Author: niveshaay@gmail.com

Over the years, the aviation industry has witnessed numerous challenges aggravated by persistent stings of economic slowdowns, crude shocks and COVID-19 lead standstill. Despite these serious challenges, the Indian market has emerged as the third-largest and fastest-growing aviation market in the world, growing at almost 10 percent for the last decade, almost 2.5 times the global average.

As the echoes of the COVID-19 standstill gradually fade, a notable shift emerges in the Indian aviation landscape. Once an aspirational luxury is now transforming into an indispensable convenience, ushering in a new era for the industry led by numerous factors.

A brief glimpse of the apparent tailwinds is highlighted in the graphic above:

• Domestic air passenger traffic has nearly tripled in the last 10 years, surging to 141.2 million departures in FY20. Industry experts expect a continued upward trajectory, with air passenger traffic projected to reach 150 million departures in FY24. Looking ahead, it is expected to grow by 2.6 times reaching 400 million departures in FY30. This impressive growth is attributed to key factors such as rapid urbanization, rising incomes, bolstered infrastructure, and improved accessibility.
• Over the past decade, the cost per kilometer at constant purchasing power of an air trip has decreased substantially by 53% (from Rs. 7.38 to Rs. 4.8) vis-à-vis railway first-class fare which has reduced marginally by 24% (from Rs. 4.46 to Rs. 3.59), thereby making air trips more accessible.
• In the past decade (FY14 to FY23), Indian airlines witnessed significant capacity growth:
  • Available Seat Kilometers (ASK = Seats available x Distance Flown) capacity nearly doubled, reaching 158 billion km from 81 billion km.
  • Revenue Passenger Kilometers (RPK = Seats occupied x Distance Flown) surged 2.2 times, climbing from 59 billion km to 132 billion km, indicating a substantial increase in passenger demand.
  • Passenger Load Factor (PLF = RPK ÷ ASK) showed impressive improvement, rising over 1000 basis points from 73.27% to 83.54%, highlighting enhanced aircraft capacity utilization.

On top of this, further capacity expansion plans of industry leaders like Indigo with close to 1000 aircraft on order, Air India with over 500 aircraft on order, and newcomer Akasa Air with over 50 aircraft on order signal robust demand expectations for the upcoming decade.

Established players, having weathered tough times, are set to benefit from favorable conditions.

Indigo, a standout performer for the past decade, boasts a dominant position in India’s airspace, with over 60% domestic and 17% international market shares. Operating the youngest fleet (average age of 3.5 years) in the 100+ aircraft category and employing the Hub and Spoke model for high-faring routes, Indigo maintains high operational efficiency, ensuring stable margins compared to other airline players.

With an established market leadership position and the aviation sector’s positive momentum, Indigo appears poised to capitalize on these tailwinds and extend its lead.

Part two delving deeper into the favorable economics of Indigo and its strategies that have propelled its growth over the years to be posted soon. Stay tuned.

Disclaimer:

Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy / sell any security or financial products.

Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

Two decades ago, it was hard to imagine that the share of renewables (including hydro) in global electricity generation could touch ~30% in 2023. The energy transition in India has been in an accelerating phase, thanks to the favourable government policies. Why has it suddenly become more important than ever? Well, COVID-19 accelerated the clean energy adoption trend and also made us realise that the shift to green energy is fuelled by necessity. In addition, the Russia-Ukraine war also highlighted the importance of a quick shift to renewables. Countries like India and Europe, which are fuel dependent on other nations, did realise the need to fill in the gaps after the energy supply disruptions for greater security after the pandemic and the war period. Hence, definitely, it’s a long-term and integral play for any economy to achieve sustainable growth. Continuing cost declines confirm that competitive renewables are a low-cost climate and decarbonisation solution that aligns with short-term economic needs while keeping long-term sustainable goals intact. The more these technologies are deployed, the more their costs could fall.

