Renewable Energy Stock's Focus in Semiconductor Manufacturing Sparks a BIG Rally

The "everything rally" aptly summarizes much of last year's above-average returns for most asset classes.

Stocks, oil, even gold posted double digit percentage gains. And of course, we can't forget about bitcoin.

Among emerging economies, Indian share markets are at the top of the list when it comes to reaching new milestones.

The optimism that we're seeing is spearheaded by government's intense focus towards emerging sectors such as data centres, green hydrogen, semiconductors, and so on...

Catching the buzz in recent trading sessions for its foray into the semiconductor sector is renewable energy player Linde India.

About Linde India

Linde India produces commodity gases. The company is a leading industrial gas company operating in India. It enjoys a rich history that dates back several decades.

It specializes in producing and supplying a wide range of industrial gases, including oxygen, nitrogen, hydrogen, and argon, along with various speciality gases.

This division accounts for 76% of the business. The balance 24% comes from project engineering division which comprises of designing, supply, installation and commissioning of tonnage air separation units.

The company serves diverse industries such as steel, automobiles, manufacturing, healthcare and chemicals.

Company Enters Discovery Phase for Semiconductors

In recent trading sessions, investors have lapped up whatever shares are available of this low free float company.

This positive sentiment comes after a brokerage report highlighted that high-purity gases are critical for semiconductor manufacturing and Linde India specializes in this segment.

Critical because -

• Gases like fluorine-based compounds are used in a process called etching, where they help remove material from the semiconductor wafer to create the desired patterns and structures.
• Then there are gases such as arsine, phosphine, and boron trifluoride are used to introduce impurities (dopants) into the semiconductor material. This process, known as doping, alters the electrical properties of the material, enabling it to conduct electricity in specific ways.

The use cases list goes on and on, but all depends on the purity of the gases. High-purity gases ensure that the chemical reactions and processes in semiconductor manufacturing occur as intended, leading to high-quality, reliable electronic devices.

With this discovery, Linde India can officially be tagged as the backdoor play to the semiconductor sector.

Just like these little known offbeat green hydrogen stocks...

Some Previous Challenges

To understand a little bit of the backstory, the MNC holding company of Linde India wants to run it like a private company with the freedom to move resources between their group companies.

Which explains the reason as to why the company was headed for a delisting not once but twice. Each of its attempt to delisting failed.

Also, reports also state that the holding company has previously been engaged in large-sized related party transactions with Linde India.

Not to mention the excessive remuneration it has paid at some instances as pointed out by its auditors.

The company's MD is currently under the SEBI lens while Linde India has approached the Bombay High Court with a petition to stop the investigation.

Linde India also operates in a cyclical industry, with customer catering to industries like steel, automobile, oil & gas etc.

What Next?

The good things is that the company has displayed exceptional executional skills in the past.

It has installed numerous large plants ahead of time and at lower than the budgeted costs.

Last month, the company acquired a 23.96% stake in Zenataris Renewable Energy for Rs 410.9 million. This acquisition is expected to help the company purchase renewable power under a captive mechanism, which will lead to a lower tariff and consequent cost savings.

Over the years, the company has displayed exceptional growth in its net profit.

In the past five years, net profit has spiked almost 20 times to Rs 5,381 million from Rs 257 million back in December 2018.

Financial Snapshot

Rs m, consolidated	18-Dec	19-Dec	20-Dec	21-Dec	FY23
Net Sales	21,917	17,618	14,711	21,120	31,355
Growth (%)	8%	-20%	-16%	44%	48%
Operating Profit	3,348	4,357	4,075	6,013	8,682
OPM (%)	15%	25%	28%	28%	28%
Net Profit	257	7,272	1,511	5,072	5,381
Net Margin (%)	1%	41%	10%	24%	17%
ROE (%)	1.3	40	6.8	20.5	18.4
ROCE (%)	5	44.5	10.3	28.3	21.3
Dividend (Rs)	1.5	10	3	13.5	12
Debt to Equity (x)	0.8	0.1	0	0	0

Data Source: Ace Equity

This growth was driven by demand for liquid and compressed medical oxygen during the pandemic, which was later replaced by growth in industrial gases.

The industrial gases market is expected to grow at 9%, (around 1.5 times of India's long-term industrial production growth of 6%) and Linde India is at the forefront of this.

Linde India has no debt on its books and has rewarded its shareholders with dividends.

Over the years, it has kept its financial position under control by repaying debt by raising money from its promoting companies and using money from asset sales.

The company does have a competitive advantage because of its technical capabilities. Its engineering group plays a critical role now more than ever as private countries pour billions of dollars to execute engineering projects.

As we mentioned above, hundreds of different gases are required throughout stages for semiconductor manufacturing. Its parent Linde Global derives 22% of revenues in 2023 from electronics segment with Intel, Samsung, TSMC - the three largest players in semiconductor industry - being its top customers.

Going forward, the strong management commentary and its expansion plan catering to the semiconductor industry will help improving margins.

How Linde India Share Price has Performed Recently

In the past 5 trading sessions, Linde India share price has rallied over 15%. This month so far, the stock is up 21%.

Shares of the company rallied 5% in early trade today and extended rally as the session progressed to surge up to 7%.

Linda India has a 52-week high of Rs 6,886 touched on 4 September 2023 and a 52-week low of Rs 3,664 touched on 16 March 2023.

In the past one year, Linde India share price has rallied 75%.

Here's a table comparing Linde India with its listed peers -

Comparative Analysis

Company	Linde India	Confidence Petroleum	GAIL	Petronet LNG	Refex Industries
ROE (%)	18.4	11.9	8.7	22.9	51.2
ROCE (%)	21.3	14.3	9.9	32.2	65.6
Latest EPS (Rs)	50.2	3.7	12.3	23.4	49.8
TTM PE (x)	120.8	23.2	13.8	11.3	12.4
TTM Price to book (x)	15.4	2.3	1.5	2.2	3.7
Dividend yield (%)	0.2	0.1	2.9	3.8	0.3
Industry PE	19.7
Industry PB	2.1

Data Source: Ace Equity

Happy Investing!

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