India Market Strategy

India Market Strategy
PLI Schemes: A new pro-growth template for

India’s Industrial Policy?
Research Analysts
Neelkanth Mishra, Neelkanth.Mishra@credit-suisse.com /
Abhay Khaitan, Abhay.Khaitan@credit-suisse.com /
Akriti Swaroop, Akriti.Swaroop@credit-Suisse.com
December 2020
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure:
Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
Agenda
 Production-Linked Incentives (PLI) are a meaningful change in India’s industrial policy

– Rs2tn of incentives over 5 years for 13 sectors; 5-10% of revenues if output targets are met
– Design principles: i) incentivise downstream output; ii) time-bound incentives to gain scale; iii) rely
on 5-10 champions in each sector/sub-sector instead of spreading the incentive thinly
– Large part of funding through replacement of MEIS with WTO compliant schemes
– To take advantage of the drop in China’s industrial labour force
 Mobile, Autos, Textiles and Food Processing the most promising
– Mobiles: production could rise from 350mn to 600mn, value-add from 15% to 30%
– Autos: largest allocation; may incentivize i) EVs; ii) PV export; iii) component import substitution
– Textiles: focus likely on man-made fabrics; to make India compete in all four seasons
– Food processing: ready-to-eat/ready-to-cook, marine, processed F&V: large local value-add
 Could add US$144bn to FY27 sales and US$70bn to GDP; net exports $55bn higher
– Industry response enthusiastic so far; estimates could get recalibrated once details are known
– 2.2mn jobs, $22bn direct capex; mobile PLI FY22-27; others FY23-27 (capex likely in FY22)
– Upstream/second-order capex and labour impact not included
CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 2

PLI Schemes: a sharp turn in India’s industrial policy
Timeline for the PLI schemes: the first three run FY22-26 and the next ten FY23-27
Source: PIB, Credit Suisse estimates
 Production-Linked Incentive (PLI) schemes launched for 13 sectors

 The schemes provide 5-10% incentives on revenues beyond a set threshold
 Template set with handsets; then extended to medical devices and Pharma API, and eventually
extended to ten more sectors on 15-Nov, as savings from rollback of MEIS became available

MEIS withdrawal opened up fiscal space
Sectoral split of likely MEIS outgo in FY20 Rs1.2-1.3tn of Rs2tn PLI spend from MEIS savings
Others Leather Solar White Goods Specialty Steel Already

Electronics 4% 1% 3% notified
2% 3%
4% Mobile
Autos 21%
Jewellery Food
6%
28% 6%
Medical Drugs-
Textile
KSM
Engg. Goods 5% 3%
11% Medical
Telecom Devices
6% 2%
Battery
9%
Textiles Pharma
14% 8% Electronics
Chemicals 3%
18%
Automobiles
Agri 29%
14%
Split of Rs477bn of MEIS Split of Rs2.tn of PLI schemes
Source: Ministry of Commerce, Credit Suisse estimates Source: Ministry of Commerce, Credit Suisse estimates
 MEIS rollback effective Jan-21: fiscal cost ~Rs0.5 tn/yr (2.4% of exports); was WTO non-compliant
 For PLI, total funds allocated to the last set of 10 sectors over five years, i.e. Rs1.46 tn, was likely
decided based on the savings from replacing MEIS with WTO compliant schemes
 The sectoral split though is different: Jewellery/chemicals lose; autos, food gain

Design principles: build scale downstream, time-bound
Design Principle 1: • A 5-8% incentive on output value is 50-70% of assembly value-add: very attractive
• Assumption: scale downstream will encourage upstream value-addition
Build Scale Downstream
• Upstream firms/industry likely to respond without incentives; pushed by customers
Design Principle 2: • “Infant Industry Protection” cannot continue forever

• Focus on helping firms/industry scale up to a size where it becomes sustainable
Build Scale,
• Examples: electronic supply chain, dairy processing, electric vehicles
give an end-date
Design Principle 3: • Instead of giving Re1 each to 100 firms, give Rs10 each to 10 firms
• Selected mainly on the basis of size: larger firms given preference
Rely on “champions”
• A 1-2% incentive may not drive investments; 4-8% does
Several departures from the policy norm

 Monetary incentives for firms to grow
 Working closely with industry to maximize impact of the fiscal spending
 In each sector/sub-sector choose 5-10 firms objectively to provide incentives to
 MEIS was on all exports in the sector: PLI is for incremental output to a few firms and a few products
Source: Credit Suisse

Objectives of PLI scheme vary by chosen sector
Likely split of RoTDEP and RoSCTL annual outgoings Policy objectives differ for various sectors
600 PLI Sector PLI amount Imports Exports Net Imports Basic principle
Annual outgo of Government (Rs Bn) (Rs bn) (5 Years) Annual Annual Annual
Mobile 410 74 272 -198 Export boost
500 277
Pharma- KSMs* 69 68 24 44 Import substitution for security
Medical Devices 34 237 104 133 Import substitution for cost
400
Battery 181 4 1 3 Export boost
Automobiles 570 371 1,184 -813 Technology transition
300 Pharma Drugs 150 165 1,155 -989 Export boost/Import substitution
Telecom 122 140 20 120 Import substitution for security
200 Textile 107 81 1,098 -1,017 Export boost

Food Processing 109 19 68 -49 Export boost for surplus food
Solar Panels 45 194 21 173 Import substitution for cost/security
100
White Goods 62 410 100 310 Import substitution for mfg. boost
Specialty Steel 63 4 1 2 Export boost
0
Computer 50 224 1 223 Import substitution for cost
MEIS Outlay RoTDEP/RoSCLTL Fiscal Savings
Source: Ministry of Commerce, Credit Suisse estimates Source: Ministry of Commerce, Credit Suisse estimates
 The MEIS scheme is to be replaced by WTO compliant RoSCTL primarily for textiles, and RoTDEP for
other sectors. Expected payout for these to be smaller than MEIS, resulting in savings
 Policy objective differs for various sectors, for mobile, textile, pharma (net exporters), it could be to
boost exports, while for rest, it could be to substitute imports for cost or security

Structural change: China’s declining labour force
China’s labour force to continue to shrink Industrial workforce has shrunk by 30mn in 7 years
850 105 China industrial employment
China Labour Supply (mn) Forecast 100
100 98 98
95
800 95
90
90
750
85
79 79
80
700
75 72
70
650
65
600 60
1990 1995 2000 2005 2010 2015 2020 2025 2030 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Oct-20
mn
peop
Source: International Labour Organisation (ILO), Credit Suisse Source: CEIC, Credit Suisse estimates
 A structural change in global manufacturing is driven by the demographic shift in China: the after-
effects of the one-child policy mean that the labour force is expected to shrink by 50 mn by 2030
 A large drop is showing up in industrial employment which has fallen by 28 mn since December 2014,
and down 28% from the peak, mostly in low-wage industries (textiles, toys, footwear, etc)