A big factor in this journey has been the optimum usage of resources, a pivotal concept in stock market commonly referred to as operating efficiency. Haven’t we observed companies emphasizing reducing waste while manufacturing, optimizing resource utilization to its fullest extent, and transitioning to raw materials that offer a higher yield. These indicators suggest that the recycling industry is poised for healthy growth, with unit economics increasingly becoming favourable. Frequently, we express the adage, “What goes around, comes around,” and it is now imperative to transition from the conventional linear model of produce, use, and dispose to the circular model of reuse and recycle.

Although the recycling industry has been in existence for several years, the pace of its adoption has significantly quickened over the last 2–3 years. ESG (Environmental, Social, and Governance) compliance is not confined to this sector alone; it is now prevalent in various other industries.

Relevance of Recycling Across Industries

For example, as far back as 1993, Patagonia employed recycled polyester from plastic soda bottles to make outdoor clothing. Presently, brands and companies are increasingly embracing the concept of a “circular economy,” especially when they can command premium prices for their products due to their sustainability attributes. Notably, the utilization of recycled polyester, such as PET bottle recycling, by major brands like Zara and H&M stands out as a crucial element of sustainability initiatives in the fashion industry.

• 24 barrels of crude oil equivalent of energy
• Over 15 tons of fresh or sea water used
• More than 9 tons of CO2 equivalent of GHG emissions
• 2.5 tons of solid waste, including recyclable solid waste

Globally, nearly 70% of aluminum cans are recycled, and in India, the recycling rate is an impressive 85%.

The EPR policy assigns the highest level of importance to reclaimed rubber, and as a result of its introduction, the current usage of reclaimed rubber, which stands at 3-4%, is expected to increase to 7-8%. This adjustment is aimed at helping manufacturers meet recycling targets and boost the overall production of reclaimed rubber.

Examining the current utilization of sustainable materials by global players like Bridgestone and Michelin, who currently incorporate 30–40% sustainable materials and have plans to raise this to 80% by 2050, it becomes evident that there is significant growth potential for Indian industry players.

Undoubtedly, efforts are underway to enhance the structure of the recycling industry, and the potential for growth is vast. Part Two of the blog will delve deeper into specific industries within this sector, providing detailed insights into the companies that are highlighting their significant contributions and advancements in this direction.

Disclaimer:

Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy / sell any security or financial products.

Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

1. Understanding Electronics System Design and Manufacturing
2. Value Chain Analysis of ESDM Market
3. Industry wise segmentation and growth opportunities
4. Product/Service in ESDM Market
5. Growth Drivers-Why is it right time for India?
6. Industry Players
7. Key Monitorable Factors

Research Analyst – Karan Sanwal (karan.sanwal@niveshaay.com)

Why does the industry look interesting to us?

India has been importing huge quantities of electronic products since decades. In fact, import of electronic products accounts for the second highest import bill. Multiple reasons like lack of infrastructure, technical know-how, cost competitiveness, etc., were responsible for low domestic manufacturing. However, there has been a paradigm shift where decades of hardship faced by electronic manufacturing companies has finally been converted to significant opportunities. Lots of factors have converged in the recent past that we are now standing at an inflection point. In modern-day India, when opportunity knocks the door, we grab it with both hands. What’s even more interesting is that if any company needs to achieve scale, they would want the entire electronics manufacturing ecosystem to develop. This would lead to simultaneous growth of multiple players, easy availability of advanced electronic products and a lower import bill. Win-win for everyone!

1. Understanding Electronics System Design and Manufacturing (ESDM)

ESDM involves a process of conceptualization, design, prototyping, manufacturing, testing, and providing after-market services for electronic systems and components. The Original Equipment Manufacturer (OEMs) around the world are increasingly outsourcing their electronic product manufacturing to the ESDM players to focus on their core business of serving the end-user.

