Wait for Tata Electronics IPO to Buy Semiconductor Stocks?

Apr 18, 2024

Wait for Tata Electronics IPO to Buy Semiconductor Stocks

A couple of weeks ago, US' biggest chipmaker, Intel, received the largest government grant of US$ 8.5 billion for building new facilities.

It will invest up to US$ 100 bn in chip facilities over the next five years.

The world's largest semiconductor chipmaker Taiwan Semiconductor Manufacturing Company (TSMC) also won a US$ 6.6 bn US subsidy for producing the most advanced 2 nanometer processor chips.

At present, most of the world's chips are designed in the US and manufactured in Asia. The advanced chips, which are currently in high demand, are only produced in Taiwan and South Korea. Of this, 90% come from TSMC.

Diversifying the chip supply chain has become more important than ever.

National security concerns and the fear of missing out on having the world's best chips have prompted the US to bolster domestic chip production.

In 2022, the US government passed the CHIPS Act, promising US$ 52 bn to secure the semiconductor supply chain.

The US is going all out to set up chip fabrication plants to be less reliant on other economies.

Meanwhile, Chinese chip companies are rapidly investing in new semiconductor factories to try and advance the nation's capabilities.

China also needs to get around export controls imposed by the US and its allies. Those curbs are making it harder for Chinese companies to get access to the machines needed to make the most powerful chips.

Such curbs have been slowing the development of China's high-tech sector, which is seen as a threat to the US.

So, in 2023, China's imports from the Netherlands soared last year ahead of new export controls on chip manufacturing machines.

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Chinese chip companies such as Semiconductor Manufacturing International Corp. (SMIC) are doing all they can to get the latest machinery to strengthen their supply chain.

Where Does India Stand?

India recorded a significant uptick in its electric vehicle (EV) sales in 2023, with volumes surpassing 1.5 million. This marked a 50% increase from the previous year.

The government's commitment to boost EV sales and electronics manufacturing in India makes domestic chip production inevitable.

Indian government approved the establishment of three new semiconductor manufacturing facilities in February 20204, under the country's flagship incentive program.

  • Tata Electronics is set to collaborate with Powerchip Semiconductor Manufacturing Corp, Taiwan, to establish a semiconductor fab in Dholera, Gujarat
  • Tata Semiconductor Assembly and Test (TSAT) will set up a semiconductor unit in Morigaon, Assam.
  • CG Power, in partnership with Renesas Electronics Corporation, Japan, and Stars Microelectronics, Thailand, will establish a semiconductor unit in Sanand, Gujarat.

In addition, prominent American chip company Micron has committed to invest up to US$ 825 m to build a facility for the assembly and testing of semiconductor chips, at Sanand, in Gujarat.

And most recently, US EV maker Tesla signed a strategic deal with Tata Electronics to procure semiconductor chips for its global operations.

So, Tata Electronics will establish a new facility to manufacture electronics parts such as printed circuit board assemblies for Tesla units assembled in India.

Until 2021, India's chip manufacturing capacity was heavily dependent on China. Nevertheless, a few Indian companies had already grown into global leaders when it comes to chip design and research.

Thanks to the ready pool of talent in IITs and NITs, all major global semiconductor companies have their chip design houses in India.

Some estimates predict the Indian semiconductor design market will reach US$ 55 bn by 2026. Also, the sector will attract at least half a million employees.

Even as India gets less dependent on China for chip manufacturing, the chip designers are already tying up with companies in South Korea, Taiwan, and Vietnam.

A handful of Indian chip designers are already playing a key role in helping with the shift.

HCL Tech, with its dominant role in semiconductor chip designing, particularly deserves a mention.

The company has set up management teams in Taiwan, South Korea, and Vietnam in recent months seeing the growth potential of this business.

Taiwan's Foxconn Technology Group has formed a joint venture (JV) with HCL group to set up a semiconductor outsourced assembly and testing (OSAT) unit.

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Tata Electronics IPO - Worth the Wait?

Although hugely anticipated, the Tata Electronics IPO will be one among the many IPOs from the Tata group over next few years.

Companies such as Tata Capital, Tata Autocomp Systems, Tata Passenger Electric Mobility, BigBasket, Tata Digital, Tata Electronics, Tata Housing, and Tata Batteries are among those being primed to tap into the capital markets.

The Tata group has been aggressively seeking to scale up its presence in new-age sectors like digital, retail, semiconductors, and electric vehicle batteries, among others.

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Of course, there is the hope that the Tata - Tesla partnership will attract other MNC players and offer a boost to the high-value-add component in India.

However, the question remains if the chips to be produced will be among the most advanced or not.

The most advanced chips today are nodes of 3nm to 10nm (1nm is one billionth of a metre). As per the management of Tata Electronics, chips made by it would be minimum 28nm.

Thus, whether Indian chip makers are able to access the latest technology and help build capacity for new age chips remains to be seen.

While India is bound to see several players leading the transformation in semiconductor ecosystem over next few decades, some early movers will have the advantage.

Investors can certainly evaluate the merits of investing in the Tata Electronics IPO in future, based one on its fundamentals.

However, there are several stocks in India's semiconductor ecosystem which are better placed to ride the upside.

Instead of waiting for the IPO, start your journey of riding upside in India semiconductor stocks here.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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