Proxy Smallcaps to Ride the Electronics Revolution

Summary

The video discusses the strong performance of AC manufacturers like Amber Enterprises, PG Electroplast, and EPD Durables, which reported over 70% year-on-year growth due to rising AC demand, especially in tier 2 towns and villages. These companies dominate the original design manufacturing market in India and have expanded capacity, aided by government support. Despite high valuations and potential risks like demand fluctuations, there are investment opportunities in proxy stocks such as Taranis Performance Materials, Bansali Engineering Polymers, and Supreme Petrochem, which supply materials for electronics and home appliances. These stocks are noted for strong balance sheets and market positions.

Takeaways

• 🌟 The earning season was exceptionally profitable for AC manufacturers, with leading companies like Ember PG, Electroplast, and E-Pad Durables reporting over 70% year-on-year growth.
• 🏭 These companies, known as Original Design Manufacturers (ODM) or Electronics Manufacturing Services (EMS) providers, design and manufacture ACs for major brands like Voltas, Blue Star, Samsung, and others.
• 📈 They hold over 90% of the Aftermarket Domestic (ADM) market share, and with initiatives like 'Make in India' and the PL scheme, they have significantly expanded their production capacities.
• ☀️ Rising heat waves across India have led to an unprecedented demand for ACs, especially from tier 2 towns and villages, turning a luxury into a necessity.
• 📊 Despite the high demand, India's AC penetration level is only 8%, significantly lower compared to 100% in China and 90% in the US and Japan, indicating a vast growth potential.
• 💹 The companies experienced a surge in orders due to supply not keeping up with demand, resulting in substantial profits.
• 🚀 Investing in companies like Blue Star and EMS players like Ember PG, Electroplast, and E-Pad Durables could be a way to capitalize on the growing electronics and AC market.
• 🔍 However, caution is advised due to the high valuations and price-to-earnings multiples these companies are commanding, which may not be sustainable.
• 📉 A less severe summer next season could lead to a correction in the stock prices of these companies, highlighting the need for careful investment consideration.
• 📈 Three proxy stocks for electronics that could benefit from the rise in electronics demand are Tyrannic Performance Materials, Bansali Engineering Polymer, and Supreme Petrochem, each with a strong balance sheet and notable market positions.

Q & A

What was the performance of AC manufacturers like Ember PG, Electroplast, and E-Pad Durables in the June quarter?

AC manufacturers such as Ember PG, Electroplast, and E-Pad Durables reported over 70% year-on-year growth in the June quarter.

What are some of the brands for which these companies design and make ACs?

These companies design and make ACs for brands like Voltas, Blue Star, Samsung, and other leading brands.

What is the term used for companies that design and manufacture products for other brands?

Such companies are referred to as Original Design Manufacturers (ODM) or sometimes as Electronic Manufacturing Services (EMS) providers.

What is the combined market share of Ember PG, Electroplast, and E-Pad Durables in the Indian AC market?

Together, these three companies command over 90% of the Indian AC market.

How has the 'Make in India' initiative and the PLI scheme supported these companies?

The 'Make in India' push and the Production Linked Incentive (PLI) scheme have supported these companies by encouraging them to undertake significant capacity expansions to meet the rising demand for ACs and electronics in India.

What was the new pattern of AC demand observed during the earning season?

A new pattern of demand was observed with a significant increase in demand for ACs coming from tier 2 towns and villages, where ACs have transitioned from being a luxury to a necessity.

What is the current AC penetration level in India compared to other countries?

India has an AC penetration level of just 8%, which is significantly lower than 100% in China and 90% in the US and Japan. It is also behind economies like the Philippines and Mexico.

What are the potential risks for investors considering investing in AC and electronics companies?

Investors should be cautious of the high valuations these companies are commanding, which could lead to a correction in their stock prices, especially if there is a benign summer in the next season and demand does not continue at the same pace.

What are some proxy stocks for electronics that could benefit from the rise in electronic items and ACs?

Some proxy stocks for electronics that could benefit include Tyrannic Performance Materials, Bansali Engineering Polymer, and Supreme Petrochem.

What are the financial strengths of Tyrannic Performance Materials as mentioned in the script?

Tyrannic Performance Materials has a strong balance sheet with almost no debt, and its return on equity (ROE) and return on capital employed (ROCE) stand at 24% and 32.5% respectively.

What is the market position of Supreme Petrochem in the PO industry?