India advantage of growing labor force, productivity
Given the scale of the decline, India has a chance Weak productivity growth in SSA/MENA
12%
RoW Sub-Saharan Africa Mid-East, N Afr, AFG, PAK India
CHN 10%
EUR
RUS 2018-2030 Change in Labour Force (mn) 8%
JPN
NPL
PER 6%
IRQ
VNM 4%
AFG
BRA 2%
USA
PHL
MEX 0%
BGD
N Afr -2%
IDN
PAK -4%
IND
Sub S Afr
-6%
(50) - 50 100 150 200 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Source: WTO, Credit Suisse Source: WTO, Credit Suisse
 Given the scale of the drop in labour force, India’s size stands out
 Sub-Saharan Africa, MENA, PAK & AFG together add 229m of the 360m global addition till 2030
 But they have seen muted and near-zero growth in per-worker output in the past five years, meaning a
sharp increase in manufacturing may not be an attractive option in these geographies

Import duties preceded PLI for several sectors
Changes in import duties over the years Most sectors has seen increase in import duties in past 2Y
60% Import Duty 2014 2015 2016 2017 2018 2019
% of products (HS code 6 digits)
seeing change in import duties Mobile 0 0 0 0 20 20
40%
Pharma- KSMs 8 8 8 8 10 10
20% Medical Devices 8 8 8 8 10 10
Battery 10 10 10 10 14 14
0%
Electronic components 2 2 2 2 2 2
-20% Automobiles 29 25 25 33 42 42
Pharma Drugs 10 10 10 10 10 10
-40%
Telecom Equipment 7 7 7 7 8 9
-60% Textile 10 10 10 10 25 25
Food Processing 42 42 42 42 47 47
-80%
1996-2000 2000-2005 2005-2010 2010-2014 2014-2019 Solar Panels* 0 0 0 0 0 0
White Goods 8 8 8 9 10 12
Increase Decrease
Specialty Steel 5 5 10 10 15 15
Source: WTO, Credit Suisse estimates Source: WTO, Credit Suisse estimates
 Several of these sectors have been on the government radar for a while, as seen in the imposition or
hiking of import duties over the past few years.
 40% of tariff lines saw increases in import duties in the past five years. In every five year period up
until 2010, 60-70% of tariff lines used to see cuts: this has reversed since then.

Broad based increase in import duties in last 5 years
Weighted average import duties on MFN & preferential rates Weighted average import duties by sector
30
Weighted average import duties Agri
MFN Rates Preferential Rates
Textiles
25
Leather
20 Jewellery
Chemicals Weighted average
15 Others import duties
Engg. Goods
10 Autos
Ores
5 Petroleum
0 10 20 30 40 50 60 70 80
0
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2019 2014 1996
Source: WTO, Credit Suisse Source: WTO, Credit Suisse
 The average import duty, as weighted by the value of imports in each category, fell until 2007, then
stayed mostly unchanged until 2017, but has now risen to nearly 12%.
 The increase above 10% is mainly because of agriculture and textiles; the duties for other products
mostly average below 10%, broad based increase in 2014-19.

Handsets: Most advanced, the most transformational
Global producers to get most of the incentives India was already an exporter: exports to rise
Electronic 5Y Production: US$153bn
Components 250
4% mn units
200
Domestic Firms
17% 150
100
50
(50)
(100)
Global Firms (invoice FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
value >US$200)
79% Imports Exports Net Imports
Source: Press Information Bureau, Credit Suisse Source: WTO, Ministry of Commerce, Credit Suisse
 ~80% of the incentive is for the global manufacturers, which by scheme design, will have higher ASPs
 Domestic firms may see larger numbers, though
 As India is already a net exporter of phones, incremental output likely to be exported

2 clusters emerging as mobile manufacturing hub
Emerging production hubs for electronics in India
Mobile Manufacturing Plants
HIMACHAL PRADESHHAMIRPUR Noida Plant of Samsung
Andhra plant of Foxconn
Chennai plant of Pegatron, Foxconn
Kolar plant of Wistron
 Two clusters are emerging, one near Chennai (Sri City in AP, Sriperumbudur in TN, Kolar in Karnataka
and one near Delhi (Greater Noida).

Handsets: India’ share of production to rise steadily
India’s share of global smartphone production India phone production ASPs could rise sharply
Smartphone production (Mn) Govt target of 10,000 16,000

1,800 40%
1bn by FY25 9,000
1,600 Forecast Forecast 14,000
35%
8,000
1,400 12,000
30% 7,000
1,200 10,000
25% 6,000
1,000
5,000 8,000
20%
800 4,000
6,000
15%
600 3,000
4,000
10% 2,000
400
2,000
200 5% 1,000
- -
- 0%
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY25e
FY17 FY18 FY19 FY20 FY21e FY22e FY23e FY24e FY25e
Production (Rs Bn) Implied ASP (Rs)
Global India India as % of Total (RHS)
Source: Ministry of Electronics, Credit Suisse estimates Source: Ministry of Electronics, Credit Suisse estimates
 We expect production to reach 600mn by FY26, taking volume share for India to 40%. This is much
lower than the government’s aspirational target of 1 bn units, but still a large increase
 Shifting of global brands like Apple and Samsung (higher-end phones), will also raise ASPs of
handsets produced in India

Handsets: Apple, Samsung may shift their vendors too
Global smartphone share by company ASPs of different brands: Apple and Samsung lead
Others Apple
900
17% 15%
ZTE 800
0%
700
Smartphone ASP (US$)
Lenovo 600
3%
vivo 500
9% Samsung
20%
400
300
OPPO
8% 200
100
Xiaomi Huawei+Honor
12% 16% 0
Apple Samsung Huawei OPPO vivo Lenovo Xiaomi Others ZTE
Smartphone market share (2020) +Honor
Source: Ministry of Electronics, Credit Suisse estimates Source: Ministry of Electronics, Credit Suisse estimates
 Indian firms do not own global brands and production shift would depend on global OEMs. Apple and
Samsung shifting production to India is a win
 These firms are also likely to shift their component suppliers (already underway), as they plan for the
post-subsidy environment. These vendors can then be accessible to local firms as well

Handsets: Incentives match assembly costs
Bill of Materials for a high-end smartphone Bill of Materials for a low-end smartphone
Supporting Test/Assembly Application
Supporting Test/Assembly Application 8%
materials Processor
materials 3% Processor
4% 19%
Mechanicals 5% 17% Mechanicals
7% 9%
Battery Other
Other 2% Battery
Electronics Sensor Electronics 4%
7% 3% 2%
Power/Audio Power/Audio Sensor
2% 2% 1%
Cameras
Mixed 13% Mixed Cameras
Signal/RF Signal/RF 16%
8% 10%
Memory Memory
12% 14% Display
Display 11%
21%
BoM of $195 of Redmi 10X 5G
BoM of $420 of Galaxy S10+
Source: TechInsight, Credit Suisse estimates Source: TechInsight, Credit Suisse estimates
 Companies are incentivised only to grow assembly, where the incentives are the highest: the 4-6%
incentives could be 100% of the assembly costs of high end phones and ~50% for low-end phones
 Basic components such as casing, chargers and box content may be easy to do in India, but shift in
assembly of sub-modules such as cameras, acoustics, batteries and displays is likely to be next step

