Electronics manufacturing stocks in focus as India enters super cycle phase
- India’s outsourced EMS market is expected to grow at 33% for the next four to five years.
- EMS companies have guided revenue CAGR of 30-40% for the next few years.
- Recently listed EMS companies have piqued the interest of investors.
- Even as EMS stocks are now well valued, their high earnings potential makes them a long term play, say brokerages.
As per a research report by Nuvama, India’s outsourced EMS market has been growing at a compounded annual growth rate (CAGR) of 22% to $26 billion in the last five years. In the next four to five years, it’s expected to grow faster at a CAGR of 33% and to $100 billion.
“What doubles down in India’s favour is, for several global majors, India is now also a huge demand centre and the highest growth contributor. Capitalising on these changing dynamics, the GoI’s policies such as PLI and import curbs are further fuelling a massive electronics super cycle in India,” says Nuvama.
As the world moves towards a ‘China plus one’ strategy, India offers many advantages like lowest labour costs in Asian countries, a huge working-age population, high basic education levels and conducive manufacturing policies.
Most of the Indian players in the sector are into original design manufacturers (ODM) and original equipment manufacturers (OEM) ranging from printed circuit boards to box builds and a range of businesses with diverse value and volume play.
*Returns since listing
Missed the bus?
In the last few months, the stocks of EMS companies have had a huge run up. Most leading players guided their revenue to grow at a CAGR of 30-40% for the next few years – and that piqued the interest in this industry.
“Stock prices of EMS companies have soared up to 75% in three months on strong management guidance. Thus, any major deviation from actual results could cause these scrips to de-rate significantly,” says a report by Systematix Institutional Equities.
A few other brokerages however believe in the medium to long term potential of these stocks – given the opportunities ahead. “A significant tailwind on the back of uptick seen in overall manufacturing backed by strong order backlog and high enquiry levels along with thrust on increased localization augurs well for the EMS space as India steps up to develop its domestic manufacturing ecosystem,” says a report by Haitong.
Nuvama judges the long term potential of the stocks by comparing it to upcycle seen in specialty chemicals. About 15 Indian specialty chemicals companies had benefited from China plus One, between FY14–23 – when their revenues tripled, EBITDA quadrupled and net profit surged seven times.
“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 potential to deliver extremely healthy stock returns in our view,” says Nuvama.
To take advantage of the growth cycle, companies in the sector would need to make capital investments to build scale, competitive advantages with capability upgrades.
“We would focus on Return on Capital Employed (RoCE) rather than margins to judge an EMS business; Dixon, Kaynes and Avalon rank high in this context,” says Systematix. Syrma and Kaynes both have the ability to self-fund their EMS growth paths entirely, says Nuvama.
Yet the sector is not without its downside risks — apart from a general economic slowdown within and outside the country that can dampen demand, lack of business commitments from clients and inability to sustain advancements in technology and emerging trends – can veer off these companies from their high growth path.
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