Bharat FIH is the largest EMS provider in India, with approximately 15% market revenue share in Financial Year 2021, according to the F&S Report. In addition to its EMS business which mainly comprises of manufacturing services, Bharat FIH is also building the capabilities to provide OEMs with a comprehensive, vertically integrated “one-stop solution” comprising a range of ODM services including product design and development, component manufacturing and sourcing, logistics, and after-sales services. The company has expanded its business into high-growth industries other than mobile phones, including mechanics, electric vehicles, televisions and hearables. EMS industry includes domestic electronics production and imports of electronic finished goods, while OEMs engage EMS providers for products and services.
Bharat FIH will not receive any proceeds from the offer for sale (OFS). The promoter selling shareholder which is Wonderful Stars will receive the proceeds in the OFS category. Also it needs to be noted, that Bharat FIH have not entered into any definitive arrangements to utilize certain portions of the net proceeds from the fresh issue. The funding requirements and deployment of the Net Proceeds of the Offer are based on management estimates and a cost assessment report from Axium Valuation Services LLP and have not been independently appraised.
However, Bharat FIH plans to utilize Rs10,581.71 million for funding capital expenditure requirements of our Company towards expansion of its existing campuses. While Rs7,069 million will be utilized for funding working capital requirements and Rs3632.6 million will be used to pump in subsidiary RSHTPL for financing capital expenditure requirements. The company plans to utilize 25% of the fresh issue proceeds for general corporate purposes and remaining amount of the total is yet to be decided.
Bharat FIH witnessed an impact on its financial books during FY21 as the pandemic took a toll on economies globally impacting supply chain and demand. However, in the first half of FY22, the company is on the path of recovery in terms of revenue (Rs101,557.92 million), operating profit (Rs2,458.34 million) and PAT (Rs891.71 million) compared to revenue, EBITDA and PAT of Rs158,548.58 million, Rs3,869.32 million and Rs1,619.15 million in FY21. The company had made a strong turnaround in earnings during FY20 in terms of EBITDA and PAT levels in comparison to FY19, although, revenue was better in the fiscal of 2019. If the economy does not see any further new variant and stringent lockdown measures due to the pandemic ahead, then Bharat FIH is likely to record a healthy FY22 financial year.
Bharat FIH has made sufficient CAPEX to increase its production capacity, achieve a highly scalable business model, and diversify into new service areas without having to depend on debt financing, and to also sustain our operations during the COVID-19 pandemic.
|(`₹ in millions)||FY19||FY20||FY21||As of September 2021|
|Revenue from Operations||343,453.89||266,355.58||158,548.58||101,557.92|
|EBITDA Margin (%)||(0.08)||2.60||2.44||2.42|
|Diluted Earnings Per Share (Rs)||(1.57)||2.08||0.68||0.37|
|NAV per share (Rs)||11.11||14.26||11.91||12.29|
Bharat FIH is the largest electronic manufacturing services (EMS) provider in India, with approximately 15% market share in terms of revenue in FY21. There are many other entities working in the segment, that are trading in the stock exchanges. In the background of Bharat FIH's IPO, let us get familiar with its listed peers and their market capitalizations
|Dixon Technologies Limited||₹ 26,659 crore|
|Amber Enterprises India Limited||₹ 7,636 crore|
Bharat FIH is the largest EMS provider in India with approximately 15% share of EMS market revenue, and more than twice the revenue market share of the next largest provider in Financial Year 2021. The company plans to move up the value chain and expand its portfolio of service offerings in the areas of product design and development, component manufacturing and sourcing, logistics, and after-sales services. The diversification in services will enable the company to vertically integrate its service portfolio and increase revenues from existing mobile phone customers and actively pursue new customers in the mobile phone industry, and further the industry diversification will enable the company to win new customers in those industries. Also, the company’s existing capabilities and the additional ones that it is building, supported by a favourable market and regulatory tailwinds, will position the company as one of the few EMS providers in India that is able to move up the value chain to become a full service ODM provider in the near to medium term.
