4 Indian Companies Investing Heavily in R&D to Trigger Growth

To adopt to new technologies, companies are redefining strategies and allocating more towards Research and Development (R&D). (Representational image: AFP)
To adopt to new technologies, companies are redefining strategies and allocating more towards Research and Development (R&D). (Representational image: AFP)

Summary

  • R&D is essential for all businesses, regardless of the industry they’re in

The Covid-19 pandemic has made companies aware of at least one thing by now - adopting new technology is a must to focus on faster deliveries, reduced costs, and better user experience.

While several companies are enthusiastic about embracing new technology, some react to it differently. Just like how Charlie Munger has a contrarian view on cryptos.

To adopt to new technologies, companies are redefining strategies and allocating more towards Research and Development (R&D).

While pharma companies top the list when it comes to R&D spends, there are a few Indian companies which are making tremendous improvements to keep up with the pace.

Back in November 2021, we wrote about the 3 Indian pharma companies which are investing heavily towards R&D. In today’s article, we take a look at few other companies which are spending a significant amount of their revenues towards R&D.

These companies are winning the digital transformation battle and getting lots of things right.

#1 Tata Elxsi

Tata Elxsi is among the world’s leading providers of design and technology services across industries including auto, media, communications, and healthcare.

From Artificial Intelligence (AI), Internet of Things (IoT), big data analytics, cloud, mobility, virtual reality, driverless cars, electric vehicles (EVs), to semiconductors – it’s riding megatrends of many new-age technologies.

The Tata group company is quick enough to identify emerging technology and offers all round play on all of them.

Its major verticals have huge growth opportunities. Tata Elxsi, being a specialist vendor for top OEMs and Tier-I suppliers, enjoys significant tailwinds once it starts catering to a large addressable market.

The EV opportunity is massive for Tata Elxsi. It’s not just what goes inside the car but other things too including electronics, packaging, AI, data analytics. All of which make EVs successful.

As the company offers opportunities on new-age technologies, the post pandemic scenario has made this opportunity bigger. As Tata Elxsi focuses on high-growth sectors and emerging technology areas, its growth story remains intact.

This can be seen from its stock price performance. Even as the company is trading at expensive valuations, investors are betting big on the company’s future.

Have a look at the chart below which shows the company’s performance over the past five years.

Data Source: Ace Equity
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Data Source: Ace Equity

A huge chunk of gains have come in the past one year as the pandemic made IT companies stronger.

The stellar run is due to the company’s financials over the past few years.

Data Source: Ace Equity
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Data Source: Ace Equity

With its strong financials, a debt-free balance sheet, robust cash balance which is crucial in the fast-changing technology landscape, and support from Tata group, Tata Elxsi is set to create fortunes in the coming decade.

For the year ending March 2021, Tata Elxsi has spent 390 m in research & development (R&D) which accounts for 2.1% of its turnover.

Data Source: Ace Equity
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Data Source: Ace Equity

#2 Hindustan Aeronautics 

Next on the list we have a monopoly stock from the defence space.

Hindustan Aeronautics (HAL) is the largest defence PSU and holds 100% dominance in aerospace and defence manufacturing.

The company is a dominant supplier of aircrafts, helicopters, engines, avionics and accessories as well as main provider of maintenance, repair and overhaul services to the Indian defence forces.

It faces limited competition from the private sector due to the high capital intensity and long gestation period for developing manufacturing capabilities in the sector.

For the year ended March 2021, HAL has incurred massive R&D expenses to the tune of 16,874 m. This accounts for around 12.4% of its turnover.

As defence products require high level skills and ample research, HAL has been increasing its R&D expenses over the years.

Data Source: Ace Equity
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Data Source: Ace Equity

After years of R&D, the company won a big order in February 2021 which reversed its declining order book. At present, HAL has a robust order book of around 806.4 bn.

HAL has showcased its research, design, and development capabilities with successful development of military aircraft and helicopters such as the Ajeet, Marut, HPT-32, Kiran, and Advanced Light Helicopter. It also manufactures aircrafts under license such as the MiG-21, MiG-27, Avro, Jaguar, Dornier 228, Su-30 MKI and Hawk Mk 132 and helicopters such as the Cheetah and Chetak.

