5 Semiconductor Stocks to Watch Out for Potential Multibagger Returns

India is slowly but surely building up its semiconductor industry.

The country has been working on its 'Make-in-India' initiative for some time now. This will help to produce products locally and gain a competitive advantage.

Just a few years back, we didn't have many options when it came to semiconductors. Even the most tech savvy people were using motherboards with chipsets made by Intel or AMD, safe in the confidence that their computer could be easily repaired.

But now, we are seeing small and medium-sized companies innovating and introducing semiconductor parts that offer unprecedented power for the price.

And this is a big opportunity for not just Indian investors, but also ambitious startups, and even large corporations that want to be at the forefront of this boom.

In the next 20 years, massive demand for application processors, memory chips and connectivity solutions will make India a global semiconductor hub.

Leading Indian electronics companies are getting exposed to this nascent but promising market. The government is going to start approving proposals to set up manufacturing plants in India by the end of 2022.

Let's take a look at five semiconductor related stocks, which can potentially offer multibagger returns.

Mind you these are not recommendations. These are merely few semiconductor related stocks that could be considered for a watchlist.

#1 Vedanta

You probably thought of this stock when you clicked on this article.

Vedanta, in September 2022, announced one of the biggest ever corporate investment. The company took the first step towards its next phase of growth in the semiconductor business.

By forming a joint venture with Taiwanese electronics manufacturing giant Foxconn, Vedanta is all set to produce semiconductor chips as early as 2025.

Vedanta recently signed a Memorandum of Understanding (MoU) with the Gujarat government to invest Rs 1,540 bn and set up a semiconductor plant.

It's also planning to put up a second semiconductor and display unit plant to strengthen its diversification drive.

Initially, the company will manufacture 12-inch wafers using the 28-nanometer process. As production ramps up, the metal-to-mining giant is aiming to produce around 40,000 wafers per month, primarily for the Indian market.

Now, when the company announced the JV, its share price rallied over 15% in the next two days. But the rally was somewhat short lived. The company clarified its semiconductor project will be undertaken by Volcan Investments - the holding company of Vedanta.

Under the JV, Foxconn will act as a technical partner. Funding will come from Vedanta. If Vedanta is able to maintain its debt under control after funding for the semiconductor plant, it could be smooth sailing for the company.

Some questions were raised on how Vedanta will be able to fund the semiconductor business as its London based parent Vedanta Resources is indebted. To this, S&P Global Ratings said the semiconductor related investment will be done outside Vedanta Resources so as to not hurt its liquidity.

Having cost efficiency in key businesses has resulted in healthy profitability for Vedanta over the years.

The company's revenue has grown at a CAGR of 8% over the past five years while profits have grown 12% during the same period.

In 2022, the company's aluminum business stood out as a result of improved linkages for coal sourcing, reduced coal prices, and lower cost of imported alumina.

A big risk factor for Vedanta is the cyclicality of its business. The company is present in various segments including zinc, lead, silver, aluminium, power, steel, among others with a strong market footing.

#2 Tata Elxsi

Next on the list is Tata Elxsi.

The Tata group company has an established presence in the designing and development of systems and software for varied end-user industries, including semiconductors.

The products designed by the company have become an integral part of the numerous devices we use daily. These include home appliances, mobile phones, cars and vehicles, medical equipment, and more.

In the covid rebound, Tata Elxsi saw a strong recovery as its share price jumped from Rs 730 in March 2020 to touch a record high of Rs 10,760 in August 2022.

This was possible as the company increased its R&D spends in high growth segments.

The stock was already a compelling story as it offered an opportunity to ride the wave in artificial intelligence and Internet of Things (IoT). The post pandemic scenario just made the opportunity much bigger.

In financial year 2022, the company recorded highest annual growth in its history. Full year operating revenues grew 35.3%. Net profit crossed Rs 5 bn for the first time.

