The chip race is heating up. Watch out for this semiconductor stock in 2024

Adding to this excitement, Qualcomm Inc., a global semiconductor giant, has announced plans to outsource the manufacturing of semiconductor chips in India.

The company aims to capitalise on its substantial scale and the need for high chip volumes by collaborating with key industry players to introduce state-of-the-art technology in the country.

This development has piqued the interest of investors, intensifying the focus on semiconductor IPOs, as investors eagerly anticipate opportunities in this thriving industry.

In alignment with this trend, an Indian opto-semiconductor manufacturer, Polymatech Electronics, has filed for an IPO and it looks to go public soon.

#1 About the company

Polymatech Electronics is an India-based semiconductor chip manufacturer.

The company designs, manufactures, and supplies opto-semiconductor chips and luminaries to a wide range of industries, including lighting, medical devices, data transmission, and specialised lighting.

The company was founded in 2007 and is headquartered in Chennai, Tamil Nadu. Polymatech has a state-of-the-art manufacturing facility in Oragadam, Tamil Nadu, which has a capacity of 300 million (m) chips per annum.

Its clients include Fortune 1,000 multinational corporations.

#2 Factors setting this IPO apart

It is the first opto-semiconductor chip manufacturer in India. Opto-semiconductor chips are used in a wide range of applications, including lighting, displays, sensors, and medical devices. This makes Polymatech a unique and valuable company in the Indian market.

The company has a strong track record of innovation. It has developed and commercialized several new products, including chips for large-area lighting, medical applications, and data transmission. This shows that Polymatech is a company that is constantly looking to the future and developing new products to meet the needs of its customers.

Polymatech is well-positioned to benefit from the growing demand for semiconductors in India and around the world. The global semiconductor market is expected to grow from US$ 555.9 billion (bn) in 2022 to US$ 804.7 bn in 2028. This means that Polymatech is operating in a high-growth industry with a lot of potential.

Furthermore, the Indian government’s ambitious mission under the Modi administration, to establish the world’s largest semiconductor ecosystem in India, provides additional tailwinds for Polymatech’s growth, aligning the company with a supportive and promising national initiative.

The company submitted its Draft Red Herring Prospectus (DHRP) to the market regulator last month on 6 October 2023.

However, the crucial details related to the IPO are yet to be disclosed.

#3 A look at the financials

The company has achieved remarkable revenue growth, registering a compounded annual growth rate (CAGR) of 139.9% between the financial years 2021 and 2023.

This growth is evidenced by the increase in revenue from operations, which shot up from ₹450 million (m) in FY21 to ₹6,490.2 m in the financial year 2023.

While the net profit has increased at a CAGR of 198.8% during the same time.

This remarkable performance can be credited to the growing customer base and backing from government.

Looking ahead, the company has plans to expand its business to international markets. It intends to focus expansion primarily in North American, European, Middle East, and South East Asian markets.

#4 Arguments in favor of the business

Polymatech’s competitive edge lies in its exclusive use of in-house opto-semiconductor chips that it has designed, developed, and manufactured. This approach affords the company distinct advantages in terms of pricing and quality, setting it apart in the market.

The company excels in various critical aspects of the business, including product design, electronic circuit design, prototype development, and more. With a dedicated research and development team, Polymatech independently conceives opto-semiconductor chip designs and transforms them into viable products.

This process involves enhancing designs, recommending suitable raw materials, and conducting rigorous testing of trial products, to ensure top-tier quality and performance.

Polymatech is committed to substantial investment in its future growth. The company plans to inject US$ 1 bn into expanding its manufacturing capacity and establishing new units by 2025. This proactive approach underscores its dedication to meeting rising demand and staying at the forefront of the industry.

The firm is strategically positioning itself for growth, with plans to elevate its production capacity by December 2024.

To achieve this ambitious goal, Polymatech is preparing to inaugurate two additional manufacturing facilities in the Krishnagiri district of Tamil Nadu, complementing its existing production site in Chennai.

#5 Risk Factors

Any disruptions, slowdowns, or shutdowns in the manufacturing or research and development operations of Polymatech could potentially have adverse effects on the company’s business, financial condition, cash flows, and operational results.

Polymatech’s dependence on a limited number of customers poses a significant risk. In FY23, FY22, and FY21, the top five customers accounted for 62%, 65.8%, and 72.7% of the company’s restated revenue from operations, respectively.

Any cancellations, delays, or reductions in orders by these top customers could lead to a material adverse impact on Polymatech’s business, financial condition, and operational results.

Any delays, interruptions, or reductions in the supply of raw materials from third-party suppliers and manufacturers or increased costs associated with these raw materials may negatively affect the pricing and availability of Polymatech’s products. This could potentially impact the company’s business and financial condition, cash flows, and operational results.

Conclusion

The opto-semiconductor market presents a substantial growth opportunity, with a total addressable market projected to reach US$ 2.2 trillion (tn) by 2030, significantly surpassing its current size of around US$ 1.35 tn. This bodes well for Polymatech’s position within the Indian semiconductor sector.

The government’s ambitious Semicon India Program, launched under the India Semiconductor Mission (ISM), signifies a concerted effort to foster semiconductor and display manufacturing in India, with a substantial financial allocation of ₹760 bn.

In September 2022, the scheme was further refined based on industry feedback, resulting in the launch of the Modified Semicon India Programme, maintaining the ₹760 bn investment commitment to strengthen India’s sustainable semiconductor and display manufacturing ecosystem.

Moreover, in addition to the Semicon India Programme, the government is set to introduce the Design-led Manufacturing (DLM) Program, aimed at promoting semiconductor design and manufacturing within the country.

Nonetheless, it’s important to acknowledge that like any investment opportunity, Polymatech Electronics presents its own unique set of advantages and disadvantages that potential investors should consider.

The Indian semiconductor industry stands at the cusp of transformation, poised for significant growth and influence on the global stage. For more, check out our editorial India’s Semiconductor Dream: Is It Becoming a Reality?

Until next time.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com