When the Covid-19 pandemic hit the world in early 2020, semiconductor chip manufacturing companies were not aggressively investing in their businesses. The reason being that they did not project there would be such a king of chip demand across the world that could lead to a shortage! You may now ask that after knowing this fact, the chip manufacturing companies could have ramped up manufacturing and catered to the increased demand. The shortage would have ended as a result.
But the hard fact is that chip manufacturing can’t be ramped up overnight. It requires billions of dollars in investments, supply to tons of fresh water, and an uninterrupted power supply. So it takes a lot of time to do so. And to make the situation worse, due to remote working scenarios, demand for electronics such as computers, laptops, and mobile phones increased. Chips are used in all these equipments as well!
Where does India stand in the semiconductor industry?
When it comes to India, the country does not stand anywhere in the semiconductor chip manufacturing. India imports all of its chip requirements from countries such as Taiwan, USA, and China. As discussed, setting up a manufacturing plant requires tons of capital, and the private sector was unwilling to put in such money as the break-even would be longer.
So in a bid to encourage domestic production of chips, the Government of India has launched a lot of incentives and the production-linked incentive scheme worth $10 billion to attract global chip makers to set up chip manufacturing plants in the country. And after realizing the gravity of the situation, several Indian firms have to plan to deploy capital for the same. Although it will take 4-5 years for chip manufacturing to materialize, atleast it is a step in the right direction so that such future shortages could be avoided!
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Best semiconductor stocks in India
Following are the best semiconductor value stocks in India:
1. Dixon Technologies Limited
Dixon Technologies Limited is a contract manufacturing company engaged in the manufacturing of products such as consumer durables, washing machines, air conditioners, and smartphones for companies on a contract manufacturing basis. Over the last one year, the company’s stock price has risen by 45% and trades at a P/E ratio of 155.
Since the company manufactures products that include chips as components, a shortage of it would also impact the company’s business. As a result of this, Dixon Technologies Limited also has plans to investing in semiconductor chip manufacturing under the government incentives and the PLI scheme.
2. Bharat Heavy Electronics Limited
Over the past one year, Bharat Heavy Electronics Limited stock has risen by over 51%. Although the company is reeling under losses, it has communicated its pans to be a part of India’s semiconductor industry.
And being a public sector undertaking, it can get orders from the Indian government. Although the company is not profitable, the Indian government could give them orders due to privacy concerns. The company has plans to set up a foundry capacity in the country.
3. Vedanta Limited
Over the last one year, Vedanta Limited’s stock price has risen by 87% and now trades at a P/E ratio of 6.2. Barring a few corporate governance issues such as the company wanting to delist itself from the stock exchanges at very cheap price multiples, the company has good business fundamentals, including a dividend yield of 10%!
Vedanta Limited is a natural resource company having presence across various industries such as aluminum, zinc, lead, iron, and nickel. In December 2021, the company announced that the group will invest up to ₹60,000 crores to set up a chip and glass manufacturing ecosystem in India over the next three years. Investors wanting to bet on semiconductor industry’s future could bet on this natural resource giant!
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4. Tata Elxsi Limited
The Tata Elxsi Limited stock has risen by over 157% in the past one year and now trades at a P/E ratio of 93. Investors ascribing such a high P/E ratio are a result of the company’s future growth prospects and its plans to invest in semiconductor chip manufacturing.
Tata Elxsi Limited is a part of the Tata Group and is engaged in design and technology services across industries that include automotive, broadcast, communications, healthcare, and transportation. The company showed its interest in investing in chip manufacturing and has been in talks with various state governments like Tamil Nadu, Karnataka, and Telangana to invest USD 300 million to set up a new plant. By manufacturing chips, the company can cater to the demand of its group company Tata Motors Limited and its foreign subsidiary, Jaguar Land Rover, both of which were severely affected by chip shortage.
These are the four companies which have conveyed their plans to take a step further in the direction of chip manufacturing. Although India stands nowhere in the industry as of now, the incentive scheme is a step in the right direction as we currently import all the chips needed. So investors betting on the future of this industry could keep these companies on their radar.