Foxconn India Unit Files For ₹5,000 cr IPO: PLI Scheme A Huge Positive For Bharat FIH But Several Key Risks Remain

Bharat FIH, the India unit of the Taiwanese contract electronic manufacturer Foxconn Technology Group, has filed papers for an initial public offering (IPO) with the Securities and Exchange Board of India (SEBI). The company is looking to raise fresh funds worth Rs 2502 crores while the existing shareholders sell off shares worth another Rs 2,502 crores.

What is Bharat FIH’s Business Model?

Bharat FIH is the largest electronic manufacturing services (EMS) company in India, with around 15 per cent market share in India for the financial year 2021 (FY21).

According to the draft red herring prospectus, the company is the largest EMS provider in the mobile phone market with a 23 per cent revenue share along with being the largest EMS provider to Xiaomi.

Another important customer for Bharat FIH is HMD, which is an associate of HMD Global OY, the exclusive licensee of Nokia-branded devices. With a 27 per cent volume share, Xiaomi is the leader in the Indian smartphone industry.

The company expects the total addressable EMS market to grow at 30 per cent over the next five years in India. Given the current under-penetration of electronic items in India, combined with a diversification from China by manufacturers and the availability of government incentives, the Indian EMS market has several tailwinds behind it.

Apart from manufacturing, the company hopes to move into areas such as product design, component manufacturing, logistics, sourcing, and after-sales services for electronic items.

The government approval for a performance linked incentive scheme is a major incentive, as the company could potentially receive Rs 6,000 crores through the scheme between FY22 and FY26.

In addition, the company’s subsidiary could receive incentives of upto Rs 1,245 crores during the same period. The networking products manufacturing incentives could aggregate upto Rs 402 crores between FY22 and FY26. Apart from these incentive schemes, the company has applied for several other schemes as well.

However, despite the dominant position in mobile phones, Bharat FIH is looking to explore expansions in other areas such as electric vehicles, televisions, and hearables as well. It has already begun making sales to various clients such as Boat, Ather Energy, Ola Electric, ZTE and others. Though these revenue sources are quite minor, with time, the company expects to scale these to a significant proportion of revenues over time.

Bharat FIH’s Financials

The company’s revenues have been falling since 2019 on a standalone basis from around Rs 34,345 crores in FY19 to Rs 15,854 crores in FY21, while the revenue figure of FY20 stood at Rs 26,635.

According to Bharat FIH, the decline can be attributed to a market slowdown in the Indian markets, as well as due to Covid. The company’s cash flows from operations have remained volatile as well over the last three fiscals, with only FY20 witnessing positive cash flow from operations.

The company’s net fixed asset turnover has been quite high indicating that the business does not require large fixed capital investments. However, the net fixed asset turnover has been falling over the years as revenues have fallen lower. The business does have working capital requirement.

The company plans to use a part of the funds raised through the IPO to fund its working capital requirements. The company has zero debt, which has come down since 2019. The company has a low single digit return on capital, indicating that the business might be using its capital efficiently, or might not have a sustainable competitive advantage. The company’s IPO valuations have not been disclosed yet.

Key Risks

Heavy Competition

The EMS industry faces heavy competition from both domestic and external competitors. Further, with government incentives being introduced for the sector, along with growing consumption demand, several deep-pocketed players are looking to enter the sector. As a result, heavy competition could erode margins and return on capital employed as well.

Dependence on Chinese Imports

The company is heavily dependent on China for sourcing its raw material for the products it manufactures in India. Therefore, any supply shortages in China or supply chain risks could put the company in trouble.

Falling Revenues

The company’s revenues have been falling since the last three years due to the pandemic situation along with the market conditions for the mobile industry. Standalone revenue have almost halved over the previous three fiscals.

Dependence on a Single Customer and Industry

Xiaomi alone contributes to almost 90 per cent of Bharat FIH’s revenues. Thus any adverse issues in Xiaomi’s operations could affect the operations of Bharat FIH. Nevertheless, the company is looking to diversify into other products as well.