India’s policy push including Production Linked Incentive (PLI) scheme and Make in India is likely to propel its electronics output to $300 billion from $100 billion over the next five years (FY26E targeted by the government). Domestic brokerage house Nuvama believes that this is an unmistakable megatrend—one that, in turn, is creating a super cycle for the Indian Electronics Manufacturing Services (EMS) space, which can potentially burgeon from $26 billion in FY23 to $100 billion-plus by FY28E at a 33 percent CAGR.
As per the brokerage, its study of Indian EMS reveals their biggest moats are ‘operational excellence’ and ‘existing scale’, which in turn allow for creating capability upgrades and a high-reliability factor for customers.
Amid this backdrop, the brokerage has initiated coverage on Syrma SGS and Kaynes Technology with ‘buy’ calls. It said that both these firms are established Indian players in the non-mobile EMS space, and their large diversified business models should keep them electrified, aiding them ride this megatrend. It forecasts Syrma and Kaynes would clock PAT CAGRs of 43 percent and 52 percent, respectively, over FY23–26E along with improving incremental RoCEs (Return on Capital Employed).
EMS stocks’ run-up – Have you missed the bus?
The brokerage further informed that EMS stocks such as Syrma, Kaynes, Avalon, and Cyient DLM (all listed during the past year) have rallied 36-138 percent YTD.
"Though all of these are businesses growing at 40 percent-plus, we find a part of the market worried about missing the bus. To assess how the market rewards megatrends and super cycles, we look back at case studies such as the 2014–21 Indian specialty chemicals cycle (also China Plus One). During FY14–23, a set of 15 Indian chemicals stocks delivered a PAT CAGR of 24 percent and a staggering 49 percent CAGR in stock value. While starting valuations were meaningfully lower for chemicals stocks in 2014 (EMS stocks’ current PEs are 30–40x), the key aspect for EMS stocks is that they are at very early stages in a long, high-growth cycle. Hence, even if one assumes that valuations have discounted the story, earnings compounding over the next five–seven years still have the potential to deliver extremely healthy stock returns in our view," recommended the brokerage.
Top stock picks
Syrma SGS: The brokerage has initiated coverage on the stock with a ‘buy’ call and a target price of ₹760, indicating an upside of over 59 percent.
"Syrma is a leading and fast-growing domestic EMS player within India’s non-mobile EMS space. It has been in the EMS space since 2006 and now reaping the benefits of India’s massive electronics upcycle, with all key moats in place. We like Syrma due to its: i) strong capabilities built over time in PCBA and box-builds, with 200+ customers and sourcing from 1,700 suppliers; ii) diversified client base, which not only reduces risk but also gives access to huge TAM; iii) successful expansion and M&A track record; iv) ability to self-fund capex over FY23–28E," explained Nuvama.
It forecasts revenue of $1 billion by FY27 and a 40 percent CAGR in revenue/PAT over FY23–28E for Syrma. Vitally, Syrma should be able self-fund its investment needs of ₹3,500 crore (FY23–28), through its OCF. Furthermore, Syrma can generate incremental RoCE of 22–24 percent, which should lift its current 13 percent RoCE profile to 18–20 percent by FY26–28E, a key driver for value creation, it noted.
"We are initiating with a ‘BUY’ and TP of INR760, valuing the stock at a PE of 35x on one-year-forward EPS (FY27 EPS discounted back by 2Y), so that we capture its long-range growth adequately," it said.
Kaynes Tech: The brokerage has initiated coverage on the stock with a ‘buy’ call and a target price of ₹2,340, implying an almost 36 percent upside.
"Kaynes is a leading player in the low volume-high value, largely non-consumer EMS sub-space, with a proven track record of servicing sectors that entail complexity and criticality. We like Kaynes due to its: (i) a well-diversified client base across several key verticals; (ii) Its marquee client roster is reflective of its abilities to manage complex tasks; (iii) robust B2B capex trends and GoI’s import substitution focus (iv) potential to clock over 40 percent revenue CAGR over the next five years, with ample cash flows to fund EMS business expansion. We are initiating Kaynes at ‘BUY’ with a TP of INR2,340, i.e. 38x 1Y-fwd P/E (FY27E EPS discounted back by two years). Robust RoCE and leadership in complex sectors should drive long-term value creation," it said.
Apart from these two, the brokerage also has ‘hold’ calls on Dixon Tech and Amber Enterprises with target prices of ₹3,925 and ₹2,490, respectively. This indicates a potential downside of 21 percent for Dixon and a flat growth for Amber.
Meanwhile, Avalon Tech, Cyient DLM, PG Elect and Elin have not yet been rated by the brokerage house.
Key downside risks
- Adverse regulatory policies in the future or aggressive manufacturing policies in competing nations such as Vietnam, or even in China.
- Lack of execution by specific players, or collectively, can put a question mark on India’s electronics production story.
- Competitive environment is becoming aggressive, which can potentially lead to a meaningful contraction in pricing and margins.