Bharat FIH Ltd IPO : 7 things to know about

Bharat FIH Ltd, the Indian arm of Taiwan based Foxconn, had filed for its Rs.5,004 crore IPO towards the end of December 2021 and the final approval from SEBI is still awaited. Normally, SEBI takes about 2-3 months to gives its approval for the IPO, which normally comes in the form of SEBI observations.

In this case, Bharat FIH Ltd is into electronic manufacturing services (EMS), which is another name for outsourcing the design, manufacture, marketing and servicing of electronic products. Foxconn of Taiwan is already present in South India and is one of the largest outsourcers for Apple. Here are seven important things that investors must know about the Bharat FIH IPO.

1) Bharat FIH Ltd has filed for a Rs.5,004 crore IPO with SEBI which comprises of a fresh issue of Rs.2,502 crore and an offer for sale or OFS of an equivalent amount of Rs.2,052 crore.

Bharat FIH Ltd is one of the largest EMS businesses in India and in the electronic manufacturing services alone, the company has a revenue market share of over 15%, making it a really dominant player in the industry. Globally, Foxconn is part of the Hon Hai Precision Industry group based out of Taiwan.

2) The offer for sale will be done by the company through its subsidiary Wonderful Stars Pte Ltd. It will totally represent 25% of the enlarged issued share capital of Bharat FIH Ltd.

BFIH is an indirect wholly owned subsidiary of FIH. Post the spin-off, FIH will hold less than 75% of Bharat FIH Ltd. However, since Bharat FIH Ltd will continue to be a subsidiary of FIH, the results will be consolidated in that of the parent.

3) The Rs.2,502 crore fresh issue portion will be used predominantly for paying a special cash dividend to the shareholders. The regulator is likely to raise some questions on the justification of raising public funds for paying special dividends.

In addition, the company will also use the funds to enhance working capital funding of the company and to meet general business expenses and mitigate the risk of the business to the extent possible. 

4) The IPO comes at a time when the Foxconn Chennai plan has been in the midst of a major controversy, which has now hopefully been sorted out and settled for good. This issue became high profile after a case of food poisoning at the plant.

Currently, Bharat FIH Ltd gets most of its revenues from Xiaomi, the Chinese smart phone manufacturer which outsources its entire manufacturing, design and after sales service activity to Bharat FIH Ltd. It may be recollected that Xiaomi is the market leader in the smart phone segment in India.

5) Bharat FIH Ltd currently has operations across Tamil Nadu and Andhra Pradesh. Both these operations manage to integrate manufacturing, warehousing and logistics into one seamless value chain.

While its predominant focus at this point of time has been in the area of mobile phones, it is planning to diversify and has already started to move into other high growth segments like electrical vehicles (EV), mechanics, televisions and wearables.

It also has a dedicated research and development subsidiary based out of Taiwan. Of course, the political situation in Taiwan remains a major challenge but that should not pose a very major systemic risk for Taiwan.

6) The EMS space is gradually getting crowded and competitive. While Bharat FIH Ltd still has a leadership in terms of revenue market share, there are several competitors in the fray. These competitors include some of the well established names like Flextronics, Jabi, Dixon, Sanmina, Optiemus Infocom etc.

Bharat FIH Ltd has in-house manufacturing and assembly capabilities supported by a strong servicing and support back end too. 

7) The IPO of Bharat FIH Ltd will be lead managed by Citigroup Global Markets, BNP Paribas, HSBC Securities and Capital Markets. They will act as the book running lead managers or BRLMs to the issue.

By default, outsourcing of electronic manufacturing or EMS is a specialized but low margin business that largely thrives on volumes and cost efficiencies.

That will be the challenge. However, the one area of debate could be the use of fresh issue funds to pay special dividends to shareholders. That needs to pass muster with SEBI.

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