Business / Industry Sectors
Israeli chip maker eyes Mr. Narendra Modi’s nod for India plant to sustain rally
Tower Semiconductor seeks nod to operate one of the two factories that Modi has earmarked to support local semiconductor industry

Israeli chip maker Tower Semiconductor Ltd needs approval for a plant in India to sustain a rally that more than doubled the share price this year, according to Meitav DS Investments Ltd.


“Tower is confident the company and its partners will receive consent to operate the new Indian factory,” chief executive officer (CEO) Mr. Russell Ellwanger said in an interview recently.


The shares advanced 108% in 2014 through Tuesday, about three times the next-best performer in Tel Aviv, after Tower said a deal with Panasonic Corp. will generate $400 million in annual revenue. Yields on the company’s bonds fell as much as 12 percentage points in the period.


“The main upside is in India right now,” Mr. Avihai Bracha, a senior buy-side analyst at Meitav, which holds some of the company’s shares and bonds among the more than $37 billion it manages, said by phone from Tel Aviv.


“All the good news from the Panasonic deal has been priced into the stock. Investors right now aren’t entirely pricing in the potential of the India project.”


Tower, International Business Machines Corp. (IBM) and India’s Jaypee Infratech Ltd are together seeking permission to operate one of two factories that Indian Prime Minister Mr. Narendra Modi has earmarked to support the local semiconductor industry, part of efforts to boost his country’s economy.


Mr. Ellwanger, who became CEO in 2005, has said that the plant could add hundreds of millions of dollars to the Israeli chip maker’s gross margin. India’s economy grew 5.7% in April-June, the fastest pace since 2012, government data showed 29 August. India will expand as much as 5.9% in the year through March 2015, the government forecasts.


The Indian Cabinet has given two consortiums, including the Tower-IBM group, letters of intent, Mr. Ellwanger said in a first-quarter earnings conference call in May.


“It’s reasonable that if the government gives final approval, it could happen in October,” Mr. Ellwanger said by telephone this week.


“We believe this government, led by Mr. Modi, is very much technologically driven.” Mr. D.S. Malik, spokesman for India’s finance ministry, said he wasn’t aware of the administration’s plans for completing permit approvals for the project.


Panasonic deal “Tower’s sales will exceed $1 billion within four years,” Mr. Ellwanger said in an interview. The chip maker’s Tel Aviv shares on Tuesday closed at 7.7 times projected 12-month earnings, about half the average of its peers, according to data compiled by Bloomberg.


That compares with more than 15 times for the MSCI World Index. Tower’s 14-day relative strength climbed to more than 73 this week, the highest since July. A level above 70 indicates to some technical analysts that a stock may be overbought and is poised to sell off. As part of Tower’s April deal to run three factories in a joint venture with Panasonic, the Japanese company agreed to acquire products from the facilities for at least five years. Demand from Panasonic accounts for less than 50% of the factories’ capacity, allowing Tower to seek other customers, the chip maker said in its second-quarter earnings call in August.


“The major challenge now is to fill the capacity that Panasonic won’t buy, and they seem to be showing good progress in finding new customers,” Ms. Sabina Levy, an analyst at Leader and Co. in Tel Aviv, said on 31 August by telephone. “It will also be a challenge to stay on track regarding existing operations because the semiconductor business is cyclical.”


Best performer Tower last week announced a deal with Himax Imaging Inc. to help develop new high-end cameras for smartphone applications. “Agreements with multiple third-party image sensor companies may lead to more than $100 million in revenue,” Mr. Ellwanger said. The stock is trading near the highest level in two years and is the best performer on the TA-100 Index in 2014.


The yield on the company’s 7.8% 400 million-shekel ($112 million) bond due December 2016 plunged to 5.1% in the period. “Approval for the India plant is not a question of if, but when,” Mr. Ellwanger said


Source: Live Mint


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