How to Profit from India's Smartphone Boom

Apple accounts for 90% of the market capitalisation of the entire Indian stock market.

In fact, in terms of GDP, only 7 countries have a GDP more than the market capitalisation of Apple.

Hold on to that thought for a bit. Let me take you back to 2011, when Steve Jobs, the legend behind Apple, died after a prolonged battle with pancreatic cancer, obituaries were written for Apple as a company.

After all, the biggest moat which Apple had was Steve Jobs. It was his innovation, his obsession to design and quality which led to Apple scaling new heights.

Companies like Motorola were the pioneers of touch screens but when asked what reminds you about the touch screen revolution, it is Steve Jobs wearing his trademark black T shirt and blue Jeans removing the Apple I phone 3G from his pocket.

Such was the power of Steve Jobs and his influence. When Steve Jobs passed away in 2011, the marketcap of Apple was US$ 350 bn. Apple's current market cap is at US$ 2.9 tn, up 8 times over the past 12 years.

In fact, majority of gains in the Apple stock have come after Steve Jobs died.

Isn't this counter intuitive?

Warren Buffett made his first purchase of Apple after Steve Jobs' death. His investment has done exceedingly well.

So, the billion-dollar question or in Apple's case, the trillion-dollar question is... How did Apple as a company not only survive but thrive after Steve Jobs death?

The answer lies in the processes which Steve Jobs built. Jobs' lieutenant and the current CEO of Apple is a master in supply chain management.

Apple always had its products in place. The only thing it had to do was to built scale and focus on the supply chain. Tim Cook was a pro at it.

Strategies like selling a charger separately was a master stroke. Every Apple user has to buy a cable and an adapter, both of which are high margin products.

According to me, the category of earphones (Air Pods) which Apple has created, made US$ 14.5 bn of revenue in 2022 from alone. Air Pods revenue is more than the revenue of Spotify, Twitter, or Shopify.

In manufacturing terms this is classic case of forward integration of a product which was sold for free prior to 2016.

Another category where Apple created a strong stream of recurring revenues was the Apple Store.

Apple store app had 2.2 m apps at the end of 2022. Every purchase made on the app on an Apple iPhone, 15-30% goes to Apple which directly goes to the bottom-line. This is exactly what monetising technology looks like.

For domestic investors like us, rather than investing in the stock of Apple Inc., why not focus on the domestic beneficiaries of Apple's growth.

Two companies which investors can focus on to play the Apple story along with the smart phone growth are Redington India and TCPL Packaging.

Let me start with Redington India.

Being the second largest distributor of IT products in India, Redington is a premier distributor of products for 200 + global technology vendors.

Redington has 3 major verticals

1. IT - This vertical comprises of the IT consumer business which includes PC, laptop, printers, tablets
2. Mobility - This vertical comprises of mobile phones.
3. Services - This segment accounts for the support services and the logistics business. The company has incorporated a fully owned subsidiary for warehousing, transportation and logistics.

With 30% of revenues coming from Apple, the story has just begun.

With Apple's main supplier Foxcon setting up a mega factory in India to reduce its dependence on China, the India growth story has just begun.

Rise in disposable incomes and a jump in the young aspirational class, the demand for I phones along with apple products is expected to meaningfully rise going ahead.

With only 2 distributors in India which distribute Apple products - Redington and Ingram, it's is a near duopoly.

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Also, Redington is one of the leading distributors globally with 45% of revenues and profitability coming from the export market.

While, the growth trigger is India, other markets too offer a strong diversification.

Besides, it's not only mobile phones but Redington is also the distributor of other IT products of companies like Dell and HP.

The company is also focussing in to cloud services distribution and management which is a high margin business.

In that case, why is it that the world is not running to buy the stock of Redington?

Well, the issue is with rising interest rates.

Redington operates on wafer thin operating margins of 1.5-2%.

Interest costs and working capital cycle are the main determinants of how the company performs apart from revenue growth.

With interest rate cycle at the peak, its cost of capital is hurting its bottom line.

Working capital cycle which was the best during Covid due to supply chain issues (no inventory leading to cost savings) has reverted to pre-covid levels putting pressure on profitability.

TCPL Packaging (TCPL) is one of India's largest folding carton manufacturers as well as a standalone paperboard converter.

In FY17, it forayed into the flexible packaging segment, thus diversifying its client base.

It ranks among the top two companies in folding cartons and is one of the fastest growing firms in flexible packaging space.

The company has 2 main segments and a newly acquired 3rd segment i.e. Rigid Packaging.

To diversify and tap the growth opportunity in the expanding smartphone and electronics sector, it acquired an 89% stake in Creative Offset Printers Pvt (COPPL).

This firm has a presence in the high-margin rigid box space. COPPL supplies boxes to leading mobile companies such as Samsung.

With Apple shifting some of its manufacturing base in India, we believe making packaging boxes for Apple could be the game changer.

Currently Apple sources its packaging requirement from its global vendors in India. However the company is hopeful it will increase localisation.

To conclude, focussing on stocks which have a high exposure to Apple or the smartphone industry is a good idea.

After all, suppliers of a main company often give higher returns than the company itself.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)