More and more organisations in India are filing to go public and raise funds. But why aren’t they taking the foreign investment route instead? Should you, as an electronics company, file for an IPO? If yes, what are the checkpoints, and what are the challenges?
The years 2020 and 2021 have been important for electronics. The government of India has launched numerous production-linked incentive (PLI) schemes for promoting indigenous manufacture of electronics within the country. Recent announcement for promoting manufacture of semiconductors and displays in the country is promising incentives of ₹760 billion.
What makes the previous two years more important for the electronics sector is the number of Indian electronics companies that have filed for Initial Public Offering (IPO), the most recent addition being Foxconn’s India subsidiary. Foxconn, being the giant it is, could have easily invested in its Indian subsidiary, but it chose to take the IPO route. There is Data Patterns and Paras Defence from the strategic electronics sector, Lava Mobile from the smartphones and feature phones segment, Waaree from the solar segment, Elin Electronics and Syrma SGS from the EMS segment, and more!
The ones that have already listed themselves are witnessing a strong response from the market as well. For instance, aerospace electronics solutions provider Data Patterns’ IPO saw massive interest from investors as the issue was subscribed 119.62 times on the last day of bidding. What makes these IPO filings more interesting is the fact that there was a gap of more than six years between two electronics component contract manufacturers filing IPOs in India.
PG Electroplast had floated a ₹1.21 billion IPO in September 2011, while Dixon Technologies filed for IPO in May 2017. The latter’s share price, as of December 28, 2021, was ₹5,645, and it was originally subscribed by the market at a price upwards of ₹2,200 in 2017. Similarly, the shares of PG Electroplast are being bought and sold at around ₹790 today, whereas these were being traded in the range of ₹100 to 150 during the year 2015.
“While many of the IPOs are still in the draft stage, the overall electronics industry presents a strong growth opportunity for investors. A large end-user industry, scalability of companies, availability of labour, capital, and a robust policy ecosystem have created a long runway of growth opportunity for these companies, and this is already being noticed and rewarded by markets from the kind of returns delivered by Dixon Technologies, one of our top holdings,” says Abhay Agarwal, Founder, Piper Serica, SEBI registered PMS.
Why so many IPOs
The way the India based electronics companies are filing IPOs one after another is something that has surprised not one but many share market gurus.
“There are several factors motivating electronics company IPOs, including a stronger-than-expected recovery in the economy after the second wave, continued FPIs and domestic flows in the markets, an increase in retail participation in the stock market, and policy ecosystem which is favouring electronics companies and creating growth opportunities at a level playing field with most global companies,” explains Agarwal.
The first and foremost reason encouraging Indian electronics companies to go public seems to be the increased size of the electronics manufacturing market. India’s domestic electronics manufacturing industry, as per a MeitY official, is expected to be worth nearly ₹7 trillion. These figures represent 30% growth in the coming fiscal. Then there are heavy-weights like Samsung announcing big plans for the Indian market. Apple’s suppliers, including Wistron and Foxconn, are also investing millions of dollars in the Indian market.
“It’s obvious that big names coming and setting up shop in India would mean mammoth business opportunities for Indian companies, and to grab a hold of these opportunities the companies will need a lot of investment. IPOs are one of the best ways to gather this investment for the future,” says K. Krishna Moorthy, CEO, India Electronics and Semiconductor Association (IESA).
Second, the incentives on offer by the government of India are more than `900 billion. The PLI schemes include IT hardware, telecom, white goods, solar cells, battery cells, healthcare devices. Add `760 billion for semiconductor manufacturing, and India’s electronics sector starts looking as the most attractive out there.
“The quantum change in the mindset has primarily come from the push for local manufacturing. Earlier it was always easy to import and sell, rather than manufacturing here in India. The policies being driven by the government during the last five-six years are the biggest encouraging factors for companies to invest in manufacturing. There is a predictability to the whole world of electronics now,” says Krishna.
He adds, “Earlier there were instances of duty being reduced in a year and then increasing it again. It used to go back and forth. The number two reason is the market. Not only are we trying to develop self-sufficiency for the Indian market, but we have also started exporting to many international markets.”
The biggest examples of India being a wealth-generation opportunity for electronics companies are smart energy meters and smartphones. Companies manufacturing and supplying these in India, from India, as per Krishna, do not need to look beyond the local markets for generating wealth. The proposed Power Distribution Reforms Scheme envisages to install 250 million smart meters, 10,000 feeders, and 400,000km low-tension overhead lines, while about 2,470,325 smart meters have already been installed in India.
“Forget about export, such verticals of the industry can be sustained from business in India itself. The market, in terms of local consumption, is becoming bigger and better. People now think that the new policies are worth giving a thought and chance,” he says.
Moreover, a lot of the companies filing IPO recently have existed for over five years. Faisal Kawoosa, Founder & Chief Analyst, TechArc, believes that it is natural for these companies to file IPOs. Though Foxconn’s Bharat FIH was established in the year 2021.
“It is but natural for such companies to file IPO as they need massive funding. The kind of funds these companies will require can only be raised by going public. The scale at which these companies are today requires them to go public. Otherwise, they will not be adequately resourced, and they will not be able to expand the way they want to,” explains Kawoosa.