Supreme Petrochem is a market leader in PO (Polyolefin) with a market share of over 50%.

Outlines

00:00

🌟 AC Manufacturers Report Record Growth

The video script discusses the impressive performance of AC manufacturers during the earning season, with companies like Ember PG, Electroplast, and E-Pad Durables experiencing over 70% year-on-year growth. These original design manufacturers (ODMs) and electronic manufacturing services (EMS) providers have seen a surge in demand, particularly from tier 2 towns and villages in India, due to rising heat waves. The demand for ACs has shifted from a luxury to a necessity, and despite India's low AC penetration rate of 8% compared to countries like China and the US, there is significant room for growth. The video suggests that investing in companies like these or in EMS players could be beneficial, but cautions viewers to be mindful of high valuations and the potential for market correction in the future.

Keywords

💡AC manufacturers

AC manufacturers refer to companies that produce air conditioning units. In the context of the video, these manufacturers experienced significant growth due to high demand, especially in India. The video mentions companies like Ember PG, Electroplast, and E-PAd Durables, which are leading in this sector and have reported over 70% year-on-year growth.

💡Year on year growth

Year on year growth indicates the increase in a financial metric (like revenue or profit) compared to the same period in the previous year. The video script highlights that the leading AC manufacturers reported over 70% year-on-year growth in the June quarter, showcasing their strong performance relative to the same period in the previous year.

💡Original Design Manufacturers (ODM)

ODMs are companies that design and manufacture products for other companies that will eventually sell them under their own brand names. In the video, Ember PG, Electroplast, and E-PAd Durables are mentioned as ODMs that make ACs for various brands like Voltas, Blue Star, Samsung, and others.

💡Electronics Manufacturing Services (EMS)

EMS refers to a business model where companies provide electronics manufacturing services to other firms. The video uses EMS as another term for ODMs in the context of AC manufacturing, emphasizing the role of these service providers in the electronics and AC industry.

💡Make in India

Make in India is a campaign by the Indian government to encourage companies to manufacture products in India. The video mentions that the ODM players have undertaken significant capacity expansions due to the 'Make in India' push and PLI (Production Linked Incentive) scheme support, indicating the government's role in promoting domestic manufacturing.

💡Heat waves

Heat waves refer to prolonged periods of excessively hot weather. The video correlates the rising heat waves across India with the increased demand for ACs, suggesting that the extreme weather conditions have driven the need for air conditioning units.

💡Tier 2 towns and villages

Tier 2 towns and villages are smaller urban areas and rural regions in India, which are not the primary or secondary cities. The video points out that the demand for ACs is now coming from these areas, indicating a shift in market dynamics and a broader penetration of AC usage in India.

💡AC penetration

AC penetration refers to the percentage of households or buildings that have air conditioning units. The video states that India has an AC penetration level of just 8%, compared to 100% in China and 90% in the US and Japan, highlighting the potential for growth in the Indian AC market.

💡Price to Earnings (PE) multiple

The PE multiple is a valuation ratio of a company's current share price compared to its per-share earnings. It is mentioned in the video as a measure of how expensive a stock is, with some companies commanding high PE multiples, which may not be suitable for long-term value investors.

💡Proxy stocks

Proxy stocks are shares in companies that indirectly benefit from a particular trend or sector. The video suggests considering proxy stocks for electronics, such as Tyrannic Performance Materials, Bansali Engineering Polymer, and Supreme Petron, as a way to play the strength of the electronics and AC market without directly investing in AC manufacturers.

Highlights

AC manufacturers reported over 70% year-on-year growth in the June quarter, driven by rising demand and heatwaves across India.

Leading companies like Amber PG, Dixon Electroplasts, and EPE Durables hold over 90% of the AC original design manufacturing (ODM) market in India.

With government support through the Make in India push and PLI schemes, these ODM players have significantly expanded their production capacities.

This year, a surprising increase in AC demand came from tier 2 towns and villages, where ACs are transitioning from luxury items to necessities.

India has one of the lowest AC penetration rates at just 8%, compared to 100% in China and 90% in the US and Japan, highlighting a vast growth potential.

The growing trend in AC and electronics demand is expected to continue, driven by increasing penetration in India, despite potential seasonal fluctuations.

High valuations of leading companies like Voltas and Blue Star suggest caution as some stocks may face corrections if demand doesn't sustain.