In 2020, HAL announced an ambitious project of developing a 10-12 tonne attack helicopter by 2027, touted to be India's answer to America's Apache helicopter, which is manufactured by Boeing.

To attract foreign players in buying military helicopters, HAL is also looking to set up logistics bases in Malaysia, Vietnam, Indonesia, and Sri Lanka.

With new orders and government’s Atmanirbhar Bharat program, the future looks bright for HAL.

#3 Lupin

What makes Lupin score better than other pharma companies?

While other pharma companies look at high number of product launches, Lupin focuses on few quality products where it is able to gain sufficient market size.

The company has consistently stayed ahead of the curve, be it in terms of acquisitions or R&D spends. Lupin's R&D spend has gone from 8% of net sales in fiscal 2013 to 11.5% in fiscal 2021.

Data Source: Ace Equity
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Data Source: Ace Equity

The company’s R&D spends are the highest among its peers at 13,478 m. The next best in line being Dr Reddy’s Lab at 13,104 m.

It has invested over US$1 bn in R&D over the last 5 years with investments in areas of biosimilars, complex generics, long acting complex injectables, inhalation, and specialty portfolio.

With the right product mix, Lupin has been able to execute its strategy seamlessly across various geographies.

Its successful foray into the Japanese market is one such example. Japanese markets have been one of the toughest markets to crack for Indian pharma companies due to the country's strict adherence to product quality and low acceptance of generics.

The company made over 4x on its investment and exited its Japanese subsidiary Kyowa for US$300 m in 2019.

Last month, Lupin forayed into diagnostics and established a 45,000-sq-ft national reference laboratory in Navi Mumbai, Maharashtra.

For around 15 years, Lupin has continued to be a global leader in the cephalosporins (third-generation antibiotics), anti-tuberculosis (anti-TB), and cardiovascular space. To date, it remains one of the largest suppliers of anti-TB products to the World Health Organization’s (WHO) global drug facility. It’s the only company pre-qualified by WHO globally for its anti-TB APIs as well as formulations.

#4 Tejas Networks

Telecom equipment maker Tejas Networks is a global R&D-driven company headquartered in India.

It designs, develops, and manufactures high-performance optical and data networking products that are used by telecom service providers, utilities, government, and defense networks.

For fiscal 2021, the company spent 23.1% of its total turnover amounting to 1,182 m on R&D. Ever since it got listed in 2017, the R&D expenses are on the rise.

Data Source: Ace Equity
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Data Source: Ace Equity

As Tejas Networks is among the earliest companies to have started making homegrown technology products in networking and optical backhaul, high level of R&D is crucial for high-speed broadband.

This is the nature of the industry. Tejas Networks needs to continuously invest in R&D to stay competitive and compete with global players, who have a more diversified portfolio.

Shares of the company are on a tear ever since Tata Sons acquire a controlling stake in Tejas to help it access 5G technology. This move will help Tejas take on the likes of Ericsson, Nokia, and Huawei in tapping capital investments.

Apart from Tata, Bharti Airtel has also chosen Tejas Networks to expand its optical network capacity in key metropolitan markets.

As the demand has increased for internet services due to pandemic and remote working scenarios across the world, Tejas Networks has emerged as a clear winner.

Data Source: Ace Equity
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Data Source: Ace Equity

Renowned investor Vijay Kedia has a 1.18% stake in the company as of September 2021.

In conclusion…

While it was evident that technology would take over, what’s different this time is the pace at which it is happening - and disrupting old ways of living and doing business. Disruptive technologies as an investment theme interests a lot of people.

But here’s the thing.

When it comes to investing in such stocks, it's important to remember that numbers aren't everything.

One should look out for companies that are focused on expanding businesses in India and overseas with excellent technical and business fundamentals, minimal debt, and are available at attractive valuations.

Similarly, an investor should weigh in the benefits versus cost if the company is investing in blockchain technology, artificial intelligence (AI), or other form of technology because the initial costs can be high.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com

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