If you have been following the news over the last 2-3 years, you have likely seen the following headlines.

Source: FOF Presentation PPFAS

So, what actually is this semiconductor? How is it impacting the global auto industry to the tune of $61 bn in 2021? This blog entirely focuses on that. Not just that, with this blog unlocking the mystery of semiconductors, I will also focus on semiconductor stocks in India and how to analyse them.

Semiconductors in simple languages are the chips that make your gadgets do things that they do. From your TV to your car, from your phone to complex data centres, all the brains fit into this chip called a semiconductor. Seemingly, this seems to be a very costly and humongous chip, right? Well, it’s exactly the opposite. The size of a semiconductor chip today is just 5nm (nano-meters). Do you know the size of the coronavirus? Well, that was 10-20 nm – depending on the variant. So, a thing this important is smaller than the size of a virus! Then it would be very costly, right?

See this chart showing the cost of semiconductor chips used in various day-to-day devices.

A brand-new car costs at least INR 7 Lakhs. The semiconductor used in this is just $460 or INR 39,000 – just 5-6% of the overall cost of a base variant car. Practically, the cars using a higher number of semiconductors will be the higher cars, so definitely the cost of semiconductors will be less than 5% of the overall cost of a car.

Now, think about it: a chip so small (smaller than a virus) and so insignificant in terms of cost has brought all the automobile manufacturers to their knees due to the shortage. Sounds weird, right?

To top it all off, sand is the base material for semiconductor chips. I’m not joking. There’s more on this in the blog.

This is exactly what makes understanding the semiconductor industry so interesting as well as important.

Let’s start with your morning scheduleJaipur Investment. If you are an office-going person, chances are you will start your day with an alarm clock and then switch on the lights in your room. If you’re a tech enthusiast, you’ll use an electric toothbrush, have your breakfast using a toaster or a microwave, and finally, use a car to get to your office to work the entire day on a laptop. If somebody asks what is common across all devices, the safest answer is semiconductors.

Semiconductors in today’s world are used across our daily routines. The alarm clock will use a semiconductor to know the time and play the sound at a particular time (those who are not old fashioned like me and use a phone as an alarm, chill; it functions in a similar way). The same goes with an electric toothbrush; it needs a semiconductor to know what is the speed at which it needs to rotate. When it comes to a microwave, the semiconductor would send signals to know at what temperature the oven needs to be heated.

The car uses semiconductor chips to control automatic functionality, such as your basic screen interface (where you use audio, videos, and maps), different driving modes, etc. Your phone is the ultimate user of semiconductor chips, with an iPhone using as many as 160 semiconductor chips in a single phone.

Semiconductors are made from a special type of sand called quartz, which has a high silicon content and is abundantly found in the earth’s crust.

Now, silicon is extracted from this sand to create silicon bars or cylinders, which are chipped into nano plates—ultimately, on which all the magic happensSurat Investment. The magic here is the transistors that fit on these silicon chips in specific designs and send and receive electrical signals to get the gadget going.

The process of creating a Semiconductor chip looks something like this:

Source: FOF PPFAS

There are 4 parts to semiconductor manufacturing:

Fun fact: Moore’s Law (it’s rather an expectation than a Law) by Gordon Moore, Co-founder of Intel, once stated that the number of transistors on a chip will approximately double every two years. This is an indication that the computing power of chips will double every two years. See the increase in a number of transistors in the Apple chip:

ARM, ASML, Synopsys, Siemens, Nvidia, Apple, Qualcomm, and others are global companies that design chips.

Currently, there are no semiconductor stocks in India that are involved in design.

Taiwan is the world leader in chips, led by the Taiwanese company TSMC, which has a 55% market share worldwide.

Source: FOF PPFAS

Currently, there are no semiconductor stocks in India engaged in fabrication.

As investors, we are interested in finding semiconductor stocks in India that are involved in the above process and can generate wealth for us.

As per the research report by the Semiconductor Industry Association, the demand for semiconductors is as shown.

Source: Semiconductor Industry Association 2020 report

As widely known, computer and communication devices have the most demand for semiconductors. With increasing connectivity and computing power, semiconductors are increasingly being used in industrial activities as well.

Semiconductor stocks in India catering to these sectors can create huge wealth for investors in times to come.

The Indian semiconductor market is worth $34.3bn and is expected to grow at a staggering 20% CAGR for the next 10 years to reach $100.2bn by 2032. The use of semiconductors in areas like safety, electrification, networking, and communication is expected to increase as electric vehicles (EVs) gain popularity and production in India.

