finance Corporation promoted DHFL Holdings Pvt Ltd as 100% subsidiaryto act as a special purpose vehicle for acquiring and holding 67.56% of equity of DeutschePostbank Home Finance by investing Rs 735.5 crore in 2010-11. A company-led consortiumacquired 100% equity share capital of Deutsche Postbank Home Finance from BHW Holding AG,Germany, under a share purchase agreement. The company acquired the stake through DHFLHoldings Pvt Ltd.

Divis Laboratories commissioned a part of the deep space network special economiczone (SEZ) unit and commenced trial runs in May 2011.

   

Universal Learn Today Pvt Ltd, an India Today group company and promoters of the VasantValley Schools (VVS), and Educomp Infrastructure and School Management. A subsidiary of EducompSolutions, entered into an agreement with the aim of jointly facilitating independenttrusts to set up 30 VVSs across the country. Educomp Solutions also acquired a majoritystake in Gate Forum Educational Services Pvt Ltd to support aggressive growth plans insupplemental education market. It formed a JV with Zeebo Inc, USA, to launch firstwireless educational platform for children in the country.
   

The 2.2-tpa integrated steel plant and ductile iron pipe plant of ElectrosteelSteels is under construction in Jharkhand. A part of the plant, commissioned inSeptember 2010, was temporarily shut down for synchronisation with other units and hassince restarted from March 2011. Accordingly, proportionate expenditure related to theproject under construction has been accounted as ‘Project developmentexpenditure’ pending capitalisation.

  Essar Ports acquired 151,418 DWT capsize bulk carrier in the March 2011 quarter. Itentered into a memorandum of agreement to acquire a 1,52,065-DWT capsize bulk carrier,which is expected to be delivered by end June 2011. Essar Bulk Termnal Paradip became asubsidiary on 31 March 2011.
  As a part of its global expansion plans, Everest Kanto Cylinder formed awholly-owned subsidiary, EKC Industries (Thailand) Company, in Thailand in October 2010.The subsidiary will cater to the needs of the Thailand market since Thailand is promotingnatural gas vehicles in a big way. To consolidate and promote synergy among similarfacilities and effective utilisation of manufacturing facilities, it was consideredprudent to shift the entire activities of the Aurangabad plant in Maharashtra to a largerunit located at Gandhidham in Gujarat.
  Escorts Heart Institute and Research Centre, a subsidiary of Fortis Healthcare,acquired 100% stake in Fortis Asia Medicare Pte in January 2011. International Hospitalacquired an additional stake of 13.18% in Fortis Malar Hospitals through the open market,thus, increasing its stake to 63.20%.
  To further leverage its R&D and manufacturing competency, Fresenius KabiOncology is in the process of entering into contract R&D and manufacturingagreement with Fresenius Kabi, Germany, and its affiliates for future products withoutaffecting the existing intellectual property rights and products.
  Gammon India incorporated subsidiaries, Franco Tosi Turbines Pvt Ltd, Franco TosiHydro Pvt Ltd, and SAE Transmission India.
  Godrej Properties acquired 100% of equity stake of Udhay-GK Realty Pvt Ltd fromHDFC Property Fund for Rs 24.5 crore.
  Great Eastern Shipping Company made further investments in its subsidiary,Greatship (India), by subscribing to equity shares at a premium of Rs 170 per shareaggregating to Rs 318.2 crore, and 22.50% cumulative convertible redeemable preferenceshares at a premium of Rs 20 per share aggregating to Rs 181.8 crore. Total investment inGreatship’s equity shares till date amounts to Rs 1170.2 crore and in the cumulativeconvertible redeemable preference shares Rs 445.8 crore, aggregating to Rs. 1616.1 crore.
  GTL was awarded the power distribution franchise contract by Maharashtra StateElectricity Distribution Company for re-distribution of power to its customers for thedesignated Aurangabad distribution franchise area. The commercial operations of the powerdistribution franchise will commence from the next quarter.
  Gujarat State Fertilizers & Chemicals commissioned 33-MW windpower projects inthe March 2011 quarter, taking the total wind power projects commissioned to 51 MW in theyear.
  HEG’s capital expenditure programme to increase its graphite electrodescapacity from the current 66,000 tpa to 80,000 tpa is progressing as per schedule and isexpected to be completed in the second quarter of 2011-12.
  In January 2011, the board of Indosolar decided to go for expansion by 200 MWinstead of 100 MW and to utilise the IPO proceeds up to Rs 200 crore for expansion. Thecompany has spent Rs 123.1 crore on the expansion project. It has also opened a letter ofcredit of euro 32.4 million for import of equipment. The current quarter and year figuresare not comparable as the company was in the start-up phase. The company commenced itscommercial production in 2009 and significantly increased its capacity by setting upadditional line for manufacture of solar cells in March 2010.
  Jaiprakash Power Ventures’s Baspa-II hydro electric project in HimachalPradesh recorded the highest levels of power generation in the year ended 31 March 2011since commencement of commercial operations. This resulted in additional supply of 98.4million units to the Himachal Pradesh State Electricity Board without any charges. Thecompany and its subsidiaries and associates are implementing 13,020 MW (thermal 8,100 MWand hydro 4,920 MW) of additional power generation capacity for which it has raisedresources by securitisation of receivables of its operating projects and also otherfinancial assistance. This has resulted in additional interest cost, impactingprofitability. The 1000-MW Karcham Wangtoo Hydro Electric Project, being implemented byJaypee Karcham Hydro Corporation, a subsidiary, achieved significant milestone when itsyncronised its first unit of 250 MW with the grid ahead of schedule on 13 May 2011.

