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%.