* Targets operating margin of 17 pct vs 15 pct previously
* Automotive to be main growth driver - CEO
* Fourth-quarter operating profit 280 mln euros (Adds CEO, CFO, analyst comment, background, updates shares,)
By Harro Ten Wolde
FRANKFURT, Nov 23 (Reuters) - German chipmaker Infineon raised its medium-term profitability target on Wednesday, banking on strong growth in its automotive business as carmakers invest heavily on electric and self-driving vehicles.
The increased operating margin target outweighed a cautious annual revenue forecast and Infineon shares traded 1.6 percent higher at 16.69 euros by 1100 GMT, having gained more than 20 percent this year.
Automotive is fuelling merger deals in the chip sector. NXP Semiconductors, the largest supplier of chips to the industry, agreed to a $38 billion takeover by Qualcomm Inc last month, the biggest deal so far in the sector.
Car makers including Volkswagen are rushing to develop electric and self-driving cars, pushed by tougher anti-pollution rules and the emergence of new competitors from the technology sector such Alphabet's Google.
"Autonomous driving is one of the main drivers of our industry, an area where we play a key role," Chief Executive Reinhard Ploss said at the company's news conference in Munich.
Infineon's chips activate car airbags, enable cruise control, manage power supplies and cut vehicle emissions.
Infineon is the world's second largest semiconductor supplier to the automotive sector, with a market share of 10.4 percent according to Strategy Analytics, behind NXP which has 14.2 percent.
Its automotive unit, which makes high-margin chips used by carmakers including Tesla and Hyundai as well as auto suppliers Continental and Bosch , will grow faster then the rest of the group, which is predicted to grow around 6 percent this year.
As a result, the group's operating margin will likely hit around 17 percent in the 2017/18 fiscal year if market circumstances remain normal, Finance Chief Dominik Asam said. The previous forecast was for 15 percent.
Infineon reported a 2 percent drop in operating profit, excluding special items, for the quarter ending Sept. 30 to 280 million euros ($298 million).
That was slightly below the 285 million euro average forecast in a Reuters poll in which estimates ranged from 272-293 million euros.
For its fiscal year ending in September 2017, Infineon said it expected revenue to rise some 6 percent with an operating margin of about 16 percent.
A 6 percent rise would mean revenue of 6.86 billion euros, below the most pessimistic forecast in the Reuters poll.
"The weaker-than-expected guide for 2017 reflects a weaker environment in security and PMM (power management) but doesn't affect our thesis, centred on autos and industrials," said Bernstein analyst Pierre Ferragu in a client note. Bernstein has an "Outperform" rating on the stock. ($1 = 0.9408 euros) (Editing by David Clarke/Keith Weir)