Bharat FIH is well poised to o benefit substantially from the Government of India’s “Aatmanirbhar Bharat Abhiyaan”, or Self-Reliant India, campaign, which provides an increasing range of incentives to attract and localize manufacturing and production in the country. The company has received approval for a PLI for mobile phone manufacturing which provides a revenue subsidy of 4-6% on the incremental revenue from mobile phones priced above Rs15,000. The aggregate maximum potential incentive for the Company under this scheme is Rs60,004 million over the FY2022 to 2026.
Additionally, Bharat FIH-led subsidiary Rising Stars HiTech Private Limited (“RSHTPL”) has been approved for a PLI for (i) IT hardware with aggregate maximum potential incentive of Rs12,450 million over the Financial Years 2022 to 2026 and (ii) telecom and networking products with aggregate maximum potential incentive of Rs4,025 million over the FY2022 to 2026.
Further, Bharat FIH seeks to apply for the electric vehicles (components category) and hearables PLI schemes as and when applications are invited, while the company is already eligible for Modified Special Incentive Package. Also, the company is eligible for capital and revenue subsidies from the government of Andhra Pradesh for investments in that state, where the maximum potential incentive is Rs3,433 million over the FY22-26. These incentives will contribute to the company’s profitability of its diversification initiatives into new industries and service offerings.
Bharat FIH has established longstanding, strategic and collaborative relationships with key OEM customers. It is the largest manufacturing and assembly services provider to Xiaomi. Further, the company has commenced business with market-leading brands in the new industries. These include Ather Energy, Ola Electric, Vu Technologies, ZTE Telecom India and Imagine Marketing (boAt).
The company's ability to provide ODM solutions will be a key differentiator in the Indian EMS market, and strategic collaboration across the EMS and ODM lifecycle will also foster greater customer satisfaction and loyalty, and generate repeat business. Additionally, the constant engagement with its customers enhances its ability to maintain high quality standards and engage in more complex design and other value-added services, enabling the company to increase business from them and also develop key capabilities and knowhow that are used to market their services to new customers.
Bharat FIH maintains flexibility of its manufacturing facilities through multiple function training and standardization of equipment, which allows the company to quickly redeploy its production lines to meet variations in customer demand. The large scale and flexibility of the company’s production facilities enables them to offer high quality, timely and cost-effective solutions to their customers while limiting individual order volatility and maintaining our competitiveness and margins. Currently, the company has an aggregate of 94 production lines, consisting of 29 SMT lines, 35 assembly lines and 30 sub-assembly mechanics lines, with total installed capacity of 55.77 and 30.07 million units in Financial Year 2021 and the six months ended 30 September 2021, and total actual production of 28.26 and 14.81 million units in Financial Year 2021 and the six months ended 30 September 2021.
Bharat FIH aims to vertically integrate its portfolio of service offerings and provide OEMs with comprehensive solutions that enable them to satisfy their fast time-to-market, time-to-volume and time-to-money demands in a market where product life-cycles are becoming shorter. Such will support the company to provide services to its OEM clients across their product value chain instead of having to bid for each process individually as is typically the case for EMS providers. Further, the company’s capabilities also reduce its reliance on third parties for the provision of key services required to bring customers’ products to market. The company’s ability to provide a wide range of capabilities in-house provides us with a significant competitive advantage over competitors who have not established this expertise and are dependent on a range of third parties for their service delivery to customers.
Bharat FIH aims to become involved in the design and development processes for electric vehicles, and it is developing a plan to design and manufacture a 4G mobile phone that can be sold to OEM customers as a full unit for them to brand with its name. The company’s R&D teams also aim to provide solutions to improve their manufacturing efficiency for existing products and reduce manufacturing costs. To leverage the experience and knowledge derived from manufacturing and assembling mobile phones, Bharat FIH has set up an R&D centre in Chennai focused on industrial and mechanical design, product development, hardware design and component engineering, among others, and to provide design enhancement and verification to customers.