However, with growing demand currently, the world, as well as India, is experiencing a shortage of semiconductors.

Source: McKinsey & Company

In 2022, there was a shortage of 22mn silicon chips (wafers). This shortage started with the COVID crisis. The chain of events for the chip shortage is very easy to understand.

During COVID-19 (2019-2022), initially, automakers, who were very prominent customers of semiconductor chips, started to pare down their chip orders to fabrication companies as they expected slower demand due to work-from-home and COVID restrictions.

However, as the lockdown opened, no one had imagined the rise in industry demand.

Source: Business Standard

The increase was not only in the number of cars demanded but also in the features of these new-age cars. These were possible only with semiconductors. Since there were no semiconductor stocks or manufacturers in India, the majority of the demand was for imports.

This led to modification of the guidance for order by global players, and hence, the supply chain had to be restructured. Added to this were geopolitical tensions like the Ukraine-Russia and Israel-Hammas wars. All of this dented the supply chain mechanics of semiconductor manufacturing, and hence, there was/ is a shortage of semiconductors.

Now that you understand the various processes in manufacturing a semiconductor chip, you can understand the complexity of the supply chain using the chart below.

Source: FOF PPFAS

As you can see, no single country or state does the entire value chain; for example, the US is very prominent in software and designing while, Taiwan is into fabrication (manufacturing) – 63% market share hence there is a requirement of a lot of import and export necessitating seamless supply chain – which is a challenge in the current geopolitical dynamics. Semiconductor stocks in India are affected by this as well.

Due to the semiconductor shortage, the estimated loss in revenue in the year 2021 alone was $110 bn. India, with its skillful and reasonably priced labor can tap this market and create wealth.

Some of the semiconductor stocks in India, like Bharat Electronics (BEL) have been in manufacturing of semiconductors which are used by ISRO, however, the scale and technology is not up to the current requirements in hi-tech devices. Today, 90% of the Indian semiconductor demand is met by imports from Taiwan, China, South Korea and the US.

Hence the Government of India, under its Digital India programme is giving incentives like the Production Linked Incentive (PLI) scheme, which will provide subsidies to companies entering semiconductor manufacturing. India’s Semiconductor Mission will have an outlay of INR 76,000 crores for boosting semiconductor production in India. The results for this are:

The next 5-10 years look very promising for the semiconductor stocks in India.

Considering the shortage of supply, major interest in the Indian market, and government support for the semiconductor industry, the semiconductor stocks in India make a valid proposition as a long-term investment theme.

Like any other stock/ theme investing, investing in semiconductor stocks in India also requires a stringent checklist approach. You must not miss the following prior to investing in semiconductor stocks in India.

Now, since we know the process of semiconductor manufacturing, let us divide our stock study according to the industry. Please note that the semiconductor industry is in a nascent stage in India, and semiconductor stocks in India discussed here have a small portion of their revenues dedicated to this. However, in the future, we will see revenue rising as this industry picks up pace in India.

Dixon is an Electric Manufacturing Services company that builds electric equipment like mobiles on a contractual basis (called contract manufacturers). The company uses semiconductors in the assembly chain to manufacture various devices, such as ACs, Fridges, Mobile phones, etc.

Tejas Networks designs and manufactures wireless network products. In 2024, the company set up a subsidiary, Saankhya Labs, to develop a system-on-chip for 5G telecom infrastructure. Tejas Network is a part of Tata Group (via Panatone Finvest Ltd.). Let us look at the company’s fundamentals.

CG Power is owned by Murugappa group, and has recently entered into the Outsourced Semiconductor Assembly and Test market which is a $13bn market globally. The company will invest 7,600 crores in the manufacturing facility over the next 5-yearsSurat Stock. The company is currently in the business of designing, manufacturing and marketing of products related to power generation, transmission and railKolkata Wealth Management. Let’s look at its financials.

The company is engaged in the water treatment field. Fact: A 30 cm semiconductor wafer requires 2200 gallons (8,800 liters) of clean water. Therefore, if semiconductor fabrication needs to boom in India, a support from the water treatment companies is essential. Therefore, VA Tech Wabag can be a great semiconductor stock in India. Let’s look at its existing financials.

Tata Elxsi is an ER&D (engineering research and development) player that supports various designers in designing semiconductor wafers. This is a crucial process as we have seen – more the transistors fit onto a semiconductor chip – better is the computing power. Today not a significant share of revenue is into designing semiconductors, however with the advent of Tata Electronics semiconductor chip, possibility of good order in-flows in the next 4-5 years is a possibility. Let’s look at the fundamentals of the company.