India Deal Could mean Margin expansion at Tower Semiconductor

Zacks Small Cap Research

By Ken Nagy, CFA

On September 12, 2013, Capital.gr reported that Tower Semiconductor Ltd. (TSEM), the Israel based global specialty foundry leader, was one of two initial proposals approved by India’s federal cabinet to set up semiconductor manufacturing facilities within the country.

The cabinet will seek proposals from more chipmakers before making the final decision in four weeks.

Still, the important business opportunity would expand Tower’s presence in India through an initiative by the Indian government for a 300 millimeter factory.

The initiative would provide the Company with a major revenue stream during the portion of Fab build out and subsequent Fab operation and give it the specific portion of the Fab capacity for its own customer needs.

To set up the facility, Tower Semiconductor would work with International Business Machines Corp. (IBM) and Jaypee Associates Ltd. of India.

Higher Margin

Assuming the deal does go through as intended, investors can expect very high margin. Recall on the second quarter call Tower’s management team explained that the first three years margins will be close to 100%. The reason is they will strictly be providing a service based business activity rather than a business activity that would count against Cost of Goods Sold.  Tower would not be investing cash, rather participating in the investment providing managerial support.

After a period of time the firm will control a portion of the factory for its own sales, and it likely will look more like a standard fab model.

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 Tower Semiconductor Report

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