A wave of warnings over Kaynes Technology’s finances has rattled India’s electronics manufacturing sector (EMS), sharpening focus on the industry’s ability to fund the heavy investments required to tap upcoming government incentives.
Brokerage firm Kotak Securities’ notes on the company this month has had a cascade effect on the wider sector. Since 1 December, shares of Dixon, Syrma and Kaynes have crashed 11-30%, as analysts noted issues with cash flow, availability of working capital, and ability to expand manufacturing to seek government incentives.
On 3 December, a Kotak Securities note reported “ambiguous accounting” of revenue accounted for from one of Kaynes’ acquisitions, as well as “inconsistencies” in related party transactions. The note also questioned if the company’s current operating cash flow would permit its planned capital expenditures in new projects.
Despite shaky investor confidence, analysts remain optimistic for the long run, as India’s four top electronics firms retain the exponential gains they’ve brought for investors since their listings.
Over the past week, after Kotak Securities' note. there were similar flags by the likes of JM Financial and JPMorgan, raising concern around financial disclosures and operating cash flow at Kaynes. They raised questions around the company’s accounting discrepancies, and if it had enough capital to grow at the pace it intended to.
On 5 December, Kaynes submitted a response on the BSE, admitting to “inadvertent non-disclosure” of related party transactions in its financial statements. And, on 8 December, the company's management, headed by executive vice-chairman and founder Ramesh Kannan, addressed these concerns in a call with analysts.
Investors, however, appeared jittery. On Wednesday, Kaynes’s shares fell 10.5%, before recovering 3.5% on Thursday. Overall, Kaynes’s share price is down 30% since 1 December, and 44% from its 52-week high.
Industry under stress
So far, electronics manufacturing services firms have largely relied upon building scale, driven by central and state government incentive schemes. This had so far worked out very well—both for the companies and their investors. Kaynes, since listing in November 2022, gave investors a 10x return within three years. Even now, its share prices are at 5.4x since listing. The benchmark 30-share BSE Sensex, in this time, has risen 37%.
Similarly, Dixon, Amber and Syrma have returned investors 6x, 5x and 2.5x since their listings in September 2017, February 2018 and August 2022, respectively.
Now, a new set of incentive schemes are looking to boost component manufacturing, which in turn would need these companies to invest in building factories before they get the said sops and reap the rewards. Analysts are now questioning if the sector would indeed be able to make such investments.
“We take note of management responses to our report; however, certain aspects with respect to intangible accounting and elevated working capital still remain unclear. We believe generation of positive OCF (operating cash flow) in FY2026, improvement in internal controls and timely execution of PCB (printed circuit board) and Osat (outsourced semiconductor assembly and testing) expansion will be crucial,” said a second note on 9 December by Kotak Securities analysts Deepak Krishnan, Aditya Mongia, Naman Jain and Kartik Kohli.
A note by Bhavik Mehta and Ankur Rudra, analysts at brokerage firm JPMorgan, added, “There has been no change in fundamentals on revenues and margins, but one of the key concerns on the stock has been stretched working capital and receivables post 2Q.”
The sector, to be sure, is capital-intensive. On 14 November, Mint reported that all of India’s top electronics companies, including the privately-held Tata Electronics, are pursuing acquisitions to venture into component manufacturing and other sub-segments that reap better rewards in electronics.
Concerns about Kaynes have had a cascading effect on the entire electronics maufacturing services sector. Since 1 December, Dixon Technologies, the sole large cap EMS firm, saw its share prices decline 15% before recovering 5.3% on Thursday. Syrma SGS and Amber Enterprises shares fell 10% and 8%, respectively over the past nine working days.
At the heart of the issue, therefore, are questions around the ability of EMS companies, which have largely relied upon high-volume, low-value electronics assemblies, to generate enough operating cash flow to invest in their businesses.
Long-term outlook
In response to a questionnaire sent by Mint, Jairam Sampath, chief financial officer at Kaynes Technology, reaffirmed his claim from the previous quarter’s earnings call, stating, “We hold our resolve to get positive operating cash flows by March 2026.”
“Kaynes has always delivered on execution of new projects. We were the first to produce and ship ICs (integrated circuits) made in India amongst the various entities who were granted capital subsidy approvals by the government," he said. "Similarly, significant progress has been made in both the new projects of Osat as well as the HDI/Multilayer PC (printed circuit) Board fabrication. We have taken note of the comments by various people in media and during our analyst interactions, and we are confident of ensuring the desired improvements on each of the key issues facing the business.”
Sampath added that the company expects “to clock higher revenues in sectors other than industrials such as railway electronics, aerospace, electric vehicles, automotive, etc., which will drive the growth of ESDM (electronics system design and manufacturing) revenues for Kaynes to compensate for the smart meter revenues.”
The company also plans to start supplying packaged chips from its Osat plant in Sanand, Gujarat, this fiscal year itself. He, however, denied there was any need to raise any further capital, at least in the near term.
On this note, analysts said that despite the concerns, Kaynes may remain as a stable company for investors in the long run.
“The company’s overall business model is solid, and as far as the expansions are concerned, there’s no reason for Kaynes to fail at any stage. It can consider raising further funding for future acquisitions or venturing into more new categories," said Harshit Kapadia, vice-president at brokerage firm, Elara Capital. "Overall, what will be key to see are tighter internal controls in financial reporting, and if it will really meet its positive operating cash flow guidance this financial year.”
“We remain OW (overweight) and expect improving receivables and NWC (net working capital) over the next two quarters to be key drivers of the stock,” Mehta and Rudra of JPMorgan added.