Proxy stocks for electronics, such as Tarang Performance Materials, Bansali Engineering Polymers, and Supreme Petrochem, are potential investment alternatives.

Tarang Performance Materials makes engineering thermoplastics used in home appliances, auto, and healthcare, with a strong balance sheet and almost no debt.

Bansali Engineering Polymers manufactures plastics for auto, home appliances, and healthcare with a debt-free balance sheet and strong returns on equity.

Supreme Petrochem, a market leader in polystyrene, has diversified its product line and maintains a debt-free status with significant investable surplus.

Despite their potential, some of these companies face challenges, such as high promoter pledging seen in Tarang Performance Materials.

The extraordinary growth in AC demand was unexpected, catching both leading brands and manufacturers off-guard, leading to supply shortages.

While high valuations might deter long-term investors, the overall electronics and AC market in India remains a growing sector with potential investment opportunities.

This transcript does not endorse any specific stocks but provides examples of companies that could benefit from rising electronics demand in India.

Transcripts

dear viewers this earning season was a

bumper Harvest for AC manufacturers

leading companies like Ember PG

electroplast and epad durables reported

over 70% year on-year growth in the June

quarter these are the companies that

among other things like washing machine

and electronic appliances design and

make ACS for various Brands like voltas

blue star Samsung and other leading

Brands they are called original design

manufacturers or

audience electonic Manufacturing

Services or EMS is another term used for

this in case of AC's itself these three

companies command over 90% of the ADM

market with the Mak India push and pl

scheme support these odm players have

undertaken significant capacity

expansions to cater to the trend of

rising AC and electronics penetration in

India the reason these companies came up

with the Blockbuster results was Rising

heat waves across the country and the

ensuing Dem for AC's so much so that a

new pattern was seen a lot of demand for

AC's this time came from tier 2 towns

and Villages what used to be luxury ons

has become a necessity now this

extraordinary demand was something that

neither the leading Brands nor audience

had anticipated or prepared for yet as a

demand outstrip 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 level standed just 8%

versus 100% in China and 90% in the US

and Japan we are also lagging behind as

compared to economies like Philippines

and Mexico in this regard so even if a

similar demand is not seen in the next

season AC penetration in India has a

long way to go now one way to bet on the

rise of electronic items and AC is

betting on companies like vas blue star

and on EMS players like Ember PG

electroplast and epeg dur

exciting at this opportunity is one

should be careful of the high valuations

these companies are commanding almost

price to Perfection some of these

companies are still offering

underwhelming returns despite the

support and yet they're commanding PE or

price to earning multiple that long-term

value investors may not be comfortable

for in fact a benign summer next season

may even lead to correction in some of

these stocks so are there more ways to

play this strength well yes consider

proxy stock for electronics for your

watch list today I'm going to talk about

three such companies first is tyrannic

performance materials a company that

makes engineering

thermoplastics these are used in

manufacturing home appliances Auto

consumer durables and healthcare

industry packaging segment and

stationary its clients include LG

Samsung codr gyin H Compton Hero Honda

baj TVs Ola ether maruti Suzuki Tata

hindra and Ashok Len to name a few the

company enjoys a strong balance sheet

with almost no debt it's return on

equity and return on Capital employes

stand at 24% and 32.5% resp the stock is

trading at a PE of 23 times now do note

that the shareholding pattern shows High

promoter pledging the pledging is for

security of loans which were taken by

the new management to take the majority

state in the company and the management

does intend to bring it down the second

this proxy list is bansali engineering

polymer it makes engineering Plastics

with applications in Auto home

appliances Electronics Healthcare and

kushion Weare with a debt free balance

sheet return return on equity and

capital employers stand at 18% and 24%

respectively at a PE of 23 times this is

a good Electronics proxy stock to have

on your watch list the third in this

list is supreme petran it was formed as

a JV between caparas of Supreme

Industries and Ras of exite pris Johnson

and Sonata software the company is a

market leader in poing with market share

of over

50% the end applications are similar

consumer durable stationary 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 investable surplus of

rupees 10 billion and a market cap of

160 billion return on equity and capital

employees standed 18% and 24%

respectively the stock is trading at a

PE of 40 times now please note that this

video does not imply any view on any of

the stocks share these are just some

examples to keep on your watch list that

could benefit from the rise of

electronics share your feedback in the

comment section and let me know to your

likes if you wish to know more about

such opportunity thank you for watching

goodbye e