Handsets: Can add 0.6% to FY26 GDP
Impact on GDP: 0.6% of GDP in FY26 Impact on India’s trade balance
30 0.7% 10
GDP Impact ($ Bn) As % of GDP (RHS)
0.6% 5 Forecast
25
0.5% 0
Mobile Phones
20
-5
0.4%
15 -10
0.3% Estimated Net imports of
-15 Mobile phones ($ Bn)
10
0.2%
-20
5
0.1%
-25
0 0.0% -30
FY22 FY23 FY24 FY25 FY26 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Source: Credit Suisse estimates Source: Ministry of Commerce, Credit Suisse estimates
 From a current value addition of 10-15%, the government hopes that domestic value addition reaches
35-40%: at the mid-point of that range, on our expectations of production, this scheme could add
US$25 bn of value addition, or 0.8/0.6% of FY20/ FY26 GDP
 This would also imply additional $23 bn of exports by FY26

Electronics: On the coat-tails of handsets, to add heft
Laptop + tablets + desktops 46% of handset market India a net importer: Production share is just 1%
Desktop
Tablets 5% Share of GLobal 250 20%
7% Demand (2025) 18%
200 16%
14%
Laptops 150 12%
19%
10%
100 8%
6%
50 4%
Phones
69% 2%
0 0%
FY21 FY22 FY23 FY24 FY25
India Production World Demand India as % of world (RHS)
Source: TechInsight, Credit Suisse estimates Source: TechInsight, Credit Suisse estimates
 The global market for laptops, tablets and desktops is about US$220 bn, or 46% of the global
handset market, so growth in this market can help complement the component ecosystem
 India’s global share of production in these is just 1% and that too only in desktops which continue to
shrink in market size globally

Chemicals: Government paying the capital costs
Imports of KSM/APIs in the list since 2011 Incentive high for top four fermentation products
90 14.0 25
12.0
80 12.0
23 20
70 10.0
60 15
8.0
50 6.0
6.0
40 10
4.0 10
30 2.4
5
20 2.0 1.0 0.6
4
10 0.0 0
2 2
0
Penicillin G / TIOC / Key Niche Other
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 7-ACA Clavulanic Chemical Fermentation Chemical
Total KSM imports (Rs Bn) Max incentive per product (Rs bn) Number of products
Source: Ministry of Commerce, Credit Suisse Source: Company Data, Credit Suisse estimates
 India a net exporter of pharma API but for some (energy-intensive) molecules imports up steadily
 These 41 molecules segmented into : (1) key fermentation based (penicillin) (2) fermentation-based
niche; (3) key chemical synthesis; (4) other chemical synthesis
 Incentives per molecule the highest for the fermentation products: given cost difference with China it
may not be enough, but over 5 years will pay for the capital costs
Medical Devices: Foreign firms likely beneficiaries
Net imports of medical devices Split of 2019 medical device imports

160 Surgical
Instruments
Others 10% Endoscopes
140 22% 2%
Catheters
120
9%
100 Needles
3% Ultrasonic
apparatus
80 Heart 5%
1% Respiratory
60
Dental 5%
3% Hearing MRI
40
6% 4%
20 Orthopaedic
Opthalmic 4%
instruments Syringe
0 2% X-Ray Computed
5%
2013 2014 2015 2016 2017 2018 2019 2020 17% Tomography
3%
Medical Devices Net Imports (Rs Bn) Split of Rs236bn of imports (2019)
Source: Ministry of Commerce, Credit Suisse Source: Company Data, Credit Suisse estimates
 Net imports of medical devices have grown steadily even as exports have risen in some sub-segments
(Phillips for example exports to 55 countries from India). A very wide variety of products are imported
 Firms are to have a 5% incentive on incremental sales above the threshold minimum with incentives
capped at Rs370mn per applicant in Y5, implying sales of Rs7.4bn per segment and firm

Autos: Largest beneficiary of PLI scheme
Incentives to auto sector going up sharply Auto Component imports
Average Annual Incentive (Rs bn) Cooling Rubber Comp

System 2% Engine comp.
120 Misc
6% 16%
6%
114
100
Interiors
80 8% Suspension &
ACC is Advanced breaking
Chemistry Cell 8%
60 (batteries)
36
40 Electrical and
Electronics Body/Chasis
31 15% 10%
20
Drive
0 Transmission/
MEIS - Autos Autos PLI ACC PLI Imports of Auto
Sharing
components (FY20)
29%
Source: Ministry of Commerce, Credit Suisse estimates Source: Company Data, Credit Suisse estimates
 Given that Autos were a relatively small part of the MEIS scheme, but are by a margin the largest
beneficiary of the PLI schemes, the sector should get a boost
 India imports US$15bn of auto components, automotive electronics, like sensors, magnets, electric
motors and TFT screens. As are air bags and their components, and automatic transmissions.

Autos: EV production or ICE export gain?
Share of exports in total production Cost curve of ICE ownership vs EV for diff. subsidies
60
50% 46% Gasoline EV (2 lakhs) EV (4 lakhs)
45% EV(6 lakhs) EV(8 lakhs)
50
40%
35% 40
30%
25% 30
20% 18%
15% 20
15%
10% 10%
10% 6% 10
5%
Average daily drving distance in India
0% -
LCV Tractors MHCV 2W PV 3W 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
Share of Exports-FY19, FY20 Average Average daily distance in km
Source: Ministry of Commerce, Credit Suisse estimates Source: Company Data, Credit Suisse estimates
 Incentives may be split between incentivizing: i) EVs; ii) PV exports; iii) substituting component imports
 Auto OEMs have grown exports, and several like Suzuki/Toyota already have export plans
 EVs: significant gap between the TCO for EVs and those with ICE. Even at Rs0.5mn subsidy per car
the gap may remain meaningful if batteries cost US$200/kwh

Battery: Rs180bn for domestic production
50 GWh likely enough for ~20% EV penetration Key Suppliers and their plans for manufacturing
140 130 Company Plans
120 JV between Suzuki-Toshiba-Denso, have

Suzuki –
GWh of battery capacity planned Rs50bn investment over FY21-25 for
needed for 100% EV by FY26 Toshiba -
100 setting up India’s first Li-Ion battery
Denso
manufacturing plant in Gujarat
80
66 Exide set up a JV with Swiss firm Leclanche
58 to build Li-ion batteries for EVs in India. Exide
60 Exide
recently increased its stake in the JV to
80.15%
40
Tata Tata Chemicals has invested Rs40bn to set
20 Chemicals up 10GW Li-Ion battery plant in Gujarat
0 ATL plans to invest Rs70bn over the next few

Amperex
PV 2W Buses & Trucks years to set up Li-Ion battery manufacturing
Technologies
unit in Haryana
Source: Credit Suisse estimates Source: Company Data, Credit Suisse estimates
 The scheme targets to can fund capacity 50GWH of battery capacity at US$80mn/GWH cost, which
according to CS India Auto analysts can support up to 20% penetration.
 As EV demand rises (more “when” than “if”), battery demand to rise.
 Several large firms had expansion plans even before the PLI scheme, which could get expedited.