Jaypee Infratech’s Yamuna expressway project is progressing satisfactorily.The commercial operation date is now estimated as 1 July 2012 due to delay in handing overof land. The expenditure incurred on the projects aggregated to Rs 9854 crore up to 31March 2011.

JBF Global Pte Ltd, Singapore, a subsidiary of JBF Industries, became awholly-owned subsidiary in 2010-11,. JBF Industries has made additional investment of Rs191.4 crore.

A sum of US$ 2.25 lakh was invested in Jindal Resources (Mozambique), a subsidiary of JindalPoly Films, and Rs 21.6 crore was invested in Jindal Poly Films Investment, awholly-owned subsidiary. Additional investment of Rs 57.1 crore was made in equity sharesof Jindal India Powertech Ltd.

  JK Lakshmi Cement’s 12-MW green power plant, 18-MW thermal power plant, andkiln I augmentation project were commissioned in the quarter ended March 2011. The fullbenefit of these projects on profitability would accrue from 2011-12.
  JSL Stainless’s Orissa phase II project, with steel-making capacity of0.8 million tpa, was installed at JSL Stainless in Jajpur. The company has also startedrolling of stainless steel products from the project. The ramp-up and stabilisation offinishing facilities under the project is expected in 2011-12.
  jyothy Laboratories acquired 14.9 % stake in Henkel India for Rs 60.7 crore.Subsequent to the year end, it entered in to a share purchase agreement with Henkel AG& Co for acquiring 50.97% equity, 100 % preference share capital, and discharge ofloans and guarantees given by Henkel AG for Rs 616.5 crore. Jyothy Fabricare Services, asubsidiary, acquired 100% stake in Diamond Fabcare Pvt Ltd for Rs 16.5 crore from 1 April2011 and 100% stake in Akash Cleaners Pvt Ltd for Rs 19.3 crore from 1 April 2011. Also,the laundry business of Expert Drycleaners was acquired for Rs 45 lakh from 17 January2011.
  Kajaria Ceramics’s commercial production of six million square metres(MSM) per annum polished and glazed vitrified tile at the existing location in Gailpur,Rajastjan, started in March 2011. Conversion program of part of the ceramic floor tilecapacity at the Sikandrabad plant in Uttar Pradesh into vitrified (2.6 msm) was completedand commercial production started in March 2011. It acquired 51% stake in Soriso CeramicPvt Ltd in the quarter.
  The timeframe for completion of expansion of 80-tpd capacity Kesoram Industries’scar radial project at Balasore in Odisha and 85-tpd capacity of the truck radial tyreproject in Uttrakhand is being extended to the second half of 2011-12.
  Mahindra & Mahindra Financial Services made an initial investment of Rs 22.8crore (US$ 5.02 million) in Mahindra Finance, USA LLC, a joint venture company formedjointly with De Lage Landen Financial Services Inc in the US, in the March 2011 quarter.
   

