Incap: We visited the factory in India

Translation: Original published in Finnish on 11/05/2025 at 07:30 am EET

This week, we visited Incap’s factories in Tumkur, India. Yesterday and today, we familiarized ourselves with the production of all three factory units in Tumkur. Our key observations after the visits were as follows:

The Indian unit, consisting of three factories, is Incap's largest by far 

Incap's Indian factories, consisting of three factory units, are located in Tumkur, South India, near Bangalore. The oldest of the factories focuses on serving local customers operating in India, even though the local customers are also part of Western and Japanese companies. The second unit, which has been expanded several times, is in the same building as the first and handles export deliveries. The third factory is Incap's latest expansion investment, completed in 2023, which is also an export factory. Local deliveries and exports are separated for tax reasons.

The combined floor area of the three factories is 26,500 square meters, which corresponds to around 60% of the floor area of all five of Incap's factories. At the end of Q2, the factory employed around 1,870 people, or 72% of Incap's total personnel (incl. work-for-hire). Incap has not disclosed its financial figures on a plant-by-plant basis, but we estimate that the Indian factories are clearly Incap's largest unit, also in terms of revenue and earnings, accounting for roughly 60% of the group's figures. We estimate that the margin of the Indian factories is slightly higher than the group average due to their cost-effective production, but this cannot be verified from the company's external reporting. 

Most of the deliveries from the Indian factory end up in Europe

Incap's factories have the capabilities for both printed circuit board assembly (PCBA) and box build. Although the Indian factories are Incap's largest unit, in the context of the electronics industry, they focus on small and medium-sized delivery batches, similar to Incap's other factories. Typical products in the factories include power electronics such as inverters, chargers, and uninterruptible power supply units. In addition, the factories in India produce different types of industrial electronics. Of the Indian factories' revenue, around 20% goes to the US. Local deliveries are likely to be small, but they have probably been more stable than export deliveries. Based on the group's annual reporting, we believe most of the factory's deliveries end up in Europe.

Our understanding is that the revenue of the Indian factories is mainly denominated in dollars, while costs are in dollars (mostly components) and Indian rupees (personnel costs and other costs). Thus, the exchange rates of the dollar and the Indian rupee, in particular, can affect the reported figures of the Indian factories through the translation effect. Due to this and the negative demand effects of tariffs, we estimate that the Indian factory is partly responsible for the decline in the company's consolidated revenue and earnings guided and estimated for this year.

The Group's largest customer plays a significant role in the Indian factories

We believe Incap delivers the majority of its largest customer's orders from its export factories, which accounted for 41% of the company's total revenue last year. Thus, the revenue of the Indian factories is strongly concentrated on this customer. We have discussed the customer in our extensive reports, the latest of which can be read here. In principle, we see the risks related to customer continuity as small, but the development of the largest customer's own business still has a significant impact on the volume level of Incap's Indian factories and thus on Incap as a whole. Thus, the development of this customer relationship can still strongly impact Incap, as has been seen in the 2020s, even though the customer risk has clearly decreased from its 2022 peak due to the largest customer's revenue decrease and the Pennatronics acquisition (vs. in 2022, the largest customer's share of Incap's revenue was 67%). 

We estimate that the other customers of the Indian factories are clearly smaller, considering the overall scale. We believe Incap has free capacity in India, or at least capacity potential enabled by the floor area of the newest export factory, also for new customers. The third factory was only completed in 2023, at the same time as the largest customer's demand first decreased and later stabilized to a lower level than in the exceptionally hot COVID period. The company is also filling this, as a third SMT line has already been ordered for the export factory, which we see as a positive sign for next year's demand outlook. In addition, the company could expand the third factory building and also build a fourth factory in India. However, the realization of these investments would require winning significant new customers in the coming years.  

The capacity potential of the export factories offers opportunities for capital-efficient profitable growth in India

New customer acquisition is typically slow in the contract manufacturing business, as switching suppliers involves risks and costs from the customer's perspective, which are generally not desired if the existing supplier provides good quality with high delivery reliability and is cost-competitive. We believe this has also affected Incap's Indian factory over the past two years, as the company has been looking for new customers, especially for its export factories, where the largest customer's volumes did not grow at the initially expected pace. Opportunities for new customer acquisition are offered by the product development units established in the Bangalore region by international OEM manufacturers, whose proximity could open up opportunities for the Indian factories for production cooperation, from prototype series to industrial production. In Incap's diversified operating model, factory sales are primarily handled by the local team, which focuses on both new customer acquisition and growing existing customer accounts. In our interpretation, projects with larger new customers are also progressing to the production phase, although the schedules and scale of the acceleration of potential customer relationships are difficult to assess from outside the company.      

In our view, the strengths of the Indian factories are primarily cost competitiveness, as personnel costs in India are low compared to most countries. The cost competitiveness of the Indian factories is also enhanced by Incap's diversified organizational model. However, Incap manufactures demanding box build products in India, similar to the company's other factories, and significant investments have been made in the Indian factory (incl. production technology) in recent years. On the other hand, in addition to foreign competition, the Indian factories also face competition from other international and local contract manufacturers in the Bangalore region, against whom the cost advantage may be more limited. Correspondingly, the clearest risk so far is concentrated in the revenue structure. The biggest opportunity is to increase revenue (and earnings) through new customers, which, given the free capacity potential, would likely be very capital-efficient, at least in the short and medium term. Our estimates also expect that Incap will be able to fill the capacity of the Indian factory through both existing customers (cyclical recovery in demand and customer-specific market share growth) and new customers.