Electronics Manufacturing Stocks May Dominate this Decade. Here are the Top Companies to Track Now...

Atra, Tatra, Sarvatra!

This is a popular adage in Sanskrit which means 'here, there, everywhere'. It aptly explains how we are completely surrounded by electronics nowadays. Electronics are embedded in our day-to-day lives.

The increasing need for comfort and luxury led to the invention of many electronics over the years. The growing popularity of electronics led to a steadily growing electronics manufacturing services (EMS) industry over the years.

However, the electronics industry hit a roadblock in the calendar year 2019 due to three primary reasons -

• a decline in global automotive sales and saturation of consumer electronic sales.
• supply chain restrictions due to heightened trade tensions between the US and China.
• pandemic induced lockdowns.

As things stand now, the industry is picking up pace once again.

The global EMS market is expected to grow at a compounded annual growth rate (CAGR) of 5.4% to reach US$ 1,145 billion (bn) (about Rs 94,264.3 bn) in the calendar year 2026.

Globally, the EMS market is well established, and most service providers have high maturity levels in component fabrication, system assembly and testing.

In the last few decades, the market has expanded to offer design and development services and after-sales services such as repair and remanufacture marketing, and product lifecycle management.

Recently, some have even started offering software solutions due to the increased penetration of digitization in the end markets they serve.

That is why the global EMS market is growing at an accelerated pace which presents upon India a very unique opportunity.

Why is the Indian electronics industry growing at a fast pace?

Well, it doesn't take much time to figure out the reason as demand for domestic electronics keeps increasing.

In April 2023, India overtook China to become the world's most populous country. A growing population base suggests increasing demand for electronics in India.

The domestic demand for consumer electronics is seeing significant growth and is expected to touch US$ 21.2 bn (about Rs 1,745.1 bn) by 2025.

Driven by a healthy demand, the domestic electronics industry is expected to reach US$ 300 bn (about Rs 24,694 bn) worth of electronics manufacturing and US$ 120 bn (about Rs 9,877 bn) in exports by the financial year 2026. This will be supported by a US$1 trillion (tn) digital economy by 2025.

Currently, India imports majority of the electronics to cater to the domestic demand.

Rising input costs due to high imports combined with the Modi government's push on 'Atmanirbhar India' led to the need of a sturdy domestic electronic manufacturing industry.

The global semiconductor chip shortage

Semiconductors are components needed for manufacturing cars, televisions, refrigerators, washing machines, personal computers, laptops, mobiles, etc.

These components are made from silicon and fit into microcircuits that power various electronic goods and components.

These little chips are so important that tens of thousands of workers must get lines that are a millionth of a meter, i.e. one micron wide, exactly right. Or else it won't work.

Taiwan accounts for more than 60% of all chips manufactured across the world. The China-Taiwan tensions coupled with pandemic led shutdowns in China led to an acute shortage of semiconductor chips in the auto industry and electronics industry.

These supply chain problems presented an interesting opportunity for the semiconductor rush in India.

The government of India acknowledged the growing need for a domestic semiconductor industry and launched various initiatives to boost the semiconductor industry in India.

Corporate giants like the Tata group dived head-first into the semiconductor industry. The Vedanta-Foxconn joint venture was also another big step towards establishing India's own Silicon Valley.

A growing semiconductor industry was the first stepping stone towards a growing electronics manufacturing industry.

Why India is a better alternative...

China leads the global EMS business with almost 46.7% market share. Its dominance in the global market is attributed to a blend of cost-effectiveness and technological leadership in electronics manufacturing.

However, after the pandemic, many global electronics manufacturers are contemplating on China plus one strategy and looking for alternate manufacturing locations for export business.

This is creating tremendous investment potential for emerging countries like Vietnam, India, and the Philippines, etc.

So electronics manufacturing has emerged as one of the fastest growing sectors, and making India a hub for sub-contract manufacturing.

India also benefitted from the manufacturing shifts that happened in Japan and Mexico.

Due to the presence of giant players like Sony and Toshiba in Japan, it is one of the most preferred choices for semiconductor manufacturing equipment. Japan also has a strong hold on the EMS industry.

However, recently the Japanese government placed more focus on aerospace development.

This has opened a window of opportunity for other Asian countries such as India, which have the bandwidth, competency, and skill to be an efficient sub-contractor for large firms.

Maquiladoras are factories in Mexico that have been crucial in helping firms in the US with their manufacturing needs.

However, Maquiladoras have hit a roadblock due to several challenges they faced, in recent years which makes India a better sub-contracting proposition.

So that's how India emerged to become a global alternative for the EMS market...

Easy availability of resources

Various factors such as the easy availability of raw materials, cheaper manufacturing costs, a skilled workforce, and robust export systems make India a well-reputed destination for manufacturers.

India is surrounded by rich and varied natural resources. This is a big plus point for electronics manufacturers. Development and innovation of raw materials and lower cost due to the easy availability of resources help India is eliminating any supply chain shortcomings.

Another big plus point for India is the availability of a huge labour force. India has the largest tech-savvy young workforce. This includes bringing to the table a host of competent resources, i.e., engineering skills, design proficiency, and cheaper labour costs.

Various initiatives undertaken by the government to boost electronics manufacturing

Indian government's long-term vision laid out the following points:

• Make in India for the world
• Make India the number one exporter and manufacturer of electronics
• Become a substantial player in the global value chain
• Build a comprehensive ecosystem of more than US$ 1 tn in the next decade for mobile phones, consumer electronics and IT hardware

Its short-term vision includes making electronics one of the top three export categories by 2025-26.