Textiles: The empty season, vertical integration, scale
Cotton apparel production moving to Bangladesh Synthetic apparel production moving to Vietnam
50% 50%
45% 45%
40% 40%
CN
35% CN 35%
30% 30%
25% 25%
20% 20%
15% BD 15%
VN
10% 10%
5% BD
5%
VN IN
0% 0% IN
2001 2003 2005 2007 2009 2011 2013 2015 2017 2001 2003 2005 2007 2009 2011 2013 2015 2017
China Bangladesh Vietnam India China Bangladesh Vietnam India
Source: Ministry of Commerce, Credit Suisse estimates Source: TradeMap, Ministry of Commerce, Credit Suisse estimates
 In a labour intensive industry as apparel, it is surprising that India has not benefited from
manufacturing shift from China, given India’s low labour costs and historically strong record
 Cotton apparel exports seem to have moved to Bangladesh and synthetic apparel to Vietnam with
India's share marginally down in synthetic and unchanged in cotton

Textiles: Focus could be on man-made apparel
China dominates fabric production and exports India lags in synthetic yarn and fabric
60% 60%
China exports as % of global exports India exports as % of global exports
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2001 2005 2009 2013 2017 2001 2005 2009 2013 2017
Cotton Fiber C. Yarn C. Fabric Synth Yarn S. Fabric
Cotton Fiber C. Yarn C. Fabric Synth Yarn S. Fabric
Source: TradeMap, Credit Suisse Source: TradeMap, Credit Suisse
 Apparel supply chains are complex and availability of raw material close by is important.
 Whereas China dominates both the cotton and synthetic fabric markets, India’s vertical integration in
cotton fibre, yarn and fabric is much better than in synthetic yarn and fabric
 It is possible that the government chooses to incentivise the production of man-made apparel

Food processing: Gain scale in RTC/RTE, Marine, F&V
India’s food exports, and segments covered by PLI In these segments, India’s global share is very low
Ready to
Eat/Ready to Could be
Cook part of the Marine Products
1% Marine scheme
Products
Honey
22%
Organic eggs
Fruits &
Vegetables
11% Desi Ghee
Poultry meat Fruits & Vegetables India Exports

0.0% as % of World
Other Food Desi Ghee
0.2% Ready to Eat/Ready to Cook
66%
Mozzarella
cheese
Honey Mozzarella cheese
0.1%
0.3% Organic eggs
0.2% Poultry meat
Split of $30bn of Food exports
0% 1% 2% 3% 4% 5%
Source: Ministry of Commerce, Credit Suisse estimates Source: TradeMap, Ministry of Commerce, Credit Suisse estimates
 Scheme details not known, but focus areas: ready-to-eat/ready-to-cook (RTC/RTE), marine products,
processed fruits and vegetables (F&V), honey, desi ghee (rarefied butter), mozzarella cheese, organic
eggs and poultry meat
 They account for 34% of India’s food exports and India’s share of global trade in these is very low

Food processing: Focus to boost exports
A very small part of India’s food is processed Marine exports have grown meaningfully
40% 500
35% 450
400
30%
350
25%
300
20% 250
15% 200
150
10%
100
5%
50
0% 0
Dairy Fruits & Vegetables Poultry Marine 2013 2014 2015 2016 2017 2018 2019 2020
Share of Food Processing Sector Marine Exports (Rs Bn)
Source: IBEF, Credit Suisse Source: Ministry of Commerce, Credit Suisse
 Currently, only 3% of India's food is processed and this should rise naturally going forward. In many
cases, the lack of supply chain infrastructure is the bottleneck, such a cold chain for flavoured yoghurt
 Given the natural demand growth for processed food, and the pre-incentive growth in marine exports.
the government may keep a minimum investment threshold to ensure more domestic value add.

Telecom Equipment: Industry changes a dampener
Global wireless telecom capex: less hardware now Global wireless hardware capex flattish for a decade
250 60% 80 30%
70 25%
50%
200
60 20%
40%
150 50 15%
30% 40 10%
100
30 5%
20%
20 0%
50
10%
10 -5%
0 0% 0 -10%
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020E 2022E 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020E 2022E
Global wireless capex ($Bn) Hardware as % of Total (RHS) Global Wireless Hardware Capex ($Bn) Growth YoY (RHS)
Source: Omdia, Credit Suisse Source: Omdia, Credit Suisse
 The quantum of funds made available to manufacturing telecom equipment is meaningful and if the
incentives were 5-8% of incremental sales, this would imply Rs 534 bn of sales in Y5
 But hardware share of telecom capex has dropped from 40%+ to 30-33%, keeping the global
wireless telecom equipment hardware flat. The use of software is expected to rise further

Positive industry feedback
Estimated GDP impact from the PLI schemes Sector-wise split of annual value-add in FY27
Annual Investment (GFCF)
$Bn Domestic Value Addition from Incremental Sales
80 As % of GDP (RHS) 2.0% As in FY27 Incremental Sales Domestic Value Addition Success Rate
1.8%
70
US$ Bn As % of GDP US$ Bn As % of GDP
Estimated GDP Impact from the 13 PLI 1.6%
60 schemes announced Mobile 66 1.5% 25 0.6% 216%
1.4%
50 Autos 16 0.4% 12 0.3% 70%
1.2%
40 1.0% Battery 15 0.3% 4 0.1% 70%
0.8% Food 13 0.3% 10 0.2% 100%

30
0.6% Pharma 4 0.1% 2 0.0% 70%
20
0.4% Textile 4 0.2% 3 0.1% 80%
10
0.2% Telecom 7 0.2% 4 0.1% 50%
0 0.0% Others 19 0.5% 10 0.2% 70%

FY22 FY23 FY24 FY25 FY26 FY27
Total 144 3.5% 70 1.6% 82%
Source: Credit Suisse estimates Source: Credit Suisse estimates
 Feedback from industries targeted by these PLI schemes has mostly been positive so far
 Further to the value-added by the industries, the capex done by winners of PLI schemes can also add
to GDP FY22-27

PLI schemes can add 1.7% to FY27 GDP
Incremental sales by sector due to PLI scheme Increase in value-add (i.e. GDP) by sector
80 As % of GDP 1.8%
160
70 1.6%
140 1.4%
Incremental Sales due to PLI Scheme ($ Bn) 60 Incremental Domestic Value
120 addition due to PLI Scheme ($ Bn) 1.2%
50
100 1.0%
40
80 0.8%
30
0.6%
60
20
0.4%
40
10 0.2%
20
0 0.0%
0 FY22 FY23 FY24 FY25 FY26 FY27
FY22 FY23 FY24 FY25 FY26 FY27
Mobile Autos Battery Pharma Food Textile Telecom Others
Mobile Autos Battery Pharma Food Textile Telecom Others
 We estimate that the schemes can generate US$144bn in incremental sales by FY27 and US$70bn
of GVA 1.7% of FY27 GDP.
 Bulk of this production is likely to be exported, trade deficit can shrink by US$55bn as well.
 Estimates are likely to get recalibrated as details emerge for the ten schemes announced 15-Nov

