Proxy Smallcaps to Ride the Electronics Revolution 

Dear Viewers,

This earnings season was a bumper harvest for AC manufacturers. Leading companies like Amber, PG Electroplast and EPack Durables reported over 70% YoY growth in the June quarter.

These are the companies that among other things like washing machines, and electronic appliances, design and make Acs for famous brands like Voltas, Bluestar, Samsung, and other leading brands. They are called original design manufacturers or ODMs.

Electronics manufacturing services (EMS) is another term used for these .

In case of ACs itself, these three companies command over 90% of the ODM market.With the Make in India push and PLI scheme support, these ODM players have undertaken significant capacity expansions to cater to trend of rising AC and electronics penetration in India.

The reason these companies came up with blockbuster results was rising heatwaves across the country, and the ensuing demand for ACs.

So much so that a new pattern was seen. A lot of demand for ACs came from tier 2 towns and villages. What used to be a luxury once has become a necessity.

Now this extraordinary demand was something that neither the leading brands nor ODMs had anticipated or were prepared for. Yet, as the demand outstripped supply, these companies were overflowing with orders and made huge money.

India, despite its harsh weather in summers, is one of the least penetrated countries in this category. The AC penetration levels stand at just 8% versus 100% in China and 90% in US and Japan. We are also lagging as compared to economies like Philippines and Mexico in this regard.So even if a similar demand is not seen next season, AC penetration in India has a long way to go.

Now one way to bet on this rise of electronic items and ACs is betting on companies like Voltas, Bluestar, and on EMS players like Amber, PG Electroplast, and EPACK durables.

Exciting as this opportunity is, one should be careful of the high valuations these companies are trading at. Almost priced to perfection, some of these companies are still offering underwhelming results despite PLI support. Yet, they are commanding PE or price to earnings multiple that long term value investors might not be comfortable with. A less harsh summer season next year may even lead to correction in some of these stocks.

So, are there more ways to play this trend?

Well yes. Consider proxy stocks for electronics for your watchlist.

Today, I'm going to talk about three such companies.

First is Styrenix Performance Materials, a company that makes engineering thermoplastics. These are used in manufacturing home appliances, automobiles, consumer durables, in healthcare industry, packaging, and stationery. Its clients include LG, Samsung, , Godrej, Daikin, Havells, Crompton, Kent, Eureka Forbes, Hero, Honda, Bajaj, TVS, OLA, Aether, Maruti Suzuki, TATA, Mahindra, Ashok Leyland to name a few.

The company enjoys a strong balance sheet with almost no debt.

Its return on equity and return on capital employed stand at 24% and 32.5% respectively. The stock is trading at a PE of 23 times.

Do note that the shareholding pattern shows high promoter pledging. The pledging is for security of loans taken by new management to take the majority stake in the company. And the management does intend to bring It down.

The second in this proxy list is Bhansali Engineering Polymers. It makes engineering plastics with applications in auto, home appliances, electronics, healthcare and kitchenware. With a debt free balance sheet, return on equity and capital employed stand at 18% and 24% respectively. At a PE of 23 times this is a good electronics proxy stock to have on your watchlist.

The third in this list is Supreme Petrochem. It was formed as a JV between Taparia's of Supreme Industries and Raheja's of Exide, Prism Johnson and Sonata Software. The company is the market leader in Polystyrene with market share of over 50%. The end applications are similar - consumer durables, stationery, toys, packaging and so on. It is entering more products to broaden the scope of use in similar industries. The balance sheet is debt free with investible surplus of Rs 10 bn, with marketcap of Rs 160 bn. Return on equity and capital employed stand at 18% and 24% respectively. The stock is trading at a 40 times PE.

Please note that this video does not imply any view on any of the stocks shared.

These are just some examples to keep in your watchlist that could benefit from the rise of electronics.

Share your feedback in the comments section and let me know through your likes if you wish to know more about such opportunities. .

Thank you for watching. Goodbye.