The Covid-19 pandemic demonstrated how vulnerable global supply chains can be, one of if not the worst affected was the semiconductor industry due to the supply being extremely concentrated due to high barriers of entry i.e., it is an oligopolistic market. For over 3 years, this crisis has affected many sectors and industries, the worst of which was felt by the Auto, Telecom, and Consumer Electronics industries.
The crisis can be traced back to the start of the pandemic when all but essential services were shut down. Demand for consumer electronics and telecom that came with it increased production and infrastructure capacity requirements.
Next followed a series of unfortunate events starting in 2020, when the manufacturing facilities of two different companies caught major fire that put them both out of commission for months. In early 2021, a winter storm in Texas, USA caused power outages that resulted in several weeks of supply delays in semiconductor manufacturing facilities of Samsung, Infineon, and NXP, etc.,
A major earthquake, fire at a Japanese chip plant that supplied chips used in the Auto industry led it to be offline for several months. Following that, the Taiwanese manufacturer, the biggest in the world – TSMC had its access to water restricted due to a drought in the nation. This coupled with price hikes by TSMC resulted in production delays once again. Political tensions caused by the Russia-Ukraine war and the US-China Trade war intensified the situation.
What’s Ahead?
The situation has cooled down since early 2023, led by an increase in inflation and decreased demand. Several reports including those by J.P. Morgan, Chase & Co and Goldman Sachs along with other sources have indicated a taper off in the shortage by the end of the calendar year.
The Indian government has announced Rs. 7600 crore PLI scheme for the semiconductor industry over the next 5 or 6 years. India Semiconductor Mission aims to build a semiconductor and display ecosystem to enable India’s emergence as a global hub for electronics manufacturing and design.
Here are stocks in India that are expected to benefit from the recovery of semiconductor supply and growth in the nascent domestic semiconductor industry.
Semiconductor Stocks:
Moschip Technologies Ltd (“Moschip”):
Moschip is the only semiconductor service company with extensive design experience in markets such as aerospace and defense, consumer electronics, telecom, etc., The company has growing revenue and net profits and is cash flow positive. It has a 51% promoter stake and has returned 37% in 1 year period and 34% YTD. Moschip has a market cap of Rs. ~1650 crore.
Ruttonsha International Rectifier Ltd (“RIR”):
RIR is involved in the manufacture of power semiconductors. The stock has returned 180% over a 1 year period and 79% YTD. It has growing revenues and is profitable. RIR has stable and unpledged promoter holdings of 72% with a market cap of Rs. ~465 crore trading at a 52W high and its 2% upper circuit.
SPEL Semiconductor Ltd (“SPEL”):
SPEL offers semiconductor packaging used in Communications, Consumer Electronics and Computing, etc., It has a market cap of Rs. ~280 crores with 59% stable promoter holding with no pledges. It is yet to turn profitable but is one of the few established companies in India that you should watch out for deals and expansions.
Vedanta Ltd (“Vedanta”):
Vedanta is a large-cap mining company involved in iron, aluminum, copper and other non-ferrous ores. It recently snapped a deal with Foxconn for semiconductors which was supposed to be at the forefront of the govt initiative. Despite Foxconn’s exit Vedanta stated it has the license for a 40 nm chip and has other partners lined up. Foxconn said it is looking for other partners in the country as well. The saga is one to follow in the coming months.
Impacted Stocks:
Key companies that were hit by the shortage like Maruti Suzuki India Ltd, Tata Motors Ltd, Eicher Motors Ltd, and other major Auto manufacturers have stated recently that the coming taper off is expected to drive volumes and reacquisition of market share, enhanced by their respective new launches. The stocks currently have “Neutral” or “Accumulate” ratings by major brokerages and are something you should watch out for.
Written by Sandeep R
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