LG plans to set up manufacturing unit at Andhra, fears competition from parent entity

New Delhi: LG Electronics India has plans to set up a new plant in Andhra Pradesh to boost its manufacturing capacity in the country, though it also fears competition from its South Korean parent entity.

Besides, it is increasing the sourcing of raw materials from the local market, which is helping it meet consumer demands and lower its inventory and related costs, allowing the company to competitively price the products, said LG in its DRHP filed with markets regulator Sebi.

However, it also added that despite localisation efforts, there is a persisting reliance on foreign components and finished products, especially in the premium segment.

"Key imports are primarily sourced from countries such as China, South Korea, and Japan, reflecting a strategic focus on enhancing product quality and technological advancement," it said.

Moreover, dependence on its top five suppliers and top 10 suppliers that contributed 21.45 per cent and 31.44 per cent to its total purchase of raw materials and components in April-June 2024, may also have an impact in the case of "any interruption in the availability" or "supplier misconduct".

The company is supported by its parent entity, LG Electronics for various aspects of its business, including product innovations, product design, technologies for manufacturing, brand and related technical know-how and exports.

"Any adverse change in our relationship with LG Electronics and the companies in the LG Group could have an adverse impact on our business, reputation, financial condition and results of operations," said LG Electronics India in its Draft Red Herring Prospectus (DHRP).

It pays a royalty of 2.3 per cent of net sales for authorised products and 2.4 per cent of net sales for LCD televisions and monitors.

In FY24, it paid Rs 323.2 crore as cost royalty to South Korean Chaebol for use of technology and brand name.

Moreover, Hi-M Solutek India, an indirect wholly owned subsidiary of LG Electronics, which specializes in commercial air conditioner service and maintenance, is operational in India.

"However, we do not have an exclusive contractual arrangement with them and there is no assurance that Hi-M Solutek India Private Limited will not expand their business in the future to compete with ours or to provide services for our competitors," it said.

Moreover, it also depends on its parent entity for its export business. It receives export orders directly from LG Electronics and its affiliates in the export country in coordination with the respective LG regional headquarters.

"We therefore will not be able to expand our exports business without the support of LG Electronics. Any failure or delay by LG Electronics or us in accessing the export markets at the optimal time could have a material adverse effect on our prospects and results of operations," it said.

LG Electronics India, which has two manufacturing units at Greater Noida and Pune is also setting up a new plant in Andhra Pradesh to meet the growing demand.

It has an installed capacity of 1,39,90,000 products at its Noida and Pune manufacturing units collectively. Besides products, it manufactures several key components, such as compressors and motors.

"As a testament to our commitment to India, we intend to construct a third manufacturing unit in Andhra Pradesh to expand our manufacturing capacity," the company said.

LG Electronics India has already received nod for financial incentives under Andhra Pradesh Industrial Development Policy on November 26, 2024.

Last week, LG Electronics India filed preliminary papers with Sebi for an initial public offering wherein the parent company will sell over 10.18 crore shares amounting to 15 per cent stake.

After the listing of Hyundai Motors India Ltd, LG Electronics will be the second South Korean company that will tap the Indian stock market.

Though the company has not yet declared the price band, according to report from some market analysts, LG will raise Rs 15,000 crore from the Indian market.

The proposed IPO is entirely an offer for sale (OFS) of 10.18 crore equity shares by Souther Korean promoter LG Electronics with no fresh issue component. Since the public issue is completely an OFS, LG Electronics India will not receive any IPO proceeds. The funds raised will go to the South Korean parent.