2. Value Chain analysis of ESDM market

The ESDM company, which has a presence in all parts of the value chain, enjoys high margins due to higher operating leverage, economies of scale, and preference over competitors. The value chain of an ESDM industry can be divided as follows:

1. Original Design Manufacturing (ODM) Model

• Here, the customer provides its requirements to the ESDM company. Based on the specifications provided, the technical design work is done to bring the concept to reality. The terms of the contract may include mass manufacturing and after-market services.
• This model helps the company to establish deeper and long-term business relationships. The companies in India have limited presence (20% of the total ESDM market) in the ODM model due to long gestation and large CAPEX requirements.
• Companies are gradually increasing their presence in this segment. Developed economies like the USA and Europe continue IP ownership and R&D domination.

2. Electronics Manufacturing Services (EMS) Model

• Here, the design is provided by the customer. The company sources the components from an approved list of vendors of the customers and manufactures the products in required quantities. After market services may also be provided.
• These players have large manufacturing capacities of PCBA, fabrication, plastic moulding, etc., to cater to multiple customers. They source their material in bulk and have focused on increasing efficiency to achieve economies of scale.
• This model is used in countries which have low labour cost and a good supply chain infrastructure. In India, 80% of the total ESDM market is accounted for by the EMS model.

3. After Sales Services

• Companies offering end-to-end solutions also offer after sales services like repairs and maintenance. It helps to build brand loyalty and long-term relationships with clients.
• To increase the penetration in different parts of the value chain, Indian companies have started to provide these services to their customers.

Market size of the global ESDM Industry (US $ Billion)

The global ESDM industry is expected to grow at a CAGR of 5.4% from CY21 to CY26E as opposed to 3.4% CAGR recorded from CY17 to CY21.

Market size of the Indian ESDM Industry (US $ Billion)

Even though the global ESDM market is expected to grow at a low single digit CAGR, India is going to outperform the market. The Indian ESDM industry is expected to grow at a CAGR of 32.5% from FY22 to FY27 as opposed to 22.2% CAGR recorded from FY17 to FY22.

3. Industry wise segmentation and growth opportunities

Sectors based on volumes and margin

The advancement in technology and integration with artificial intelligence, machine learning, internet of things, etc., have increased the electronic content in products across various sectors. Some sectors like Aerospace & Defence, medical devices, etc., have high margins but could encounter problems related to higher gestation period and customer delays which puts pressure on working capital management. So, there are different models applicable for different sectors which are highlighted as below:

High Volume Low Margin (HVLM) model: Companies manufacturing highly automated electronics, mobile phones, or consumer electronics would be using the HVLM model. Companies try to grow volume with limited product range. Overstocking of inventory could be a problem.

Low Volume High Margins (LVHM) model: Companies manufacturing using the LVHM model would have low production volume with a wide product range. They must be able to quickly switch between different product types to accommodate customer demand. E.g., Clean Energy, Medical/ Healthcare, Aerospace & Defence, etc., have customized products with higher margins.

Low Volume Low Margins (LVLM) model: It involves companies with low production volumes and limited product mix. This could be beneficial in niche markets with high customization like Automobiles. It could also be used for prototype development

High Volume High Margin (HVHM) model: This model is prevalent in industries where products are customized and a wide variety of products are needed to meet customer demand. Effective inventory management is essential to manage a wide variety of products while avoiding stock-outs or overstocking. E.g., Internet of Things.

4. Products/Service in ESDM Industry

The ESDM market can be divided based on the process that starts from an idea and transitions through conceptualization of that idea along with mass scale manufacturing and after sales services.

1. Design Services and solutions

It focuses on conceptualization of an idea based on customer requirements. Market research may also be conducted to understand the requirements of the end-users. Indian companies have started providing these services to penetrate the value chain.

2. Prototyping

A proof of concept is created to test the functionality of the product. A prototype is manufactured before mass-production. Changes could be easily made while products are at prototype stage to avoid major future challenges.