The company's revenues and profits have more than doubled in the past five years. They have grown at a 5-year CAGR of 17% and 25%, respectively.

The return ratios have also been strong, averaging 30% in the past five years.

Apart from this, the company has no debt on its books, allowing it to reward its shareholders generously. The five-year average dividend yield stands at 1.4%.

So, it shouldn't come as a surprise that Tata Elxsi has the potential to deliver multibagger returns given its focus on semiconductors among other new age technologies. More so now, as Tata Elxsi share price has seen a sharp fall in recent days.

While many may call Tata Elxsi a much-hyped tech stock trading at expensive valuations, the stock has a lot of steam left for decades.

#3 Dixon Technologies

Third on the list we have Dixon Technologies.

Semiconductors are important components of electronic products. Dixon Technologies is a diversified electronics company with operations in verticals such as consumer electronics, lighting, home appliance, closed-circuit television cameras (CCTVs), mobile phones, etc.

So it's easy to see how the stock is involved in the semiconductor ecosystem. What makes the company stand out is its dominant market position. Over the years, the company has increased its manufacturing capacities to become one of the largest players in India.

Going forward, the government's PLI scheme for the electronics segment will make the investment case for Dixon Technologies. The government has laid out Rs 386.5 bn under this scheme.

In September 2022, the government approved its first disbursement under the scheme. Guess who was the beneficiary? Dixon Technologies' subsidiary Padget Electronics. The company received Rs 532.8 m under the PLI Scheme. Padget Electronics is a 100% subsidiary of Dixon Technologies.

Dixon also has a JV with Japanese company Rexxam for manufacturing Printed Circuit Boards (PCBs). Rexxam deals in the development, design, manufacturing, and marketing of electronic products, peripheral devices of semiconductor production equipment, etc.

As far as financials are concerned, despite the supply chain issues, Dixon delivered healthy performance in financial year 2022 due to a surge in volumes for consumer electronics and the mobile segment.

The company's revenues and profits have grown at a 5-year CAGR of 30% and 26%, respectively.

The return ratios have also been strong, with ROE and ROCE averaging 23% and 31% in the past five years.

One concern is debt, which has increased due to the ongoing capex. The company further plans to undertake a more sizeable capex, part of which will be funded by long-term borrowings.

Financial Snapshot

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenue	28,416	29,844	44,001	64,482	106,971
Growth (%)	16%	5%	47%	47%	66%
Operating Profit	1,169	1,418	2,327	2,935	3,881
OPM (%)	4%	5%	5%	5%	4%
Net Profit	609	634	1,205	1,598	1,902
NPM (%)	2%	2%	3%	2%	2%
Total Debt	446	1,412	867	1,561	4,580
Debt to Equity (x)	0.14	0.38	0.16	0.21	0.46

Data Source: Ace Equity

#4 Chemcon Specialty

Next on the list is Chemcon Speciality Chemicals.

One might wonder how a specialty chemical company fits into this list. The same way specialty chemical companies are playing a big role to make sure the electric vehicle revolution goes as planned.

Chemcon Specialty is the only Indian company, and the third largest in the world, to make a chemical called Hexamethyl Disilazane (HMDS).

High purity HMDS has potential use in the semiconductor electronics industry, among other end applications. In 2021, Chemcon commissioned a new plant specifically to produce high purity HMDS.

The company derives close to 50% revenues from this product. It's sold both in domestic and export markets.

Chemcon is also the largest global manufacturer of Chloromethyl Isopropyl Carbonate (CMIC). It's used in the pharma industry, making the business quite diversifying.

The company stands to benefit from the China plus one strategy as these chemicals are primarily imported in the economy for now.

In the June 2022 quarter, the company reported the highest ever quarterly performance led by healthy demand across the product portfolio. Both the segments (HMDS and CMIC) gained traction. The growth is driven by CMIC's newly expanded capacity.

The company's revenues and profits have grown at a 5-year CAGR of 10% and 19%, respectively.