Direct impact: Less capex, more labour
Split of potential direct employment of 2.2 mn Split of potential direct capex of US$21 bn
Others Mobile Others Mobile

15% 16% Autos 15% 16%
4%
Telecom Battery
3% 1% Telecom
6%
Pharma Textile
1% 3%
Food
7%
Food Autos
9% 26%
Pharma
8%
Textile
53% Split of incremental Battery
Split of incremental
17%
direct jobs direct capex
 Barring a few sectors such as chemicals where the incentives may just fund capacity, asset turns in
sectors such as handset, electronics and apparel are higher than normal: very likely by design
 The direct impact on jobs would be most significant in textiles and mobiles. Sectors driving the bulk of
the capex would be autos, batteries, handsets and pharmaceuticals.

Significant indirect impact on capex and jobs
The annual direct wage bill would be ~Rs550 bn This is still a small part of estimated value addition
Mobile
Others 15%
20% Textile
Autos
7%
Others
Battery Pharma
Telecom
2%
3% Direct Wage Bill as %
Battery of Estimated Value add
Pharma
3%
Telecom
Food
8% Food
Mobile
Textile
42% Autos
Split of incremental
wage bill
0% 10% 20% 30% 40% 50% 60% 70%
 Even at an average wage rate of Rs20k/month, with 20% added for managerial/other overhead
costs, the total direct wage bill would come to only Rs550 bn.
 The capex and employment generated in these upstream sectors could be a multiple of the direct
employment and capex.

Significant change in India’s external balances
Change in India’s trade balance (more exports) Aggregate trade deficit can shrink US$55 bn in FY27
25 0.6% 60
0.5% Change in trade balance

20 50
from FY21 (US$ Bn)
0.4%
15 40
0.3%
10 30
0.2%
20
5
0.1%
10
0 0.0%
Battery Pharma Telecom Textile Others Food Autos Mobile
0
Change in Trade Balance As % of GDP
2022 2023 2024 2025 2026 2027
 Some of the incremental output from these schemes is going to be for domestic demand, but the
choice of sectors and the design of schemes suggests that a big chunk would improve trade balance.
 The largest impact can come from handsets, followed by autos and then textiles and by FY27, the net
impact on the trade balance could be 1.4% of GDP

PLI Schemes: Key Beneficiaries across sectors
Key beneficiaries of PLI Scheme
Stocks Market Cap Rating Price Target P/E EPS Growth
Rs Bn 2020 2021 2022 2020 2021 2022
Industrials
ABB 245 O 1,155 1,150 103 61 48 -37% 75% 28%
Siemens 544 N 1,527 1,450 71 51 43 -30% 39% 19%
Adani Ports 958 O 471 425 25 22 17 -6% 16% 25%

Amber 78 # 2,325 45 102 36 69% -54% 188%
Dixon 133 # 11,393 111 86 46 90% 20% 90%
Autos
Maruti Suzuki 2,357 O 7,802 8,058 42 53 32 -25% -21% 68%
Mahindra & Mahindra 895 O 750 740 27 27 20 -31% 0% 31%
Greaves Cotton 19 # 84 14 24 14 -24% -44% 70%
Pharma
Lupin 423 N 933 930 88 40 25 -49% 120% 59%
Aurobindo 528 O 900 900 18 16 15 16% 14% 9%
IPCA Labs 284 # 2,250 # 47 25 25 36% 85% 2%

Source: PIB, Credit Suisse estimates
Aarti Drugs 70 # 752 # 51 27 21 53% 91% 26%
Food Processing
Neslte 1,719 O 17,826 17,800 78 66 58 11% 18% 15%
ITC 2,438 N 198 200 16 18 15 22% -13% 21%
Britannia 879 N 3,648 3,620 62 47 45 22% 31% 4%
Avanti Feeds 73 # 537 #

Pharma PLI schemes can add 10-15% to industry
profits
400 Rs bn 375
Bulk Drugs PLI Formulations PLI
300
219 Induces
220
Import ↓
capex by 300
200
industry Export ↑
150 150
100
75
69 70 75 66 9
0
Government Incentive Industry Capex Incremental Sales/yr. EBITDA/yr.
3 PLI schemes – Formulations (incentive of Rs 150bn), Bulk Drugs (Rs 69.4bn) and Bulk Drug Parks (support of Rs 30bn)
 Bulk Drugs PLI aims at import substitution (74% imported from China); Formulations PLI -> export augmentation
 Incentives = capex. Peak incremental sales ~US$5bn and EBITDA of US$750-1,000mn adding 10-15% to industry profits
 IRR: 10-15% in Bulk Drugs PLI and ~20% in Formulations PLI; Bulk Drug Parks can further improve IRR
 Cost differential vs China of ~25% can be addressed through deployment of superior technology and existing import duty.
 Bulk Drugs PLI – 41 KSMs/DIs - 50% of incentives for top four fermentation products
 Good industry response– 215 applications from 83 manufacturers (160 would be eventually selected)
 Beneficiaries: Aurobindo and Lupin (large antibiotic export portfolio).

Autos takes centre stage in PLI – ~5x increase in outlay
Autos accounted for 6% spend in erstwhile MEIS Autos + Batteries combined to account for ~38%
scheme spend under the new PLI scheme

Debate #1: Democratic distribution of incentives vs
focus on champion segments
Autos is >40% of domestic manufacturing Unless focused, PLI to amount to ~3.4% of new sales

Debates #2: EVs vs ICE
GDP multiplier effect largest for domestic ICE PV vs EV
 Local content in ICE Engine ~80%
 Local content in EVs approaching

50% (FAME subsidy target)
 Sensitivity of volumes to incentive is

higher in ICEs vs EVs.

