Touted as the “new oil”, semiconductors are indispensable to modern devices and key industries like automotive, defence, and healthcare.
Why are semiconductors so significant? These tiny chips power everything from microwaves to advanced systems. But their true value lies in enabling transformative technologies such as AI and 5G.
Global competition in this sector is fierce, with nations vying for leadership. India, in particular, is taking bold steps to challenge traditional leaders like Taiwan and South Korea.
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As AI becomes more deeply embedded in technologies like self-driving cars, smart devices, and advanced robotics, the demand for high-performance chips continues to surge.
This piece will examine five semiconductor stocks that could potentially benefit from the rising demand for AI chips.
#1 HCL Technologies Ltd
Leading the list is HCL Technologies, a global IT services powerhouse specializing in transformational outsourcing. The company offers an integrated portfolio of services, including software-led IT solutions, remote infrastructure management, engineering and R&D services, and BPO.
HCL Tech is at the forefront of securing deals in growth segments like semiconductor design and AI.
In the latest quarter, a US-based financial services and insurance firm selected HCL Tech to modernize its data insights for risk reporting, including fraud analytics and anti-money laundering for credit card and other retail functions.
Similarly, a Europe-based global semiconductor and computing technology giant engaged HCL Tech to augment its chip development program. HCL Tech is set to deliver across all phases of chip design, from verification and quality checks to power-performance metric analysis and physical design.
The company has also reported strong wins in generative AI (GenAI)-related programs, with most deals now incorporating AI capabilities. For example, a European semiconductor company tasked HCL Tech with creating ultra-efficient models for low-cost IoT microcontrollers. Additionally, HCL Tech’s Enterprise AI Foundry will build and operationalize AI models to enhance aftermarket sales operations for a US-based automotive firm.
On the financial front, HCL Tech posted revenues of ₹285.9 billion for Q2FY25, with an operating profit of ₹63.7 billion.
A significant milestone for the company was its collaboration with AWS and Google Cloud to accelerate GenAI adoption.
Despite industry challenges, HCL Tech’s management remains confident about gaining market share and sustaining growth, backed by a robust pipeline and strategic initiatives.
The second stock on this list is Bharat Electronics Ltd (BEL), an Indian state-owned defence electronics company headquartered in Bengaluru. BEL specializes in manufacturing electronic equipment for the Indian armed forces, including radar, communication systems, and electronic warfare systems.
In recent months, BEL has signed MoUs with organizations like AAI, Delhi Metro, IISc, and UAS, paving the way for increased civilian orders. The company also launched 40 new products in FY24, showcasing its focus on innovation.
For Q2FY25, BEL’s revenue grew by 15%, driven by a strong order book. During the quarter, the company secured orders worth ₹75 billion, bringing its total order book to ₹750 billion.
Higher revenue translated into a 38% YoY rise in operating profit, while operating profit margins improved by 5.1 percentage points to 30.4%, aided by lower inventory expenses.
Looking ahead, BEL expects to secure orders worth ₹250 billion in FY25, with revenue growth projected at 15-17%, fuelled by expansion in both defence and non-defence segments.
#3 CG Power & Industrial Solutions Ltd
Next on the list is CG Power & Industrial Solutions Ltd (Crompton Greaves Power), a global enterprise delivering comprehensive solutions to utilities, industries, and consumers for efficient and sustainable electrical energy management.
The company operates through two business divisions: Industrial Systems (focusing on motors, drives, and railways) and Power Systems (covering transformers, switchgear, and other related products).
CG Power recently entered a joint venture with Renesas Electronics and Stars Microelectronics to establish an OSAT (Outsourced Semiconductor Assembly and Test) facility in India. The facility aims to manufacture 15 million semiconductor chips daily, focusing on packaging, assembly, and testing for various applications.
In Q2FY25, CG Power reported revenues of ₹24.1 billion, reflecting a 20.5% YoY growth in constant currency terms. The company’s operating profit margin stood at 13% for the quarter.
Looking forward, management anticipates sustained growth in the Power Systems division, driven by increased government capital expenditure in transmission.
Despite its strong international presence, CG Power generates only 10% of its revenue from exports. However, the company has set a target to double its export revenue share to 20% over the next 4-5 years, starting from FY24.
#4 Kaynes Technology India Ltd
Next on the list is Kaynes Technology India, a prominent integrated electronics manufacturer in India. The company specializes in end-to-end solutions across sectors such as automotive, aerospace, defence, industrial, and medical fields.
Kaynes offers a wide range of services, including embedded design, IoT solutions, original equipment manufacturing (OEM), and third-party repairs.
A key development for the company is through its wholly owned subsidiary, Kaynes Semicon, which received approval on 2 September to establish a semiconductor unit in Sanand, Gujarat. The unit, with an investment of ₹33 billion, represents a significant step forward in the semiconductor space.
In Q2FY25, Kaynes reported revenues of ₹4.3 billion, a robust 48.5% YoY growth. Net profit for the same period rose to ₹630 million, compared to ₹250 million a year ago.
The company maintains a leading presence in build box and printed circuit board assemblies and is currently focused on expanding its printed circuit board assembly business.
With the global demand for semiconductor chips on the rise, Kaynes is well-positioned to capitalize on this opportunity for further growth.
The final stock on this list is Tata Elxsi, a global leader in design and technology services across industries, including automotive, media, communications, and healthcare.
Tata Elxsi, a Tata group company, is actively pursuing AI readiness, aiming to have 25% of its workforce trained in AI technologies by December 2024.
The company is forging partnerships with semiconductor firms to develop solutions on top of chips, further boosting its revenue generation.
The ER&D outsourcing industry in India, especially in software, automotive, and semiconductor sectors, is expected to thrive, with India projected to account for ~60% of global sourcing. Tata Elxsi remains a key player in this space, alongside competitors such as LTTS, KPIT, and Tata Tech.
Notably, the company has secured several multi-million-dollar deals for software development, advanced simulation, and digital twin programs.
In Q2FY25, Tata Elxsi posted revenues of ₹9.5 billion, marking an 8.3% YoY growth in constant currency terms. However, operating profit for the quarter remained flat at ₹2.7 billion, growing by just 1% YoY.
Despite this, the management remains optimistic about the growth trajectory and is committed to delivering strong results in the coming quarters.
In Conclusion
The surging demand for AI chips is set to reshape the semiconductor industry, offering significant growth potential for companies like these.
However, the industry is highly competitive, with global players commanding substantial market shares.
Investors must conduct thorough research before making any financial decisions and pay close attention to corporate governance as part of their due diligence when evaluating potential investments.
Happy Investing!
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
