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XPro - Insulating Electronics and Portfolios ⚡

Random start, but have you noticed how the grip of a screwdriver is always made of plastic? Or remember being told to wear rubber slippers when fixing a tube light?

Both plastic and rubber are very poor at carrying and transmitting electricity, letting you get really close to electricity, without getting a shock - making them insulators, or ‘dielectric’ materials. Therefore, good dielectrics are just as important as good conductors of electricity!

These dielectric films have 2 major uses:

  • Acts as a barrier between different components to avoid transfer of electricity (used in power cables and transformers to prevent leaks that don’t make it go kaboom)

  • Stores electrical energy for short periods of time, like a temporary battery (used in capacitors, which is like a storage tank of electricity for any electronic device)

In short, these dielectric films are extremely critical in anything electrical or electronic - displays, solar cells, microchips, camera lenses, sensors, radars - everywhere! The surprising bit? There is only one maker of dielectric films in India - Xpro India - the stock of which, over the last 3 years, has gone from just Rs. 15 to above Rs. 1,050 now (70x)!

Have we got you charged up yet and does this stock have the power to insulate against market volatility to continue its powerhouse performance?

High-Growth Market

The market for dielectric films has been bursting (unlike the electricals it protects), thanks to:

  1. High Demand - Since we’ve established that these films go in literally every electronic device imaginable, the demand for Dielectric films has been off the roof

  2. India’s Manufacturing Focus - India has been heavily dependent on imports so far, with 67% of the dielectric film demand being met by South-East Asian and European players. However, Make in India and the PLI scheme have been focused on flipping this dynamic, resulting in higher demand for local manufacturing and sourcing, not just for domestic consumption, but also to tap into the export market

  3. Sunrise Industries - Dielectric films have been used in high-growth and emerging industries like EVs and solar power, due to the role they play in improving the performance efficiency of solar cells and the excessive presence of electronic components in EVs (duh), signalling a boost in usage over the coming years

Monopoly Position

With demand set to grow multi-fold, Xpro India is bound to benefit from being the only manufacturer in India, with a 33% market share, and the scope to snatch further market share from the hands of the foreign players.

Basically, import substitution in the market for dielectric films, led by

  • Lower costs from domestic production versus imports,

  • Push from the government towards local production through policies around Make in India and PLI, and

  • Drive to reduce imports (especially from China) by putting restrictions and imposing duties.

But if the market is so good, why is Xpro India the only player here?

  1. It’s Not That Simple - Dielectric films are highly specialised a product, manufactured using a complex process, on highly specialised machinery, in a controlled environment, and in ultra-clean room conditions, a setting that isn’t everyone’s cup of tea

  2. High Entry Barriers - The complexity of the product needs manufacturers to have technical competencies in polymer processing, which Xpro India has honed over the last 40 years through expertise across Biax (Biaxially Oriented Polypropylene, under which Dielectric comes) films and Coex (Coextruded, which we will talk about in a bit) sheets

  3. Quality and Size Matters - Given the fact that the product is not commoditised, the quality of the product matters. In the world of dielectric films, thickness is a critical factor (measured in microns), which Xpro India has managed to capitalise on. It currently provides films with a thickness of 3-15 microns but is already making investments to lower thickness to 2 microns

These reasons are applicable not just in India, but globally. While the market is a monopoly in India, the global situation is that of an oligopoly (market is shared by a small number of producers).

Naturally, that opens up Xpro India to not just capture the Indian market, but also tap the global scale!

What Is XPro’s Move?

The estimated demand for dielectric films in India is 12,000 tonnes per year, and demand is growing so fast that the market is expected to grow to 15,000 tonnes over the next two years.

While Xpro India currently manufactures 4,000 tonnes per year, serving a third of the demand, it is in a heavy expansion phase, tripling its capacity to 12,000 tonnes per year.

To enable this, it is spending Rs. 500 crore, and setting up two new lines for the production of dielectric films at its existing plant in Barjora, West Bengal.

The first line is likely to start contributing in FY25 and the second line in FY26. With this, Xpro India would be able to potentially capture 80% of the Indian market for dielectric films.

Wait, There’s One More Monopoly

While we’ve been raving about dielectric films, that’s just a third of Xpro India’s business. A majority of Xpro India’s revenue comes from another product - co-extruded plastic sheets and films.

Barring the jargon, co-extrusion is the process of pressing two or more materials together to produce a single piece.

Xpro India is the largest supplier of co-extruded sheets and liners to the Indian refrigeration industry, and boasts of a marquee clientele, which includes Whirlpool, Godrej, Voltas, LG and Haier. These sheets are also used in making food containers, stationary, helmets, automotive interiors, luggage shells, sanitary products, and even electrical equipment used in houses.

Other than that, it can also make co-extruded films, which are widely used in tyres, sanitary napkins, food packaging, and medical packaging. Xpro India can be expected to see high growth in this business too, driven by:

  1. High-growth potential for the Indian refrigeration industry

  2. Potential leveraging of existing relationships to enter other white goods (large electrical goods used domestically) and expand the product portfolio

  3. Specialised applications, which increase the value-added mix

The Proof is in the Numbers

Xpro India has seen a massive improvement in its numbers over the last 5 years, with electronic manufacturing picking up in India. While its revenue performance has been modest with a 10% CAGR, its profit has jumped from Rs. 10 crore in FY18 to Rs. 45 crore in FY23.

There has been a steep increase in margins with Xpro India benefitting from:

  1. High bargaining power, led by market leadership

  2. Higher revenue from more value-added products (4x higher pricing in specialised products)

  3. Better capacity utilisation (from 70% in FY18 to 100% in FY23) and higher operating leverage

With the capacity set to increase by 3x in the Biax division, Xpro India is likely to deliver a revenue CAGR of 18%. With this, factors that drove margins in the past can contribute to further improve profitability, and deliver a 33% PAT CAGR.

Despite the 75x rise in the price of the stock over the last 5 years, it is still trading at a two-year forward PE of 24x, which for a 36% PAT CAGR signifies a PEG of 0.7x. In theory, a PEG of below 1x is seen as affordable.

Therefore, a hypothetical PEG of 1x, implying a PE of 36x, would, well, you can do the math that makes money, while we gave you a free science lesson!


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