What is the company’s growth plan?
One must understand the opportunity size and look at the company’s growth plan to tap into the opportunity.
If a company is expected to get more orders that will mean that the company needs to produce. In case the company does not have sufficient capacity to produce they need to set it up. This means that the company must set up new capacity or a factory. Usually setting up a new capacity takes a while. The company will be informing shareholders about these plans via annual and quarterly updates. Be on the lookout for companies that are expanding capacity. Also, be aware that capacity increase on its own is not the only thing because often companies commit to capacity expansion based on an aggressive future. If the plans don’t materialize, expansion is a wasted activity.
New product launches / Business diversification
A company must regularly launch products and create a new market. This is important for both consumer-facing companies as well as business-to-business companies. A consumer-facing company says an FMCG must regularly launch a product to capitalize on the brand name example Nestlé launching products across different categories. A business-to-business company must take feedback from its clients and work on those products. This will help them not only to grow the revenue line but also ensure that the customers stick to them.
There is a limit to how much the market can expand within a certain geography. This is the reason that a company must go beyond its local geography. This may include moving to a different location for example DMart, which was primarily dominant in Maharashtra is now moving elsewhere. Similarly, an auto manufacturing company say Suprajit engineering caters to a lot of clients in Europe.
Mergers & Acquisitions
Product development or moving into new geography is a long process. A lot of companies to reduce the gestation period may acquire a product that is already consumed by people. Or it may acquire a company in a different geography. This sounds simple however mergers and acquisition history is not very positive. If you look at companies that have done a lot of M&A, the value creation is quite limited. There may be an example of companies like Motherson Sumi that has created immense wealth by doing mergers and acquisition activities.
Funding for the growth
Merely knowing a company’s growth plan is not enough. It is equally important to know it will be funded.
There are 3 forms of funding –
1. Self-funded i.e., through internal accruals
2. Externally funded i.e., through debt and/or equity
3. Mix both (1) and (2).
Growth through internal accruals is usually a recommended approach. If a company is regularly diluting its equity for growth, it’s not a positive sign.