CG Power & Industrial: Foray in Semicon (OSAT) value chain

21 Mar 2024 , 05:48 PM

Recommendation: Buy; Target Price: Rs 530

 

Analysts of IIFL Securities are enthused by CG Power’s foray in the emerging OSAT/ ATMP market in a tie-up with the global technology majors. While the dynamics of the OSAT business are completely different and unrelated to CG’s own electrical equipment market or the EMS activities of existing players in India, early entry in this segment with attractive GoI subsidy, strong domestic market and opportunities from global supply-chain makes OSAT a lucrative business opportunity, with the right technology partners in place. Reiterate BUY. 

GoI’s capital subsidy is attracting investments in OSAT: 

While the Indian semiconductor market is poised to grow 20% Cagr from US$ 27bn in CY22 to US$80bn by CY28, back-end activities of the semicon value chain (ATMP/ OSAT) are drawing interest from many global players (directly or through JVs), following constructive GoI policies. GoI’s generous cumulative capital subsidy support of up to US$10bn to lure global OEMs and Indian companies to set up the required backend semicon eco-system in India, is starting to pay-off. Projects worth US$3bn are approved and another US$1bn in pipeline. 

CGPOWER seeks Central govt. subsidy: 

CGPOWER’s OSAT foray is planned under a JV format, along with technology tie-ups with global partners and/ anchor customers and should take about two years to commercialise. Net of subsidies (70-75% assumed), the JV targets investments of Rs17-19bn over two years (project investment of US$791mn). Given CG and the parent group - TI’s interest in EVs, key end markets for OSAT products could be for automotive and industrial applications (& possibly healthcare too); but captive demand could be a small portion of the likely turnover of Rs50bn (asset turn of 0.8x) expected from OSAT over five years. 

Attractive bet; long-term positive for CG: 

Entry in OSAT is a nonrelated diversification by CG, leveraging a strong cash chest and eyeing share of the lucrative electronics manufacturing in India. With a core capex of Rs6bn over FY24-25, CG is expected to generate total FCF of Rs24bn in FY24-26, ensuing quick mobilisation of assets for OSAT. Despite capital intensity, initial govt. subsidies make project returns attractive in the 20- 30% range. Analysts of IIFL Securities see potential addition of Rs65-75 to CG’s TP (~Rs600 implied).