Bharat FIH has made recovery in business in the current fiscal and expects the growth momentum to continue on the back of expansion into new ODM services and high-growth industries as its revenue will become more diversified and margins will improve. The company has a stable working capital cycle and the position is due to, among other things, careful management of inventory, trade receivables and trade payables, favourable credit terms in our customer contracts which enable them to mitigate the risk of foreign exchange fluctuations, as well as recent changes in tax regulations.
Bharat FIH management executed a track record performance. These are demonstrated through the build-out of three campuses – 1) the growth of its revenues from operations to ₹343,453.89 million in Financial Year 2019, 2) managing the market factors and the challenges posed by the COVID-19 pandemic in a resilient manner while still delivering profitability during Financial Years 2020 and 2021, 3) and commencing business with customers in new industries in the current Financial Year. Examples of areas where we were able to build capacity include mechanics and various other ODM capabilities, which have become revenue drivers for us within a short period.
The company’s management, in furtherance of the Foxconn Technology Group heritage, has a strong focus on ESG business, as illustrated by the employment of women in their business, accounting for nearly 85% of our workforce, as well as the actions taken to support the health, safety and well-being of employees during the COVID-19 pandemic.
Bharat FIH is a part of the Foxconn Technology Group, a Fortune 30 group which is the global leader in the EMS business with approximately 22.7% share of global EMS operating revenues in 2020. The Foxconn Technology Group has a distinguished track record of delivering growth and shareholder returns, and a long history of executing complex engagements, including being the trusted EMS/ODM partner for global technology leaders such as Apple, Cisco, Dell, Lenovo, Microsoft and Sony, among others. Its FIH Mobile parentage has provided them with the financial resources to build our business, access to a global supply chain for materials, components and other key inputs, manufacturing and R&D knowhow, as well as a globally consistent culture of innovation, entrepreneurship and teamwork.
Majority of revenue of Bharat FIH is derived from single customer i.e. Xiaomi. So decline in Xiaomi’s sales will have a material impact on Bharat FIH’s earnings. Sales of Bharat FIH’s services to Xiaomi could decline as a consequence of several factors, such as lower demand for Xiaomi’s mobile phones in the Indian market on account of changing consumer preferences or an increase in the market share of Xiaomi’s competitors, or on account of the company’s inability to fulfil Xiaomi’s purchase orders in the required quantities or quality and on schedule. The company’s ability to hold on to Xiaomi will depend on their ability to price projects at competitive levels, in addition to ensuring sufficient manufacturing capacity for Xiaomi and delivering timely and high-quality services.
Lack of long-term commitment with customers could lead to cancellation of orders and thus affecting Bharat FIH’s order book. Also, this would lead to change in production quantities, delay in production or change in sourcing strategy of the company. Bharat FIH’s master framework agreement is generally between 1-10 years. Under the framework, the terms of contracts remain effective indefinitely unless terminated by either party with prior written notices. The short-term nature of customers could lead to mismatch in production demand and production capacity of the company. It could limit the company’s ability to accurately schedule production, source raw materials and components, manage personnel capacity and maintain optimal inventory levels.
Significant capital requirements could impact Bharat FIH's earnings. The company’s business is capital intensive and they are constantly seeking to add new and upgrade existing manufacturing facilities, increase product portfolio, invest in R&D of new technologies and products, among others. In fiscal 2019, 2020 and 2021, the company's additions to Property, Plant and Equipment amounted to ₹5,081.54 million, ₹1,764.03 million and ₹2,321.90 million.
Also, the company has significant working capital requirements to finance the purchase of raw materials and the development and manufacturing of products before payment is received from customers. Continued increases in working capital requirements may adversely affect the company's results of operations and financial condition.
Availability of broadband in remote areas of the country is a key demand driver for entry level notebooks and desktops. Due to the pandemic, the work-from-home lifestyle for office workers and online education for school children have created opportunities for the IT hardware market in India.Export market of electronic products in India is expected to grow substantially in the next five years at a CAGR of 55.3%, owing to various government initiatives such as the PLI scheme, Atmanirbhar Bharat, which facilitates domestic manufacturing. Cost-effectiveness, a talented and affordable workforce, a burgeoning domestic electronics market, and export opportunities will drive the market for EMS/ODM in India.