3. Printed Circuit Box Assembly (PCBA)

PCB is the core product in any electronic item. It has copper lines which electrically link connectors and components to each other. The electronic components are attached with either Surface Mount Technology (SMT) or Through-Hole Mounting (THM) which is known as PCBA. Due to inadequate domestic manufacturing of PCB, 80-90% are imported and only PCB Assembly is done in India. The bare PCB contributes to around 8-10% in the overall product cost in the majority of the industry. Gradually, the ESDM players are expected to manufacture bare PCB in-house to have more control over the process (better working capital management) and better margins through backward integration.

The board on the left side is the bare PCB. Various automated and manual processes are done to solder components on it based on the product requirements. Some of the domestic manufacturers of bare PCB include Shogini Technoarts Pvt. Ltd., AT&S India Pvt. Ltd., Ascent Circuits Pvt. Ltd, Epitome Components, etc.

4. Box Build

It is a higher value-added product which constitutes a PCB in a small enclosure. An ESDM company needs to have a robust manufacturing infrastructure or an outsourcing vendor for components like Wire & Harness, Magnetics, Sheet Metals & Plastics Molding, and other electromechanical components that go in a box build. Indian companies are receiving more box builds orders which highlights the increasing vertical integration. This helps in better margins and long-term relationships with clients.

5. System Integration

The Box builds are part of a sub-system. These subsystems are combined to form a system to operate it as a single unit. This process of combining the sub-system into a single system is known as system integration. For e.g., A car contains different sub-system for braking, engine, fuel management, etc.

6. System Testing

The electronic products are tested at every stage i.e., from prototyping to dispatching to ensure that problems are not encountered by the end-user. Some sectors like aerospace, defence, railways, etc. have higher quality requirements leading to additional tests being conducted. Companies having better testing infrastructure are preferred by OEM. 

7. After Sales Services

After sales services like repair, rework, and maintenance are provided so that the product is functioning efficiently. It is also done to extend the life of the component. In high value items used in railways, aerospace, defence, etc., these services are of major importance as the cost of replacements are high.

5. Growth Drivers- Why is the right time for India?

The import of electronic goods accounts for the second highest import bill after oil. According to an industry report, the Indian ESDM market, which contributed to 2.2% of the global market in CY2021, is expected to contribute around 7% in CY2026.

The global ESDM market is expected to grow at a CAGR of 5.40% over CY2021-CY2026. The major players in the global market are expected to grow at following CAGR:

The substantial increase in India’s share is expected to come with contribution from multiple factors. 

China +1

• China has been able to capture a large chunk of the market due to its manufacturing infrastructure, highly skilled labour, logistical advantages, economies of scale, etc.
• However, in the 5-year period, it is expected to grow at only a CAGR of 4.3% with a decline in its share in the global ESDM market. These trends have emerged due to rising geopolitical tensions, increased labour costs, supply chain disruptions, etc.
• Many electronic manufacturers are looking to reduce its dependence on China by establishing alternate bases in countries like India, Vietnam, Philippines, etc.
• India looks attractive due to lower labour costs, availability of skilled/semi-skilled labors, development of manufacturing ecosystem, growing domestic demand, etc.

Government push

• The Government of India has launched multiple policies and initiated campaigns like AatmaNirbhar Bharat to develop India as an electronics manufacturing hub.
• The National Policy on Electronics was launched in 2019 to develop major components like chipsets, integrated circuits, etc. and establish the ESDM value chain to compete globally.
• The Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) was launched to solidify the electronic components and semiconductor’s manufacturing ecosystem. It will lead to expected new investment of Rs. 20,000 cr for electronic components and sub-assemblies.
• The Modified Electronics Manufacturing Clusters Scheme (EMC 2.0) provides financial assistance for establishing EMC projects and Common Facility Centers to strengthen the supply chain, lower logistic cost, and decrease time-to-market. 
• The Design Linked Incentive Scheme (DLI) will provide financial incentives and design infrastructure support for development and deployment of semiconductor design for Integrated Circuits, Chipsets, Systems & IP Cores over a 5-year period.
• Following Product Linked Incentive (PLI) Scheme was launched to encourage domestic manufacturing and attract investments for respective products.