The return ratios have also been strong, with ROE and ROCE averaging 40% and 46% in the past five years.

As far as debt is concerned, the company has reduced debt over the past five years. Its current debt to equity ratio stands at 0.09x.

#5 ASM Technologies

Last on our list we have ASM Technologies.

The company is into engineering, research and design space. It's in the process of expanding its service offering and is foraying into areas of virtual reality, internet of things (IoT), and open edX platform management.

The company has a 50-50 joint venture (JV) with HHV group. It's going to be one of India's state-of-the-art semiconductor focused equipment manufacturing facilities.

This will include services in designing and manufacturing semiconductor tools, sub-systems, system components, and providing field support. The management considers it a key growth vertical.

Apart from semiconductors, the company caters to hi-tech medical equipment, automotive, aerospace, enterprising storage, and networking consumer electronics, etc.

Through its arm ASM Ventures, it also makes strategic minority investments in early stage tech companies in India and abroad.

In financial year 2022, the company delivered an all-round performance where it reported a 40% growth in revenues owing to increased orders from customers.

Profits have substantially increased in the past two years.

Financial Snapshot

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenue	826	880	920	1,374	1,917
Growth (%)	2%	7%	5%	49%	40%
Operating Profit	44	109	65	202	280
OPM (%)	5%	12%	7%	15%	15%
Net Profit	-8	70	12	85	146
NPM (%)	-1%	8%	1%	6%	8%
Total Debt	79	147	210	311	451
Debt to Equity (x)	0.16	0.29	0.42	0.55	0.69

Data Source: Ace Equity

On return ratios, the company fares well at 22.8% in terms of ROE and 23.7% ROCE as of March 2022. Not bad at all for a microcap stock.

Comparative Analysis

Here's a table comparing each of these companies on various metrics as of financial year ending March 2022.

Company	Vedanta	Tata Elxsi	Dixon Technologies	Chemcon Specialty	ASM Tech
ROE (%)	37.2	37.1	22.2	16.3	22.8
ROCE (%)	29.4	51.2	25.9	20.9	23.7
Latest EPS (Rs)	51.1	107.6	39.2	20.4	13.3
TTM PE (x)	5.5	68.5	109.7	21.2	41.1
TTM Price to book (x)	1.5	27.1	24.7	3.6	8.6
Dividend yield (%)	15.9	0.6	0.1	0.0	1.6
Share price performance (%)
Company	Vedanta	Tata Elxsi	Dixon Technologies	Chemcon Specialty	ASM Tech
1 year	-20%	24%	-18%	2%	107%
3 years	92%	945%	621%	-	704%
5 years	-14%	776%	713%	-	318%

Data Source: Ace Equity, Equitymaster

These companies may continue the momentum going forward...

Companies in the semiconductor industry have consistently increased sales over the past two years. They are expected to continue the momentum amid the strong chip demand. As industries rush towards digitisation, demand for semiconductors will only grow more.

At present, there are only a few companies in the world that make semiconductors.

In India, the companies involved in this space directly or indirectly are still very few. But this can change very quickly.

Luckily for you, co-head of Research at Equitymaster Tanushree Banerjee has prepared a checklist on how should on go about investing in semiconductor stocks.

Here's what she wrote in a recent editorial...

• Before you decide to invest in any stock to capitalise on the semiconductor megatrend, follow this blueprint.
  
  Understand the demand supply dynamics of the semiconductor ecosystem.
  
  Be patient to track niche companies and their execution risks in the ecosystem. Yet another reason to take a closer look at the semiconductor ecosystem is its strong linkages to the defence ecosystem.
  
  Reject companies over dependent on leverage.
  
  And most importantly, look for managements that have a track record of creating wealth for minority shareholders.

You can read the entire piece here: Blueprint for the Semiconductor War Profits.

Meanwhile, check out the below video where Tanushree discusses how semiconductors can help you find the next Infosys-like multibagger stock.

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...