Government push for self-sufficiency and rising demand keeps market upbeat on Semiconductors

In the Interim Budget, the sector had been allocated around Rs  7,000 crore, which experts say may se some changes in the upcoming budget, but it may not make a major impact.

"This (interim budget) figure is significant as it is indicative of the possible allocation in the upcoming budget,” he said, but added that “it may not be a game-changer for the larger players,” says Sagar Lele, founder at Rupeeting.

Most budget allocations, he says, aim to subsidize capital for new players and may not impact larger players as such, "These funds might benefit smaller, non-listed players focusing on manufacturing, but not on design, leading to a partial sector play," he added.

Eswara Rao Nandam, CEO and Founder, Polymatech Electronics said that a multipronged approach was necessary to ensure global competitiveness. Polymatech Electronics designs chips for different purposes such as mobiles, TVs and wearables.

“Strategic investments in infrastructure development are paramount, with a particular focus on uninterrupted electricity supply, readily available water resources, efficient transportation networks, and a skilled workforce," he said.

Semiconductor mission

In the July 22 Economic Survey, it was highlighted that the Indian government has been placing a high priority on electronics hardware manufacturing as a part of both "Make in India" and "Digital India" initiatives. This includes schemes like the India Semiconductor Mission. “These schemes have been instrumental in driving growth in the country's electronics sector. As a result, the CAGR in the production of electronics goods from FY18 to FY23 was 16.19 percent, while the exports increased by 35.7 percent in the same period,” the survey noted.

In December 2021, the government launched the India Semiconductor Mission, announcing an Rs 76,000-crore chip incentive scheme, offering a 50 percent subsidy on capital expenditure for plant setup.

In the interim budget, an additional Rs 6,903 crore was announced.

Following this, in March 2024, three major projects received approval under the scheme: CG Power's proposed Rs 7,600-crore chip packaging facility in Gujarat's Sanand in partnership with Japan's Renesas Electronics; Tata Group's Rs 27,000-crore chip assembly plant in Morigaon, Assam; and Tata Electronics' Rs 91,000-crore plant in collaboration with Taiwan-based Powerchip in Dholera, Gujarat. Additionally, a Rs 275-crore packaging plant by US-based Micron Technology is under construction in Gujarat.

In March this year, IT Minister Ashwin Vaishnav had told Moneycontrol that the focus of the government will now be more on the semiconductor design ecosystem in the second version of the semiconductor (programme).

"The second version of semicon will basically focus on getting at least 10 chipsets which are full solutions and taking those solutions down the value chain of fab and ATMP," he said, adding that there will be a large focus on getting all the other 16,000 gases and chemicals needed in a fab. "Many of the companies have started setting up their plants now already but we have to how we scale up that to a larger level," he added.

Early days, say analysts

While the semiconductor industry presents significant growth opportunities, it is currently in a very nascent stage in India.

Vikas Gupta, smallcase Manager and CEO, Chief Investment Strategist, OmniScience Capital from Omniscience notes, "The global move towards a more redundant supply chain away from China is attracting international semiconductor companies to consider India as a possible base. The PLI schemes and the global supply chain restructuring provide solid grounds for growth for the semiconductor sector in India."

The headwinds for the sector, Gupta adds, are currently land acquisitions, access to power and water, roads and railways connectivity, raw material, import of advanced machinery, and approvals not coming in fast enough. "These pose significant challenges to manufacturers."

Krishna Appala, Senior Research Analyst, Capitalmind Research emphasizes the impact of the existing Rs 76,000-crore incentive, stating, "It would be beneficial to increase this because it has encouraged companies like CG Power, Tata, and Micron to set up facilities with capacities ranging from 5,000 to 7,000 kilowatts. If more incentives are provided or if this incentive continues, it would greatly benefit the semiconductor industry."

Valuations

Most analysts believe that the valuations for the sector are stretched, adding that currently most of the sector pure plays are unlisted.

Currently larger listed players include Tata Elxsi, BHEL, CG Power and Tata Tech.

Appala adds, "While valuations are high and may experience fluctuations, especially in the short term, they reflect expectations for growth over the next five years."

Lele notes that ultimately, "The sector's growth will depend heavily on execution. While there may be plans and announcements, tangible results in terms of production and revenue are still distant. The real value lies in not just manufacturing but also in design, testing, and an integrated approach. Without this full-chain integration, immediate investment in the sector may not be lucrative."

Lele advises caution regarding market reactions to announcements, "Announcements related to semiconductors might lead to positive stock reactions, but these are likely temporary. Major companies, like Tata collaborating with a Taiwanese firm, will take at least 150-300 days to set up capacity and start production. Smaller players will take even longer. Given this gestation period and the minimal immediate impact on revenue, market reactions to such news should be viewed cautiously."

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