Increasing electric components

• One of the primary reasons behind the growth of the global electronics industry is the increasing electronic components in products across various industries.
• Advancements in technology have allowed for miniaturization, improved performance, and energy efficiency, leading to usage of more electronic components. For e.g., Electric vehicles generally require 3x more semiconductors than internal combustion engine cars, due to the complex electronic systems needed for battery management, power electronics, electric motor control, etc.
• Electronic products have wide usage from as simple as consumer products to complicated defence and aerospace products. 

According to the industry report, all sectors in the Indian ESDM market are expected to outperform the sectoral growth in the global ESDM industry by a significant margin.

6. Industry Players

For any company, it is difficult to cater to all segments or sectors as the machinery, volume, and complexity of the products are different. So, companies develop a niche to focus on particular segments/industries. They make efforts to establish long term relationships with clients through timely execution of orders. The ultimate goal is to increase the scale of business, which helps in improving margins, revenue contribution, sourcing ability and negotiations.

Companies in the industry can be compared based on the sectors they serve, order book position, working capital management, timely execution, and profitability. 

The below table highlights the industry players and the respective sector they serve:

7. Key Monitorable Factors

The ESDM industry has significant demand for multiple players to co-exist. The order book position of various companies and market forecasts highlights the upward trajectory. Though the industry is poised for significant growth, following parameters should be monitored:

Import of Raw material and equipment

• The ESDM companies in India are importing the majority of its raw material. Around 60-70% of the components are imported and others are sourced internally. This increases the lead time of components and dependence on the supplier.
• The supplier from whom the materials are domestically sourced are actually importing. This makes the total import of most of the companies around 80-85%.
• The equipment used during the electronic manufacturing process is imported as well. This increases the import dependency of such players.
• India is expected to set up domestic manufacturing of these materials. But these developments would take some time due to high technological know-how and CAPEX requirements.
• If such facilities are set-up, the ESDM companies would have more control over the supply chain and possible margin expansion.

Inventory management

• Many companies have faced problems with elevated inventory which has created challenges for managing working capital.
• The clients have asked companies to maintain high inventory levels so that the products can be supplied without any interruptions. Even though the customer would not cancel orders due to high switching cost, this has led to high inventory levels.
• An electronic product is manufactured through multiple components. Absence of few components could halt the production. This imbalance of inventory leads to inventory pressure.
• One of the possible solutions would be taking customer advances to manage the pressure of inventory.

Execution of order book

• The companies in the industry have experienced a significant increase in order books in recent times.
• Supply chain disruptions caused by the pandemic and geo-political tension had created a lot of problems. Even though the supply chain issues have decreased they haven’t been completely eliminated.
• The execution of these robust order books would be an important tracking element going forward.

Disclaimer:

Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

Scope of NSE- A proxy play to the growing Indian Capital Market

Whenever an investor makes a trade, there are various stock market participants that ensures smooth functioning of these trades. One such company is National Stock Exchange. Staying true to our investment style of peripheral play, we believe NSE is a good proxy play on the growing Indian capital market. Let’s understand the scope and business model of how NSE derives its revenue and profitability.

The major participants of the market are explained below:

5. Stock Exchanges– Often used interchangeably with stock market, A stock exchange is a marketplace or the infrastructure that facilitates trading. On the other hand, a stock market is an umbrella term representing all of the stocks that trade in a particular region or country. One such example of a Stock exchange is NSE.

About NSE

National Stock Exchange of India Limited (NSE) is one of the leading stock exchanges in India, based in Mumbai. NSE was incorporated in 1992, recognized as a stock exchange in 1993 and commenced operations in 1994.

Now, how does a trade take place?

One such example of transaction charges charged by Zerodha (a broker) is shared in this snapshot below.

So, whenever an investor executes a trade, revenue in form of Transaction charges is received by the exchange.