Mandhana Industries’s shirting division (phase 2) operations startedcommercial production in March 2011.
  Max India made additional equity investment of Rs 37.7 crore in its subsidiary, MaxBupa Health Insurance Company. It successfully commissioned a 22,000-tpa plant 

tomanufacture biaxially-oriented polypropylene films in the speciality plastic productssegment. The company advanced Rs 25 crore against investment in compulsorily convertiblepreference shares to its subsidiary, Max Healthcare Institute. These preference sharescarry a guaranteed internal rate of return of 12% from the date of investment till thedate of conversion.

  NIIT made further long-term investment in its subsidiaries — Rs 1.5 crore inNIIT Institute of Process Excellence and Rs 70 lakh in Neo Multimedia — in 2010-11.
  OnMobile Global set up a SEZ unit, which became operational in the quarter ended 30June 2010.
   

Work on pending equipments and facilities of Pipavav Shipyard has substantiallybeen completed. One goliath crane was commissioned. The other goliath crane is in theprocess of trial commissioning.
   

Pantaloon Retail entered into a JV for mega food park with Capital Foods and SatvaDevelopers Pvt Ltd in the March 2011 quarter.

  Polyplex Corporation’s two projects are under implementation: conversion ofthe first Pet film line into specialties/thick film line at Khatima and an additionalmetallizer at Bazpur, both in Uttarakhand. Its subsidiaries are implementing fourprojects: thin Pet film line and metallizer, Pet chips plant, thick Pet film line and Petchips plant, and silicon coating line. The silicon coating line is expected to commenceproduction in the second quarter of 2011-12.
  Punj Lloyd’s wholly-owned step down subsidiary, Punj Lloyd Oil and Gas(Malaysia) Sdn Bhd, Malaysia, incorporated a new wholly-owned company, Punj Lloyd Sdn,Bhd, Malaysia. PL Engineering, a subsidiary, acquired 100% stake in Punj Lloyd EngineeringPte Ltd, Singapore, in October 2010. A stepdown subsidiary, Sembawang Engineers andConstructors Pte Ltd, disposed of two of its subsidiaries, Sembawang (Hebei) BuildingMaterials Co, China, and Construction Technology Pte Ltd, Singapore. The company hasincreased its stake in Dayim Punj Lloyd Construction Contracting Company from 49% to 51%.A wholly-owned subsidiary, Punj Lloyd Pte Ltd, Singapore, acquired 100% subsidiarycompany, Punj Lloyd Infrastructure Pte Ltd. A wholly-owned subsidiary, Punj Lloyd Pte Ltd,Singapore, incorporated two wholly-owned subsidiaries, PLI Ventures, Mauritius, and PunjLloyd, Kenya. A stepdown subsidiary, Sembawang Engineers and Constructors Pte Ltd,incorporated wholly-owned subsidiaries, Sembawang Tianjin Pte Ltd., Singapore, Sembawang(Tianjin) Investment Management Co China, and Sembawang Mining (Kekal) Re Ltd.
 Reliance Broadcast Network acquired the business of Cinestar Advertising Pvt Ltd inJanuary 2011 and entered into a joint venture with CBS Studio Inc in December 2010.
 Subsequent to the March 2011 quarter, Religare Enterprises acquired throughReligare Global Asset Management Inc, USA, a wholly-owned subsidiary, 55% stake inLandmark Partners LLC, USA, and 40% stake in Investment Professionals, Mauritius. It madeinvestments in equity and or preference shares of various subsidiaries and joint ventures.Religare Health Insurance Company, a subsidiary, issued 10% of expanded equity sharecapital, 5% each to Union Bank, of India and Corporation Bank, respectively. Accordingly,the company’s holding has reduced to 90%.

source: capitalmarket