As Kaynes Technology chases faster growth, stock’s valuations follow suit

By integrating Sensonic’s fiber optic sensing technology with its manufacturing capabilities, Kaynes aims to deliver improved railway infrastructure solutions focused on safety, operational optimization and efficiency. In the first half of FY25 (H1FY25), Kaynes’ railway vertical contributed 7.6% of its total revenue, with major clients including Siemens, Frauscher and Hitachi.

The acquisition is through a primary infusion of about ₹45 crore into the share capital of Sensonic GmbH. Further, additional financial assistance of about ₹130 crore would be provided to Sensonic GmbH upon request in one or more tranches.

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Diversification push

The acquisition aligns with Kaynes’ goal of diversifying its market outreach. Nonetheless, the success of this acquisition would depend on seamless integration and Kaynes’ ability to address execution challenges effectively, ensuring it can deliver the anticipated growth and value.

In September, Kaynes also acquired Iskraemeco India, a smart metering solutions provider for ₹43 crore. These acquisitions reflect the company’s efforts to expand into high-growth sectors with better margins, complementing its aerospace and IT businesses.

Kaynes is also integrating outsourced semiconductor assembly and test (OSAT) and printed circuit board (PCB) manufacturing into its operations. This move is expected to reduce dependency on external suppliers, enhance product quality and reliability, lower costs, and improve competitiveness. However, delays in the OSAT facility under development in Gujarat could impact project timelines and financial performance.

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For now, investors are sitting on handsome returns, with the stock appreciating over 130% so far in 2024. The company has been able to deliver on growth, and investors have given a thumbs up. “Its revenue has been growing at an average rate of about 58% over the last eight quarters, and we believe this momentum to further strengthen due to the execution of a strong order book at hand," said analysts from Motilal Oswal Financial Services in their September quarter results (Q2FY25) review report. 

“Margins are also expected to expand as a result of a favourable business mix toward high-margin sectors (industrials-smart meter, aerospace and railways)," they added.

Kaynes’ order book increased to ₹5,422 crore as of September end from ₹5,038 crore as of June end, improving revenue visibility. The company has maintained its revenue target of surpassing ₹3,000 crore for FY25. Kaynes’ H1FY25 revenue was ₹1,076 crore, up 63.5% year-on-year. Automotive and industrial (including EV) verticals contributed 28.1% and 54.3% of H1FY25 revenues, respectively.

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The company expects H2 to be strong, led by a surge in smart meters execution. Furthermore, Kaynes expects an operational Ebitda margin at about 15% in FY25. Ebitda is short for earnings before interest, tax, depreciation and amortization.

“High-growth EMS and the OSAT+PCB projects shall catapult Kaynes to a top line of about $1 billion-plus by FY28E in our view," said analysts from Nuvama Institutional Equities in its Q2FY25 review report. “Hence, we are valuing the stock on FY29E earnings (40x price-to-earnings ratio), discounted back to yield Dec-25 target price of ₹6,220 (earlier ₹5,000)," they said.

For perspective, Kaynes’ share price at about ₹6,250 apiece now. The stock trades at close to 90 times FY26 estimated earnings, as per Bloomberg data. Motilal Oswal estimates a compound annual growth rate of 57% and 64% in revenue and Ebitda, respectively, over FY24-27. Notwithstanding growth prospects, valuations are rich, leaving little room for error.