Revenue Model

Just like any other exchange, NSE offers services like exchange listing, trading services, clearing and settlement services, indices, market data feeds, technology solutions and financial education offerings.

Indian exchanges charge on value basis (turnover), whereas global exchanges charge on the basis of volumes.

Growth Drivers in Transaction Charges:

Other Services (25% of Total Revenue)

1. Listing services
2. Book-Building fees
3. Services to corporates
4. Clearing Services
5. Data Feed Services
6. Investment Income
7. Other sources of income (Training and Support Services

Cost Model

Just like any other company, NSE ltd also has a lot of expenses that are incurred regularly to ensure the smooth operations of the business. These are the major heads of expenses.

IT and telecom expenses and Employee expenses constitute nearly half of the total expenses incurred.

Why NSE Ltd.?

1. Undisputed leader – Derivatives contracts

NSE is an undisputed leader in the derivatives contracts segment. NSE has a huge running start and has virtually monopolized the entire segment. The most highly traded contracts in the derivative segment in India are the NSE’s major indices – the NIFTY 50 and Bank NIFTY which are exceptionally liquid. In comparison, the BSE enjoys far lower volumes among investors and traders alike.

Equity Derivatives – where NSE enjoys 100% market share contributes around 96% of total average daily turnover of Indian capital market.

2. Increase in active User base registrations

People are becoming aware of investing in stock market as better asset class alternative.

This rise in equity culture especially among new age investors proves to be boon for exchange like NSE.

3. Under Penetration of Capital Market

The level of capital market penetration is just 5% in India vis a vis 35-40% in developed countries. For an economy to grow, capital market development is imperative, and this provides huge scope of growth for NSE in terms of volumes and turnover.

4. Trading at a low valuation compared to other exchanges listed in India

5. Focus on different segments:

NSE is trying to diversify its revenue sources through different products and services launch like NSE Prime, data dissemination services and colocation services.  

6. Operating leverage Play:

Most of the expenses of the company are fixed in nature thereby providing an opportunity of operating leverage play with the increase in revenue.

7. Market Leader in most of the segments:

Largest stock exchange in equity derivatives and cash market in terms of total and average daily turnover.

8. New Developments: Benefitting from GIFT City

Risk Factors

1. Downturn in economy:

NSE’s key revenue is derived through market activities. So, if overall sentiment is pulled down, this will reduce daily turnover. Hence, the transaction charges would decrease. Financial crisis can negatively impact the company’s business. The Company’s operations and investments are directly correlated with the health of the Indian as well as world economy, so any financial crisis would substantially hamper the company’s operations and financials.

2. Co-location scam:

Co-location scam is an allegation on NSE that few traders were able to get the market data earlier through an insider information about the servers which had the least load from NSE officials in IT department. This helped them to get the preferential access of the data resulting into windfall gains. Contingent Liability of Rs. 687.47 Cr. has been raised against NSE ltd. Possibility of huge penalty on the company for the same.

3. Highly regulated industry and are subject to extensive regulation:

SEBI may bring in any law which it thinks is in the interest of public investors suspending any of the activities of SEBI-regulated entities posing a lingering risk.

4. High dependency on market-linked revenue sources:

Currently, around 80% of revenue is market linked. This is a sign of worry as any downward shift in market activity levels will have a direct impact on the company’s top line.

5. Listing of NSE is dependent on Regulatory Approval

Peer Analysis- Domestic and Global

Globally also, when we compare with exchanges like NASDAQ, ICE and HKEX; NSE has grown at a very good rate and is not far behind HKEX.

Financials

Income Statement for NSE ltd.

Balance Sheet of NSE ltd. For the years 2018-2022

Return on Equity ratio for years 2018-2022

Disclaimer: 

Niveshaay is a SEBI Registered (SEBI Registration No. INA000017541) Investment Advisory Firm. Our research expresses our opinions which are based on available public information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained here is accurate and reliable and has been obtained from public sources, which we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent investment advice or a recommendation or a solicitation to buy any securities.