EV Push: How much firepower do we need for it to
matter?
EV break even needs high subsidy and lower costs % of PLI spend that needs to be on EVs

ICE Push: How large is the addressable exports
opportunity?
India could be exports base for sub US$15k ASP India could be driver of domestic PV growth globally

Auto Parts Push: Import substitution opportunities in
Automotive Electronics, Drive Transmission and Safety
parts
Electronics a key area with high imports vis-a-vis use Share of domestic manufacturing in this component
category is lower than in other
Cooling Rubber Comp Sale to

System 2% OEM Export Import
6%
(FY20) (FY20) (FY20)
Misc Engine components 26% 19% 17%
6% Engine comp.
16% Suspension & breaking 16% 11% 8%
Interiors Suspension &
breaking Body/Chasis 14% 13% 10%
8%
8% Drive Transmission 13% 33% 30%
Electrical and Electrical and Electronics 12% 11% 15%
Body/Chasis
Electronics Non-electronic interiors 11% 6% 8%
10%
15%
Consumables, Misc 6% 4% 6%
Cooling System 1% 1% 6%
Drive
Transmission Rubber Comp 1% 2% 2%
29%

List of potential key beneficiaries by area
M Cap (US$
Area Sub-area Company Name Ticker bn) Rationale
Maruti MSIL IN EQUITY 31.9 Plans to make India exports hub for Africa market
Suzuki 7269 JT EQUITY 26.4 Plans to make India exports hub for Africa market
PV
Toyota 7203 JT EQUITY 225.0 Plans to make India exports hub for Africa market
Hyundai 005380 KS EQUITY 38.8 Sizeable exports already
Hero HMCL IN EQUITY 8.6 Keen to grow exports
Auto OEM Exports
2W TVS TVSL IN EQUITY 3.2 Keen to grow exports
Bajaj BJAUT IN EQUITY 13.0 Leading 2W exporter
Escorts ESC IN EQUITY 2.6 Plans with Kubota to make India exports hub
Tractors
Mahindra MM IN EQUITY 12.6 Biggest OEM with exports growth potential
CV Ashok AL IN EQUITY 3.8 Plans to expand exports to Africa followed by South East Asia
Maruti MSIL IN EQUITY 31.9 Plans to leverage Toyota EV tech
Hyundai 005380 KS EQUITY 38.8 Already launched Kona Electric in India
Electric Cars
Mahindra MM IN EQUITY 12.6 Early mover in EVs in India
Tata Motors TTMT IN EQUITY 8.2 Early mover in EVs in India
Bajaj BJAUT IN EQUITY 13.0 Already launched Chetak Electric; Sccoters new line
Electric Vehicles
Electric 2Ws TVS TVSL IN EQUITY 3.2 Already launched iQube
Greaves Cotton GRV IN EQUITY 0.3 Owns Ampere brand of E2Ws
Sandhar SANDHAR IN EQUITY 0.2 JV with Hanshin (Korea) for high end data cables
EV Supply Chain Bosch BOS IN EQUITY 5.2 Increased use of sensors etc. in EV
Motherson MSS IN EQUITY 6.8 Wiring harness content to go up in electrification
L G Chem 051910 KS EQUITY 55.2 Supplying to OEMs in India
Panasonic 6752 JT EQUITY 27.2 Supplying to OEMs in India
Batteries Tata Chemicals TTCH IN EQUITY 1.7 Setting up plant in Gujarat
Maruti / Suzuki MSIL IN EQUITY 31.9 Setting up plant in Gujarat
Exide EXID IN EQUITY 2.1 Setting up plant with Leclanche
Bosch BOS IN EQUITY 5.2 Sensors
Wabco WIL IN EQUITY 1.5 Vehicle electronic systems for trucks and buses
Auto Parts Electrical and Electronics
Minda Industries MNDA IN EQUITY 1.4 Sensors, Actuatora, Controllers
Varroc VARROC IN EQUITY 0.8 Switches, Motors, Electronics
Rane TRW RVL IN EQUITY 0.0 Variety of airbags for automotiv aplplications
Airbags
Minda Industries MNDA IN EQUITY 1.4 Manufactures airbags for PVs
Automatic Transmission Lumax Auto Tech LUMX IN EQUITY 0.2 Transmission products for PVs
Minda Industries MNDA IN EQUITY 1.4 Manufactures seat belts fo PVs
Seat Belts
Rane TRW RVL IN EQUITY 0.0 Seat Belt Comp - Pretensioners, buckles, height adjsuters

India Consumer Durables sector
Large market potential underpinned by low penetration
Low market size ex-mobile/lighting reflects potential
 The Indian electronics and consumer durable
5,000 4,600
industry is ~Rs4 tn and growing rapidly (to Market Size - 2019/20 (Rs bn)
4,000
Rs6 tn by FY25E) because of low current Market Size - 2025 (Rs bn)
penetration levels. Amber and Dixon have 3,000

2,300
taken the lead in contract manufacturing of 2,000
consumer durables and are poised to
1,000 418600 500
leverage this multi-dimensional tide. 195400 104200 263 220400 188300
-
 Opportunities range from: (1) a growing
domestic market; (2) market share; (3) new
categories; (4) vertical integration/own
designs; and (5) export markets.
 In the near term, Amber aims to increase 1000
860
market share (specifically helped by the Market Size - 2019/20 (mn units)
800 Market Size - 2025 (mn units)
embargo on the import of gas-filled ACs) and
600 533
scale up its components business for ACs
and other durables, apart from targeting 400
240
300 270
overseas markets and commercial ACs. 200
7 12 12 15 10 16 16 26 20 29
0
Source: Credit Suisse estimates

India Consumer Durables
Favorable positioning on large market (capacity) share
Import intensity high, particularly incl. components Amber and Dixon have large market shares
25.0 45%
Local (mn units, FY20) Imported 40% Market Share held by Amber & Dixon…
40% 35%
20.0 35%
30% 25%
15.0 24%
25%
5.1
14.7 20% 18%
10.0
0.7 15%
1.9 10%
5.0 3.3 10.9
7.5 5%
5.8 4.4
3.9 0%
0.0 Air Conditioners TV LED Lighting Washing Security
RAC Washing MachinesRefrigerators Flat Panel TV Air Cooler Machines Systems
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates
 Amber now makes ~25% of ACs sold in India and has built/acquired capabilities for inverter PCB
assemblies, motors, and mobility (rail/bus) applications.
 Dixon has a presence with dominant capacity market share across multiple categories such as TVs,
mobiles, washing machines, LEDs, set-top boxes and CCTV cameras, among others, with its own
designs/higher margins in washing machines and LEDs.

India Electronics Industry
Domestic production rising; Mobile 40% of industry
Electronics exports at ~US$9 bn, production up to US$70bn Mobile phone & TV dominate US$70 bn electronics market
80
Import of Electronic Goods (USD bn) Export Production
70
60 57
53
50
41
38 43
40
30
20
8.8
10 6.2 5.9 5.9 6.4
0
FY2015 FY2016 FY2017 FY2018 FY2019
Source: MEITY, Credit Suisse estimates
Mobile phone mfr has picked up sharply to Rs2.3 tn in FY20
 India imported US$57 bn of electronics products 2.50 2.25 FY2008 (Rs tn)
in FY2019, produced ~US$70 bn electronics FY2012
2.00
and exported US$9 bn of products. FY2015
1.50 FY2020
 The US$70 bn number can be further broken
0.84 0.92
down into various sub segments like mobile 1.00 0.76
phones (~40% of the pie, ~Rs2.3 tn/US$30 0.50 0.23

0.33
0.16
bn), televisions at 8% (incl traditional as well as -
LED TVs), laptops and notebooks at 6%

(~Rs400 bn).
Source: MEITY, Credit Suisse estimates

Mobile Phone market
Apple, Samsung largest players
India smartphones market share—Samsung/Xiaomi (2019)
Others, 9%
 In India, Samsung (24%) and Xiaomi (23%) are the largest OnePlus, 1.10%
players, Apple has a relatively small share in India (1.6%) Apple, 1.60% Samsung, 24%
– Samsung has 19% share in feature phones in India.