Existing capabilities and the additional ones that the company is currently building, aided by favourable market and regulatory tailwinds, will position the company as one of the few EMS providers in India that is able to move up the value chain to become a full service ODM provider in the near to medium term.
Bharat FIH has been approved for PLI for mobile phone manufacturing which provides a revenue subsidy of 4-6% on the incremental revenue from mobile phones priced above Rs15,000. Also, the company intend to apply for the electric vehicles (components category) and hearables PLI schemes as and when applications are invited. These incentives to contribute to the profitability of the company's diversification initiatives into new industries and service offerings.
Ability to manufacture components in-house also provides opportunities for vertical integration, which enables the company to get involved earlier on in the manufacturing process with OEM customers, and secure more business opportunities across the ODM value chain.
Bharat FIH intends to explore the benefits of the Mobility in Harmony (MIH) Open EV alliance at the global level for product development and exports. The company expects to leverage the benefits of our Promoter’s (FIH Mobile) membership with the MIH Open EV Alliance to have the opportunity to interact and participate with key players in the electric vehicles industry and seek new collaboration opportunities.
To be updated
Bharat FIH intends to utilize their EMS experience and the ODM capabilities to diversify into new high growth industries such as mechanics, electric vehicles, televisions, hearables, telecom and networking products, and IT hardware. Given the significant under-penetration and increasing per capita usage of these products in India, the country’s total addressable EMS market is expected to grow to US$135 billion by FY 2026, giving Bharat FIH substantial growth opportunities to diversify into these new industries. Further, Bharat FIH plans to empower their Strategic Business Units (SBUs) to formulate strategies tailored to the needs of specific industries, and to deliver ODM solutions to their OEM customers on a modular and collaborative basis.
In addition to their EMS capabilities, Bharat FIH is building capabilities to provide OEMs with a comprehensive, vertically integrated “one-stop” solution comprising a range of ODM services from product design and development, component manufacturing and sourcing, logistics, and after-sales services. The company intends to deepen its localisation strategy to manufacture and source components and other inputs, thereby reducing dependency on imports and hedging against the risk of global shortages. Where localisation is impractical, Bharat FIH intends to leverage the supply chain relationships and connectivity of the Foxconn Technology Group. Further, vertical integration will also enable Bharat FIH to capture higher margin services in the ODM value chain and benefit from barriers to entry in those higher margin areas.
Bharat FIH plans to invest further in their R&D capabilities, which are integral to their vertical integration strategy and ability to offer OEMs a broad range of services across the ODM value chain. In furtherance of R&D strategy, the company plans to recruit a number of hardware, mechanical, industrial and software design engineers, with the aim of building a 150-strong product design and development team by the end of Financial Year 2024. Also, Bharat FIH intends to develop collaborations and joint R&D programmes with the in-house R&D teams of OEM customers, as well as external research institutes and universities. These capabilities will enable Bharat FIH to achieve greater operational and cost efficiencies within manufacturing and assembly processes through technological innovations in production lines, designing and developing more efficient machines and tools, and enabling greater self-sufficiency in components and mechanics.
Bharat FIH is exploring opportunities to collaborate with mobile operators in Europe and the United States, with a view to exporting mobile phones and hearables that they can offer to their network customers. Additionally, Bharat FIH intends to explore other opportunities that global OEM customers present to the company as part of their own strategy of geographic diversification in their manufacturing and supply chains, and which leverage on the geopolitical advantages that India offers. Further, the approvals in PLIs as well as certain duty remission policies for exports is seen to enhance the company’s export opportunities.
Bharat FIH continues to provide a workforce with training and development programmes, including external vocational and skills training. It will continue to recruit and promote women in their workforce. Further, the company will continue to adhere to the required standards of environmental compliance in operations and strive to ensure ESG adherence across business and in supply chain, thereby also assisting the company’s OEM customers and their ultimate consumers in their ESG objectives and aspirations.
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