The government undertook the following initiatives to fulfil its long-term and short-term vision:

#1 National Policy on Electronics (2019)

The National Policy on Electronics 2019 (NPE 2019) was notified on 25 February 2019.

The vision of NPE 2019 is to position India as a global hub for electronics system design and manufacturing (ESDM) by encouraging and driving capabilities in the country for developing core components, including chipsets, and creating an enabling environment for the industry to compete globally.

Under the aegis of NPE 2019, the government launched various schemes to incentivise large investments in the electronics value chain and promote exports.

#2 Product-linked incentive scheme (2020)

The government had broadly divided electronics manufacturing into two different segments - largescale manufacturing and IT hardware.

It notified two different product-linked incentive (PLI) schemes for the electronics manufacturing market.

1. PLI for large-scale electronics manufacturing was notified on 1 April 2020. The scheme provides an incentive of 4% to 6% to eligible companies on incremental sales (over the base year) involved in mobile phone manufacturing and manufacturing of specified electronic components, including assembly, testing, marking and packaging (ATMP) units.
   
   Initially, for a span of five years, an outlay of Rs 409.5 billion (bn) was laid out for the scheme.
   
   However, later on, the total outlay was reduced to Rs 386 bn. One of the reasons for the reduced outlay was that Pegatron, also an Apple contract manufacturer, would be claiming incentives for only four years of the scheme tenure.
   
   The government is regularly clearing incentives to eligible companies. Reportedly in March 2023, the government cleared another tranche of financial incentives to the tune of Rs 7.7 bn under the scheme.
   
   Reports further stated that the financial incentives were worth Rs 6 bn to Wistron, followed by Rs 1.5 bn for Indian contract manufacturer Padget (Dixon Technologies).
   
   In the same tranche, it also cleared incentives for component makers AT&S (Rs 75.8 m), Shogini (Rs 30 m), and Alcon Electronics (Rs 24 m).
   
   Earlier it released incentives for another Apple contract manufacturer Foxconn, the world's largest.
   
   
2. PLI scheme for IT hardware was notified on 3 March 2021 to provide an incentive of 4% to 2%/1% on net incremental sales (over the base year) of goods manufactured in India and covered under the target segment, to eligible companies, for a period of four years.
   
   The Target Segment under PLI Scheme includes laptops, tablets, all-in-one PCs, and servers.

#3 Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS)

It was notified on 1 April 2020 to provide the financial incentive of 25% on capital expenditure for the identified list of electronic goods that comprise the downstream value chain of electronic products.

These are electronic components, semiconductor/display fabrication units, ATMP units, specialised sub-assemblies, and capital goods for their manufacture.

#4 Program for Development of Semiconductors and Display Manufacturing Ecosystem

To widen and deepen electronics manufacturing, the Union Cabinet on 15 December 2021, approved a comprehensive program with an outlay of Rs 760 bn for the development of semiconductors and display manufacturing ecosystem.

This programme was modified on 21 September 2022. The modified programme offers fiscal support of 50% of project cost uniformly for semiconductor fabs across the technology nodes as well as for compound semiconductors, packaging and other semiconductor facilities.

#5 Other initiatives

Apart from the above major schemes, the Indian government also undertook various small yet important initiatives.

• As per the extant Foreign Direct Investment (FDI) policy, FDI up to 100% under the automatic route is permitted for electronics manufacturing (except from countries sharing land borders with India), subject to applicable laws/ regulations, security, and other conditions.
• Electronics Manufacturing Clusters Scheme was notified on 22 October 2012 to provide support for the creation of world-class infrastructure along with common facilities and amenities for attracting investment.
• Notified capital goods for the manufacture of specified electronic goods are permitted for import at NIL basic customs duty.
• In budget 2022-23, The government removed the 2.75% basic customs duty on the import of camera lenses, along with the removal of duties on inputs to parts of connectors. Additionally, BCD on parts of open cell assembly for TV panels has been slashed from 5.5% previously to 2.75%.

All of these efforts clearly indicate the government's intent to boost electronics manufacturing in India.

Let's take a look at which companies stand to benefit the most from this megatrend.

The top electronics manufacturing companies in India

Large corporate houses, like Tata and Sons (via Tata Electronics), Reliance Industries (via Jio Phone), and Vedanta (via Vedanta - Foxconn joint venture) will be indirect beneficiaries of this megatrend.

The below-listed companies may also strongly benefit as they're dominating in their respective fields. Some of these companies are also big beneficiaries of the PLI scheme announced by the government.

The top Electronics Manufacturing (EMS) Companies in India

Name of the company	Closing price as on 01-June-2023	PE ratio	P/BV ratio
Polycab India	3,483.80	41	7.9
Havells India	1,331.80	77.6	12.6
Dixon Technologies	3,908.80	110.3	23
Symphony	849	36	6.5
Bajaj Electricals	1,156.90	56.3	7.3
Eureka Forbes	477.8	541.2	2.3
Orient Electric	240.6	67.5	8.8
Whirlpool India	1,433.70	98.4	5.9
Amber Enterprises India	2,691.00	147.7	4.4
Jay Jalaram Technologies	176.5	78.3	8.3

Data source: Equitymaster

India aims to be a global EMS hub but there are lot of operational and technical difficulties in becoming one.

Lack of proper infrastructure, bureaucracy, and tough competition from other countries, may dampen the bullish sentiment in the Indian EMS segment.

Hence, an investor should clearly acknowledge and evaluate all the pros and cons before making any investment decision.

Stay tuned to know more about the developments in the EMS segment. In the follow up article, we'll dig deeper into individual stocks one by one and lay out their growth plans for the EMS segment.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...