Kaynes Tech, Cyient DLM, Dixon Tech...Motilal Oswal upbeat on EMS sector, reiterates ’buy’ on 6 stocks

The Electronics Manufacturing Services (EMS) industry in India is experiencing substantial revenue growth, mainly due to robust industry demand, the introduction of new segments and acquisition of new clients, rising domestic production, import replacement, and international collaborations, believes brokerage house, Motilal Oswal Financial Services Ltd.

The brokerage affirms its 'buy' rating on Kaynes Technology, Avalon Technologies, Cyient DLM, Syrma SGS Technology, Dixon Technologies, and Amber Enterprises within its coverage universe.

In its analysis, the brokerage said that although EMS businesses had robust revenue growth in FY24/1QFY25, their profits growth trajectory was hampered by the margin erosion. Most of the firms, in Motilal Oswal's opinion, are projected to either recover or at the very least retain their existing margin profile, with a significant portion of the issues behind them.

As a result, the brokerage firm anticipates that the EMS industry's pace for profits growth would quicken, driven by robust order book execution from both new and established end-user sectors as well as margin recovery.

"We expect our EMS coverage companies to report a CAGR of 47%/49%/51% in revenue/EBITDA/adj. PAT over FY24-FY26," the brokerage said.

The brokerage also noted in its study that the market has significant growth visibility, with an aggregate order book of ₹141 billion as of June 24 (almost double the FY24 aggregate sales) (excluding Dixon and Amber). Additionally, the bulk of the companies are actively adding new client categories and onboarding new ones, indicating that future order inflows are likely to be consistent.

With a significant percentage of lower-margin business, the majority of EMS businesses saw a decline in their EBITDA margins in FY24 (down 40bp YoY to 6.4% for the total covered companies). This decline was somewhat mitigated by advantageous operating leverage.

Valuation and view: EMS industry witnessing an uptrend

"Our aggregate revenue for the EMS coverage basket is expected to clock a 47% CAGR over FY24-FY26, driven by order flows from new as well as existing segments in both domestic and international markets in areas such as high computing servers, railways, A&D, medical and healthcare, clean energies, EV, automotive, and industrial.

We reiterate our BUY rating on Kaynes Technology/Avalon Technologies/Cyient DLM/Syrma SGS Technology/Dixon Technologies/ Amber Enterprises with a target price of ₹5,550/ ₹630/ ₹880/ ₹540/ ₹15,000/ ₹5,000 for FY26. We retain our Neutral stance on Data Patterns with a target price of ₹2,900 for FY26," added Nuvama in its report.

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