Oppo, 10%
 Under the PLI scheme, International EMS players like
Foxconn,Wistron and Pegatron are expected to shift some
manufacturing to India Realme, 15%
 Samsung already has manufacturing presence in the
country and is also one of the participants selected under Xiaomi, 23%
PLI.
Vivo, 16%
Source: Counterpoint, Credit Suisse estimates
Xiaomi, Vivo and Samsung have India manufacturing India feature phones market share—Lava, Samsung, Jio lead
100 40 38
Mobile phones manufactured in China (%) 2018
India % 35
80 2019
30 28
26
60 25
19
20 17
40 14 14
15 12
10
10 8 7 7
20
5
0 0
Apple Huawei Oppo Xiaomi Vivo Samsung Samsung Jio Ite Lava Nokia Others


Mobile Phone Manufacturing
PLI contours – tiered, staggered incentive payout
 Allocation of Rs409 bn has been divided between the five years, sub divided further into each of the
sub components (mobile phones—international and domestic and electronic components). Each of
the participants get equal allocation per year within their respective categories.
 Going by the way the allocations are currently structured, maximum incentives will accrue in year 4.
One of the key objectives of the scheme is to slowly wean the industry away from incentives.
Source: Ministry documents, Credit Suisse estimates

Global EMS players
Strong historic growth; 3-6% margins
Global EMS players have stable EBITDA margins in the 3-6% range
Key learnings from looking at global 18
Flextronics Hon Hai
contract manufacturers include: 15 Jabil Wistron
Pegatron Sanmina-SCI
 Massive scale with several contract 12
manufacturers having revenues in
9
the range of US$30-40 bn. Hon Hai
is in a different league altogether, 6
with revenues of US$170 bn. 3

 Contract manufacturers have
0
continued to grow, and Hon Hai had
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
7% revenue CAGR in the last -3
decade. Global EMS players recorded ~7% revenue CAGR in last decade (indexed)
 Margins are in the low single digit 100000 Flextronics Hon Hai
7% CAGR
range and have had a trend of Jabil
Pegatron
Wistron
Sanmina-SCI
contracting. This can be a key risk 1%
10000 3%
for Indian contract manufacturers. 7%
Dixon also makes just 2-3%
margins in several categories such 4%
1000
as TVs and mobile phones, etc.
11%
 P/E is in single digit range in the
vicinity of 10x or so (is double digits) 100
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Bloomberg, Credit Suisse estimates

India Capital Goods Sector
Valuations reasonable on FY23e basis
Amber and Dixon are not expensive in the broader context of other industrial stocks. We initiate with OP given: (1)
strong near-term growth outlook (EPS CAGR of 28/34% during FY20-23E); (2) multiple dimensions of opportunities
(vertical integration, exports, broader product basket) over the medium term; (3) strong extant platform in the form of
relationships, manufacturing scale and track record; (4) strong cash flows and return ratios (RoE of 17/34% for
Amber/ Dixon); and (5) still reasonable valuations on FY23E earnings basis (P/E of 23x/34x for Amber and Dixon).
Amber and Dixon trade in line with historical averages on a FY23E basis (EV/EBITDA and P/E)
40 37.0
35 EV/EBITDA (CY22/FY23e)
28.0
30 24.6 23.4 24
25 21.1 21.9
16.0
20 8.5 9.8 17.1 13.7 13.7
15 8.5 11.5 8.2 6.4
6.2 5.4
10 7.3 5.4
5
0
Thermax
(CY22)
ULTC
L&T (EPC)
PowerGrid
Indigo
Cummins
Dixon
Shree
Voltas
Amber
Ambuja (S)
BEL
HUL
TCS
NTPC
Concor
BHEL
Maruti
ACC
Siemens
ABB
50 45.0
P/E (CY22/FY23e)
39.0
40 34.5 34.8 34.0
28.5
30 18.8 21.7 28.0
17.9 23.3 22.2
20.1 21.6 17.0
20 15.6 12.3
5.9 7.0 11.6
10 8.5
0
PowerGri
ULTC
(EPC)
Indigo
Cummins
TCS
Thermax
Amber
Concor
Ambuja
Voltas
Dixon
HUL
NTPC
Shree
BEL
(CY22)
ACC
BHEL
Maruti
Siemens
L&T
ABB
(S)
d
Source: Reuters, Credit Suisse estimates

Amber Enterprises
Unrivalled position in domestic AC manufacturing
OEM, ODMs make up one-third of the market, import
substitution opportunity
 Amber manufactures about 25% of ACs sold
in India, and almost all major brands in the Imports
22
country are its customers.
 About 60% of revenues come from room AC
manufacturing, while 40% of revenues RAC brands
43
originate from components and mobile
applications.
OEM/ODM
 Amber has 15 plants in six clusters, and aims 35
to set up a new plant in southern India. It has
been dynamic and has acquired companies in Amber manufactures ~25% of all ACs sold in India
electronics (printed circuit boards for inverter 8.0
7.2
ACs and other consumer durable applications) 7.0
Amber production (mn) Others
and mobility applications (ACs for buses, 6.0

railways, metros, etc.). 5.0 4.7
 Amber aims to leverage scale in the domestic 4.0 3.4

market to target export markets in the US and 3.0
Middle East, and is going through reliability 2.0
testing by prospective customers for both 1.0 14.7% 19.1%
24.4%
1.8 mn
components as well as complete ACs. 0.0
0.5 mn 0.9 mn
FY2015 FY2017 FY2020
Source: Company data, Credit Suisse estimates

Amber Enterprises
Domestic mfr and backward integration to aid earnings
15% Revenue CAGR; 40% component revenue
 Amber has grown revenues and PAT at a 70,000 RAC Revenues (Rs mn) Components (Stdl entity)
CAGR of ~40% and 60% respectively during 60,000 Components (Subsidiaries)
FY16-20. Despite COVID-19 interruption, we

50,000
expect FY20-23E CAGR in revenues and
PAT to be 10% and 20% respectively. 40,000
 We expect revenues to grow to Rs60 bn, with 30,000

margins improving by 100 bp. PAT is 20,000
expected to improve to 5.7% in FY23 from
10,000
4.1% in FY20, driven by lower interest costs
and higher asset turns, leading to lower -
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e
increase in depreciation expense. 28% EPS CAGR; ~100 bps EBITDA % improvement
 This is expected to improve the RoE profile of
120 EPS EBITDA (%, RHS) 12.0
the company to 17%.
100 10.0
 Amber’s FCF generation to be strong, driven
by nominal investments—both on working 80 8.0
capital and investments (compared to 60 6.0
inorganic acquisitions between FY17-20). 40 4.0
20 2.0
0 0.0
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e

