Electronics manufacturing firms tipped to outperform indices this year

Shares of companies such as Dixon Technologies, Amber Enterprises, Kaynes Technology and Syrma SGS Technology may clock strong double-digit growth, they said, outperforming headline indices.

Nirransh Jain, India analyst, consumer durables and EMS at brokerage firm BNP Paribas, said that despite valuation concerns, the core business operations of EMS firms remain strong.

“Concerns around the high valuation of EMS firms are true, especially with the sharp run-up in stock prices that we’ve seen over the past year. But the high value is also underlined by strong underlying growth and fundamentals. The likes of Dixon and Kaynes have seen strong growth every quarter in the past three quarters. If this momentum can be maintained, such valuations are likely to be sustained in the long run—giving EMS stocks room for good growth. Recent acquisitions, tie-ups and business ramp-ups are also adding to organic growth, which can add further partial support to their valuations," Jain said.

Also read | TVS Electronics plans long term EMS play

In the past year, shares of Dixon Technologies gained 69.8% to a record ₹19149.80, before losing 21% as of Tuesday. At a price-to-equity ratio of 145.3, the company’s valuation remains high. Similarly, Kaynes Technology rose 121% in a year to ₹7824.95, before correcting 23% as of Tuesday. Like Dixon, Kaynes has a high valuation of 177.34. Amber Enterprises rose 78% in one year before correcting 25% in the past month, and has a valuation of 123.02. In all three cases, analysts believe there is room for correction, before further gains.

Syrma SGS, which tied up with Taiwanese firm MSI on 10 January to assemble laptops, is the only outlier in this regard—its share price is down 16% in the past one year, and up 23% in the past month.

Projections now suggest a significant upside to this sector through 2025.

China-plus-one

Harshit Kapadia, vice-president for consumer durables, electronics and capital goods at brokerage firm Elara Securities, added that while revenue growth is assured, margins are in focus.

“The push for China-plus-one strategies is helping Vietnam, Indonesia and India establish manufacturing as a key economic growth opportunity. This is rising out of a global supply chain diversification strategy. India’s EMS market will obviously grow as more brands come to India and work with domestic firms—to both supply local consumers, and export for abroad. As a result, the key stress will be the margin profile of the EMS firms, even though the topline remains high. This is because assembly operations do not generate high-value yields, be it for Tata Electronics, Dixon Technologies or any other," Kapadia said.

Also read | India may tweak customs duties, regulations in budget to back local component manufacturing, ease trade

Both Kapadia and BNP Paribas's Jain agree that for the next phase of growth, fresh incentives will be key. On 12 December, Mint reported that the Centre is prepping a $3 billion incentives package to boost creation of product brands, as well as localize component manufacturing to generate greater value for EMS companies in the near term.

Noting that these incentives could arrive as early as April, Kapadia said, “This will start boosting the value generation of EMS firms, adding optimism to the double-digit growth potential of EMS companies. There are no clear challenges as far as revenue growth is concerned, even as margin expansion remains a touch lower for now. High valuations are essential for EMS companies, and given the challenges in this year’s market, there could be some rationalization of the valuation—leading to corrections before a growth phase."

Government scheme

Jain also said the growth potential is justified given that component localization will require specialized manufacturing needs. “The first leg of growth for EMS firms came on the back of import substitution for mobile phones. The next growth phase will shift to higher valuations, for which a components' PLI scheme will be key. Once that comes through, joint ventures can be expected in this sector to cater to specific components and subcomponents. There would also be room for higher margins, adding to growth," he said.

Also read | Manufacturing boost: Clusters near infra hubs, tax reforms likely in Budget 2025

To realize this, all eyes will be on the upcoming Union budget on 1 February. On Monday, Mint reported that alongside import duty rationalization, the Centre has also received proposals to introduce component manufacturing PLIs to boost the domestic electronics sector.

Nitin Kunkolienker, chairman of the board of directors of industry body Manufacturers Association of Information Technology (Mait), said that such schemes will be key for India’s technology industry growth.

“India currently stands at an average value addition of 15% across all electronics categories put together. In the near future, there is opportunity to expand value addition margins to 30%—if a component localization move is successfully executed," he said.

For EMS firms, achieving this could see them rank among the top bets in domestic equity market for this calendar year.

Also read | Good Glamm's Saggi said to be starting new innings in consumer electronics