Semiconductors, Ethanol and 5G: How These Megatrends are Shaping Up in India...

Last month, we wrote to you about the top Indian megatrends and how they are shaping up. We covered hot trends such as electric vehicles, renewable energy, and drones in the first edition.

Taking this up a notch, today we'll discuss three more megatrends - semiconductors, ethanol, and 5G.

There's a lot happening or has happened in recent months with regards to each of these.

Let's discuss each of them in detail.

#1 Semiconductors - A structural megatrend in the making

Earlier, countries across the globe were excessively dependent on China for semiconductor needs. The industry does not have many players and the big ones - Taiwan, South Korea and the US, have a big advantage.

But the situation is slowly changing as companies are adopting a China plus one strategy.

Semiconductors became popular as chip shortage in automobiles, among other electronics, created a demand-supply mismatch.

Later, China-Taiwan tensions, and the supply chain blockages owing to the Russia-Ukraine conflict, forced countries to make a renewed push towards the industry.

As most emerging technologies have high dependence on semiconductors, it's a fact that the opportunity presented is huge for companies increasing their semiconductor capacity.

A mobile phone or a consumer appliance or even a vehicle, as the pace of innovation increases, the use of semiconductors will also increase.

So, what is the Indian government doing to make sure India is future ready and prepared? A lot of things.

Last year, the government announced a US$ 10 bn production-linked incentive (PLI) scheme to encourage semiconductor and display manufacturing in the country. India is expecting to attract a total investment of at least US$ 25 bn as a result of this scheme.

Recently, the government approved changes to the scheme for the development of a semiconductor and display manufacturing ecosystem in the country. It was announced that 50% fiscal support for all nodes will be provided, which was earlier 30% or 40% for some nodes.

So far, the government has received proposals from five companies to set up electronic chip and display manufacturing plants.

Mining major Vedanta was the one who really kicked interest in the semiconductor space and signed an MoU to set up a Rs 1,540 bn semiconductor plant in Gujarat.

That's not all. Vedanta needs two such plants to meet the global demand of semiconductors. Hence after setting up a plant in Gujarat, Vedanta is also looking into setting up another plant. For this, it has received interesting plans from Andhra Pradesh and Maharashtra.

There are other companies too which have kickstarted their initial plans to set up fab units. In a latest, it's reported that India and the US will join hands to address supply chain challenges of semiconductors where US will help India boost its semiconductor manufacturing capacity.

However, challenges galore. Here's an interesting one as per a report by The Economic Times:

Even if one large semiconductor fabrication unit becomes operational soon, India will need at least 40 of those by 2030. If it can attract smaller units, the country may need 80-90 such fabrication units just to meet domestic consumption targets.

While the higher import bill is a worry, the government is also wary of geopolitical tensions, which it perceives as both a threat as well as an opportunity for India.

To conclude, the chip crisis has brought an unforeseen opportunity for India.

The ambitions of Indian manufacturers are no longer limited to designing and outsourcing chip making to Taiwan.

They desire to take a big tech leap. This is the right thing to do if India is to position itself firmly in the global supply chain.

#2 Ethanol - India's new green push

For years, India's sugar industry struggled due to production problems. We're not talking about low production but excess production.

Thanks to the surplus sugarcane production, India has been producing an excess quantity of sugar for more than 10 years.

But the situation is different now, all thanks to Ethanol. With the help of decent exports and ethanol, the industry is at last handling the problem. During 2021-22, the ministry said that mills/distilleries earned revenue of about Rs 180 bn from sale of ethanol.

The government has been encouraging sugar mills to divert sugar to ethanol and export surplus sugar so that mills can pay farmers on time.

Initially, India set an ambitious target of blending 20% of petrol with ethanol by 2025. Due to this, sugar companies are betting big on expanding the ethanol production capacity within the next three years. In fact, the recent article we covered on companies with aggressive capex plans features an ethanol stock.

In 2021-22, for the ethanol supply year (December to November), India has achieved a blending of over 10% till September 2022. To achieve 20% blending by 2025, the country needs 10.2-11 bn liters of ethanol.

In August this year, Prime Minister Narendra Modi launched the first 2G ethanol plant built by Indian Oil Corporation (IOC) at an estimated cost of Rs 9 bn.

Other oil marketing companies are also hoping to produce ethanol from bio-residue and agri-waste from mega projects. HPCL is expected to set up four 2G ethanol plants, IOC and BPCL will set up three plants each, and MRPL and Numaligarh Refinery in Assam will set up one each.

So, it appears the ethanol offtake is going to be huge, and also going to be a recurring source of revenues for sugar companies for a long time to come.

For more insights on ethanol, check out the video where Rahul Shah explains how to pick the best ethanol stocks in India.

#3 5G - Ushering in an era of high-speed internet

Smartphones which support 5G network are selling like hot cakes these days. 5G in India is starting to take shape as operators plan to roll out the next generation technology.

The technology is set to revolutionise network speed and capacity, becoming the de facto standard in mobile communications across the world. A major benefit here is cost. These days, data is so affordable that you get 1 GB of data for as little as Rs 10, which earlier used to cost around Rs 300.

Prime minister Narendra Modi recently highlighted an Indian spends 14 GB data in a month on average. In 2014, this would cost Rs 4,200 per month, and now it costs around Rs 125 to Rs 150.

The sheer size of Indian market is lucrative for any business but 5G holds out a special opportunity because India has a special position. India is the third largest market to deploy 5G infrastructure after US and China.

Last year in February, the government launched a product linked incentive (PLI) scheme for telecom sector. The telecom department laid out a financial plan of Rs 122 bn for the sector over five years.

The scheme was expected to boost telecom equipment manufacturing. India is already starting to see interest from global counterparts. In October this year, the government approved 31 proposals with an investment of Rs 33.5 bn over the next four and a half years.

The telecom department recently extended the PLI scheme by one year and amended the scheme to raise the incentive by 1%.

In August this year, India held the 5G spectrum auctions which recorded a huge bid of Rs 1.5 tn. The government will receive the payments for the spectrums in instalments.

On 1 October 2022, prime minister Narendra Modi officially launched 5G services at the India Mobile Congress (IMC).

Bharti Airtel rolled out 5G services in 8 cities on 1 October this year. It will cover all urban areas by December 2023 and will cover the whole of India by December 2024.

Meanwhile, Jio said that it will roll out the most affordable 5G services across India by December 2023.

Last week, finance minister Nirmala Sitharaman said India has launched its indigenously developed 5G infrastructure and is ready to share it with other countries.

Moreover, the government recently approved Rs 260 bn to install 25,000 mobile towers over 500 days. With this project the government aims to do to telecom, what it did to banking with Jandhan.

It will take some time for 5G technology to reach masses, but it will surely change the way we live and work today.

In conclusion

We believe these trends will become mainstream over time as adoption increases. Investors finding the right opportunity in these megatrends will create massive wealth for themselves.

You just need to keep an eye on the top companies involved in this space which also offer comfort on financials and valuations.

If stocks involved in these megatrends are trading at attractive valuations, they could be potential multibagger stocks.

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...