Dixon Technologies
Leading EMS player with a diversified presence
Focus on increasing ODM share in portfolio; better margins
100%
 Dixon is a leading EMS player with a FY2016
FY2019
FY2017
FY2020
FY2018 87%
80% 71%
dominant presence in multiple product
categories such as TVs, washing machines, 60%
40%
45%
40%
LED bulbs, mobile phones, set-top boxes, 40%
etc. 20%
4%
12%
6% 9% 6%
 Dixon has a dominant presence across 0%

Consumer Electroniics Lighting Home Appliances
categories in terms of the number of brands Bulk of Dixon’s profits come from ODM products
that rely on its services as well as the 17% margins
3% margins
Security
Reverse Logistics
proportion of Indian demand that it can serve 0.0 bn
Systems
0.1 bn
with its current and planned capacities. 4% margins 2% margins
 Dixon is contract manufacturer for products Mobile Phones Consumer Electronics
0.2 bn 0.4 bn
such as TVs and mobile phones with narrow
EBITDA spreads.
12% margins
 It has emerged as an ODM player in Home Appliances
0.5 bn
categories such as washing machines and
LED bulbs with strong EBITDA margins.
 Dixon has multiple dimensions of
opportunities beyond the traditional play of Dixon EBITDA 9% margins
Lighting Products
growth in market size in its categories given (FY20) 1.0 bn
the current low penetration levels in India Source: Company data, Credit Suisse estimates

Dixon Technologies
Indigenization to aid business growth
Indigenization to aid Revenue, EBITDA growth
120,000
Dixon Revenues
 We expect Dixon’s revenues/EBITDA and (Rs mn)
PLI revenues to grow
100,000 to Rs28 bn by FY23e
PAT to grow at a CAGR of 35/35/48%
during FY20-23E driven by visible capacity 80,000
addition, new customer sign-ups, margin 60,000

accretion and opportunities such as
40,000
production-linked incentives for mobiles.
 Mobile PLI led business to grow to Rs28 bn 20,000
in FY23e. -
FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
 We build Rs 336 EPS/share in FY23, aided Consumer Durables Lighting Solutions Home Appliances
by below EBITDA leverage. Mobile Phones Mobile Phones - PLI Set top box
Strong EPS growth momentum from better asset turns Security Surveliiance Systems Reverse Logistics
400 7,000
EPS Dixon EBITDA Mobile EBITDA to
350
6,000 (Rs mn) reach Rs1.9 bn
300
5,000
250
4,000
200
3,000
150
100 2,000
50 1,000
- -
FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
(50) (1,000)

Companies Mentioned (Price as of 11-Dec-2020) Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
ABB India (ABB.BO, Rs1159.2) *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Aarti Drugs (ADRG.BO, Rs766.8)
Adani Ports & SEZ (APSE.BO, Rs470.95)
Alembic Pharma (ALEM.BO, Rs1060.3)
Credit Suisse's distribution of stock ratings (and banking clients) is:
Amber Enterprises (AMBE.BO, Rs2333.45)
Apple Inc (AAPL.OQ, $123.24) Global Ratings Distribution
Aurobindo Pharma Ltd (ARBN.BO, Rs898.8)
Avanti Feeds (AVNT.BO, Rs527.15)
Biocon (BION.BO, Rs453.75)
Rating Versus universe (%) Of which banking clients (%)
Britannia Industries Limited (BRIT.BO, Rs3738.75) Outperform/Buy* 52% (33% banking clients)
Cipla Limited (CIPL.BO, Rs762.9) Neutral/Hold* 36% (28% banking clients)
Divi's (DIVI.BO, Rs3731.75)
Dixon Technologies (DIXO.BO, Rs12108.0) Underperform/Sell* 11% (20% banking clients)
Dr. Reddy's Laboratories Limited (REDY.BO, Rs5051.95) Restricted 2%
FOXCONN TECHNOLOGY (Unlisted) Please click here to view the MAR quarterly recommendations and investment services report for fundamental research recommendations.
Granules India (GRAN.BO, Rs390.1)
Greaves Cotton (GRVL.BO, Rs84.2) *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond
IPCA Laboratories Limited (IPCA.BO, Rs2221.65) to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.)
ITC Ltd (ITC.BO, Rs212.7) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other indivi dual factors.
Laurus Labs (LAUL.BO, Rs330.15)
Lupin Ltd (LUPN.BO, Rs942.95)
Magma Design (LAVA.OQ^B12)
Important Global Disclosures
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Credit Suisse Securities (India) Private Limited............................................................. Neelkanth Mishra ; Abhay Khaitan ; Akriti Swaroop, CFA
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India Market Strategy

PLI Schemes: A new pro-growth template for

 Production-Linked Incentives (PLI) are a meaningful change in India’s industrial policy

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 2

Source: PIB, Credit Suisse estimates

 Production-Linked Incentive (PLI) schemes launched for 13 sectors

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 3

Others Leather Solar White Goods Specialty Steel Already

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 4

Design Principle 2: • “Infant Industry Protection” cannot continue forever

Several departures from the policy norm

Source: Credit Suisse

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 5

200 Textile 107 81 1,098 -1,017 Export boost

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 6

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 7

Source: WTO, Credit Suisse Source: WTO, Credit Suisse

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 8

20% Medical Devices 8 8 8 8 10 10

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 9

Source: WTO, Credit Suisse Source: WTO, Credit Suisse

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 10

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 11

Emerging production hubs for electronics in India

Mobile Manufacturing Plants

HIMACHAL PRADESHHAMIRPUR Noida Plant of Samsung

Andhra plant of Foxconn

Chennai plant of Pegatron, Foxconn

Kolar plant of Wistron

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 12

Smartphone production (Mn) Govt target of 10,000 16,000

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 13

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 14

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 15

Impact on GDP: 0.6% of GDP in FY26 Impact on India’s trade balance

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 16

India Production World Demand India as % of world (RHS)

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 17

Net imports of medical devices Split of 2019 medical device imports

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 19

Incentives to auto sector going up sharply Auto Component imports

Average Annual Incentive (Rs bn) Cooling Rubber Comp

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 20

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 21

120 JV between Suzuki-Toshiba-Denso, have

0 ATL plans to invest Rs70bn over the next few

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 22

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 23

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 24

Poultry meat Fruits & Vegetables India Exports

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 25

Share of Food Processing Sector Marine Exports (Rs Bn)

Source: IBEF, Credit Suisse Source: Ministry of Commerce, Credit Suisse

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 26

250 60% 80 30%

Source: Omdia, Credit Suisse Source: Omdia, Credit Suisse

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 27

40 1.0% Battery 15 0.3% 4 0.1% 70%

0.8% Food 13 0.3% 10 0.2% 100%

0 0.0% Others 19 0.5% 10 0.2% 70%

Source: Credit Suisse estimates Source: Credit Suisse estimates

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 28

CREDIT SUISSE, Equity Research, Asia Pacific December 11, 2020 29

Others Mobile Others Mobile