Semiconductor stocks gain traction as budget boosts incentives, ISM 2.0 lifts sector outlook

Sector sentiment is also supported by expectations around ISM 2.0, which is likely to focus on backward integration, including fabrication-related activities.

• Government raises semiconductor incentives to Rs 40,000 crore in Budget 2024
• ISM 2.0 aims for deeper ecosystem, benefiting firms like Dixon and Kaynes
• Sector revenue growth expected post FY27; valuations remain elevated

Did our AI summary help?

Semiconductor and electronics manufacturing services (EMS) stocks were back in focus on February 1 after the government increased budgetary support for the sector, expanded incentives under the Production Linked Incentive (PLI) framework and signalled deeper ecosystem development through India Semiconductor Mission (ISM) 2.0.

The Centre has raised incentives for semiconductor components to Rs 40,000 crore from Rs 22,000 crore, a move expected to widen participation and accelerate domestic capacity creation across the value chain.

Earlier around 59 companies had applied under the semiconductor component ecosystem, but approvals were selective. “With the incentive now increased to Rs 40,000 crore, more companies are likely to be selected and receive PLI benefits,” Elara’s Harshit Kapadia said.

In the budget, the government has significantly stepped up its semiconductor spending in FY2026-27, allocating Rs 8,000 crore for the Modified Programme for Development of Semiconductors and Display Manufacturing Ecosystem, compared with Rs 4,300 crore in the previous year.

Funding for compound semiconductors, silicon photonics, sensors, and OSAT facilities has also been raised.

Budget meets expectations for semiconductor space

Market participants said the Budget delivered on expectations for the semiconductor sector, with targeted provisions for India’s semiconductor alliance and supply-chain development.

Mirae Asset Sharekhan’s Ankit Soni said the market was anticipating a policy announcement for semiconductors and the Budget addressed that expectation. “Provisions have been made for India’s Semiconductor Alliance with a clear focus on Indian IP creation and strengthening domestic supply chains,” he said.

According to Soni, incremental allocations of over Rs 1,000 crore linked to semiconductor incentives are likely to flow back into the sector through PLI-linked schemes. “Overall, this is a positive policy response for the semiconductor space, particularly for companies aligned with manufacturing and supply-chain development,” he said.

ISM 2.0 seen as a structural inflection point

Sector sentiment is also supported by expectations around ISM 2.0, which is likely to focus on backward integration, including fabrication-related activities.

Kapadia said ISM 1.0 was largely focused on OSAT, while ISM 2.0 would move towards backward integration and fabs. “This is a structurally important shift for the semiconductor ecosystem,” he said.

Companies such as Kaynes Technology, Syrma SGS, Dixon Technologies, Amber Enterprises, PG Electroplast and CG Power are expected to benefit from the expanded incentive pool. Kapadia said Dixon and Kaynes are seen as early beneficiaries under ISM 2.0, noting that Dixon stands out due to its plans to enter display fabrication, while Kaynes is also well positioned. He added that more companies could join as further announcements are made.

Listed players still in early execution phase

Experts cautioned that most listed semiconductor-linked companies remain in early stages, with limited operational revenues so far.

Soni said the sector is still in its initial phase, with no meaningful semiconductor revenue at present. “Revenue visibility is likely to improve only from FY27 onwards,” he said.

He added that domestic chip manufacturing is currently focused on relatively larger nodes, with advanced chips a longer-term goal. “Over time, the industry will move towards advanced nodes such as sub-10-nanometre chips, but that transition will take time,” he said.

EMS and PCB manufacturers also set to benefit

Beyond pure semiconductor plays, PCB manufacturers are expected to gain from the expanded incentive framework.

Soni said companies such as Amber Enterprises and Syrma SGS, which are investing in PCB manufacturing, stand to benefit significantly. He noted that Amber alone plans to invest Rs 5,000–6,000 crore over the next two to three years.

Under the electronic components manufacturing scheme, firms such as Dixon, Amber and Syrma SGS are expected to remain key beneficiaries as allocations increase.

Valuations elevated despite correction

Experts flagged valuations as a near-term concern, though some correction has already taken place.

Soni said valuations are still stretched but no longer at peak levels, pointing out that stocks such as Amber have corrected 40–45% from their highs, bringing forward valuations closer to 35–40 times earnings.

Kapadia echoed the need for selectivity, saying most EMS and semiconductor-linked stocks trade between 30x and 50x earnings, and investors may need to remain patient amid broader market volatility.

Long-term theme remains intact

Despite near-term execution challenges, experts remain constructive on the sector’s long-term prospects. Kapadia said meaningful semiconductor revenue contribution is likely only post FY27–FY28, but sustained policy support keeps semiconductors a strong theme for India.