India to replicate its success in autos to electronics. Which stocks capture this growth story?

A Jefferies report points out some of the select electronics manufacturing companies one should look out for.

India is strategically expanding from the electronics industry to the semiconductor sector, aiming to replicate its success in automobiles, according to a recent report from Jefferies. This move is driven by the increasing importance of chips, which have become the new oil. India presents itself as a compelling China+1 option, bolstered by rising domestic demand and significant incentives. The country has already secured the second position in mobile manufacturing globally, and Apple is ramping up its exports.

Ambitious target

Dixon Technologies, Syrma, Kaynes Technology, and Avalon Technologies are some of the select electronics manufacturing companies to look out for, as per the elaborate Jefferies report. The key financials of the same are discussed below briefly.

Key financials for select Indian electronics manufacturing companies

The government of India is actively encouraging the establishment of chip and display fabrication facilities, along with testing capabilities, supplementing the Production-Linked Incentive (PLI) scheme. It has set an ambitious target of achieving $300 billion in electronics production by the fiscal year 2026, three times the amount in FY23.

Electronics and semiconductors are not only critical for a nation's economic progress but also for its national security. India's demand for electronics is surging, driven by increasing incomes and digital adoption. In FY23, net electronic imports amounted to $54 billion, constituting 21 percent of the trade deficit, second only to oil (43 percent). Despite this, India's per capita electronics consumption remains a quarter of the global average, offering significant room for growth.

The report further said, “Electronics, and semiconductors as its building blocks, have become critical not only for the economic progress of a country but also its national security. Global electronics industry sales stood at an estimated $2.6 trillion in 2022, i.e. nearly 3 percent of global GDP. Global semiconductor sales have almost doubled over the last 10 years to approximately $0.6 trillion in 2022. Global chip production has crossed 1.1 trillion units, i.e. about 140 chips per person on earth.”

Role of the Government of India

According to the report, “The government announced the broad-based PLI program in 2019 allocating nearly $25 bn across 13 sectors to enhance India's manufacturing capabilities and exports. Electronics is a key focus with nearly $10 bn allocated in incentives across mobile phones and components along with IT hardware, laptop, tablet, PC and servers, etc., and white goods such as air conditioners and LED lights, and telecom hardware.”

The Indian government has recognised the importance of electronics and has embarked on a path to promote domestic manufacturing. The target of $300 billion in electronics production by FY26 includes a goal of $120 billion in exports. While these targets may seem ambitious, prudent policies have already propelled India in the right direction, with electronics production and exports increasing three to fourfold over the past seven years. However, there is still a need to focus on increasing value addition, as the country heavily relies on imported components.

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To accelerate growth in the semiconductor industry, the Indian government has launched a program worth approximately $10 billion. This program provides incentives covering around 50 percent of the project cost for chip and display fabrication, as well as testing facilities. Some states are offering additional incentives of approximately 20 percent, bringing the total benefits to around 70 percent.

Furthermore, the government is providing subsidised land, water, and power. These incentives complement the $10 billion allocated to the electronics and related sectors under the PLI scheme.

India as an attractive investment destination

India's attractive investment opportunities have caught the attention of global electronics firms, who are adopting a China+1 strategy due to rising geopolitical uncertainty. India currently accounts for 5-7 percent of Apple's global production, and the government expects this share to increase to 25 percent gradually.

Major companies such as Foxconn, Pegatron, Samsung, and Dixon are expanding their footprint in India, and others like Cisco plan to establish new plants. A joint venture between Vedanta Group and Foxconn has made progress in establishing chip and display fabs. Additionally, Tata Group, HCL Group, and Syrma have shown interest in testing and packaging facilities, according to the report.

India possesses key ingredients for success

“India's electronics demand has grown at a rapid 11 percent CAGR over the last seven years to nearly $117 bn, led by rising disposable incomes, accelerating digital adoption and the government's digitisation push,” said the report. However, the country’s per-capita electronics consumption in India is still a fourth of the global average, providing enough headroom for growth, it added

While the journey to establish a robust electronics and semiconductor ecosystem is a long-term endeavor, India possesses key ingredients for success. These include rising demand, low manufacturing costs, substantial fiscal support, and strategic goodwill with Western nations. However, to ensure sustained growth, there is a need to strengthen supply chains and forge strong technology partnerships.

“India's success story in attracting global auto companies serves as a testament to its ability to overcome initial challenges. Today, India stands as the fourth-largest auto producer globally, operating in a market dominated by early entrants and domestic original equipment manufacturers. Establishing a thriving electronics and semiconductor ecosystem follows a similar trajectory, and India is undoubtedly on the right path.”