He adds, “The recent developments like the announcement of PLI schemes have shown a much bigger scale for electronics to such companies. Their potential addressable market, with PLIs, has now stretched beyond India.” He explains that to meet the expectations the new scale has put, electronics companies will need a lot of funding, and the best possible way to source that funding is the public route.
Talking about the new scale and then taking an example from the consumer electronics vertical makes things a lot clear about the future of electronics in India. The country is already among the top markets for consumer electronics despite the fact that the penetration rates are still south of 30 to 35%. A report by Statista mentions that revenue in the consumer electronics market (India) has already amounted to US$70,067 million in 2021. The same is forecast to be worth $89,035 million in 2026.
“The market is so vast that even the smartphone companies have started offering consumer electronics beyond smartphones,” shares Kawoosa.
Why IPO and not foreign investment
A close look at the factors mentioned above and it becomes easier to guess that all of these are interconnected. Whether it is the increasing market size, the rising geo-polititacl tensions, or the recent PLIs announced by the government of India, all appear to be placed there in a definite pattern.
But why aren’t these companies instead of filing for IPO choosing to partner with MNCs for investment?
“Going public majorly means that the controls of the company will majorly remain in the country. People do realise that once they go for a foreign collaboration, most of the foreign partners go for 51:49 kind of partnership, where the 51% belongs to them and the rest belongs to Indian entities. This 51% gives them the decision-making powers. I do not think any Indian company would want that, keeping in mind the way opportunities in the country are growing,” explains Kawoosa.
Foxconn’s India subsidiary presents a good example of an Indian company trying to raise funds via the public route. The technology group posted revenues of around $178 billion in the year 2019, and in India it is looking to raise around 50 billion rupees through the IPO. The company’s IPO will be offered with a 75% reservation for Qualified Institutional Buyers (QIBs), 15% non-institutional investors (NIIs), leaving a meager 10% for retail investors. Would it have been difficult for Foxconn to infuse money in its Indian subsidiary?
“There is no doubt that foreign companies are also investing in India. Dixon had multiple partners who could have invested a lot of money, but they preferred to go with the IPO route. What would you pick when it comes to servicing international debt versus equity? At some point of time equity is going to look better,” explains Krishna.
He adds, “The pure-play Indian companies will not prefer foreign investment unless they have subsidiaries already established in and outside of India.”
Then comes the ‘vocal for local factor.’ It is but natural that individuals investing in IPOs will have a lot of confidence in the companies they are putting their money in. The scenario is somewhat like investors funding startups. A good investor in a startup attracts others to put their money in.
Moreover, the likes of Rakesh Jhunjhunwala and others putting their money in electronics companies’ stocks has already proved what the move can do. As a matter of fact, what’s happening in India now has already happened in countries like the United States, China, Germany, and others.
Should you consider filing for an IPO?
The electronics firms thinking of taking the public route should keep in consideration that filing for an IPO is one thing but being able to generate good market response is another. Right now, the market looks a lot favourable for the electronics companies, but success in the long term depends a lot on not only the company’s performance but the continuation of the right set of policies, and a lot of other things.
“The companies looking to file IPOs should have been in the business for at least five to eight years. Companies which started two to three years back should refrain from investing in filing IPOs. Instead, they should be more focussed on building their dominance in what they are doing,” Kirshna opines.
Further, the returns that a company filing or thinking to file an IPO expects should always be kept in mind. The company looking to raise funds via the IPO route should be clear in formulating and conveying what it intends to use the funds for. The checklist also contains owning IPs and product development.
“Whatever kind of investment is a responsibility for the company. If my company does not own an IP or does not have any kind of product development under my belt, then I am just a contract manufacturer. Yes, I do have scales of production, but it will never be seen as long-term by the market or the investors,” says Kawoosa.
He adds, “It’s important to calculate whether the expected returns will be lucrative enough or not. Will these be as lucrative as returns garnered by BFSI, services, or IT companies. You have every breed of investors. The shares may not be high retuning ones but fundamentally these will be the strong ones.”
Trade wars and global disenfranchisement with China has also led to shifts in global manufacturing to alternate locations like India. India with a large and growing domestic electronics market (US$110 billion) and affordable labour is attracting high-ticket investments.
“The development of a robust electronics component ecosystem in India is expected to increase domestic value addition from present levels of 34% to more than 50% by 2025. We believe all these factors converging together will provide a good wealth creation opportunity for investors,” says Agarwal.
The global scenario in terms of electronics manufacturing is changing. OEMs and ODMs are resorting to automated processes, whereas the Indian companies are still majorly dependent on human labour. For instance, there were reports of Foxconn’s India plant being shut for more than two weeks in the month of December 2021 due to protests by workers.
“There is smart manufacturing, robotics manufacturing, and implementation of IIoT already taking place. A lot of the countries that were not so open for manufacturing will now also think of manufacturing. The decentralisation of manufacturing has begun in China. How are the Indian companies filing for IPO going to address the challenge of automated manufacturing three years down the line?” asks Kawoosa.
The author, Mukul Yudhveer Singh, is a technology enthusiast