Kaynes Technology Forays into Semiconductors!

Summary

Take a moment to consider how much our world revolves around electronics. From the phone in your pocket to the car you drive, electronics are embedded in nearly every aspect of daily life. At the heart of it all is the semiconductor—the tiny but mighty component that powers modern devices. One company making moves in this space is Kaynes Technology, and their recent expansion into semiconductors is a story you won’t want to miss!

Kaynes is More Than Just Electronics!

Kaynes Technology India Ltd. (KTIL) is much more than just another electronics company! Over the past 30 years, it has indeed evolved from a traditional manufacturer into a comprehensive solutions provider, offering end-to-end services that span design, prototyping, and full-scale production. The company operates through three primary business segments, collaborating with Original Equipment Manufacturers (OEMs) and various other industries to deliver comprehensive solutions tailored to their needs.

1. OEM Services: Think of it as Kaynes being your go-to partner for all things electronics! 

• Box Build: Imagine them creating custom assembly lines for things like cables and plastic parts, ensuring everything fits together perfectly before it lands in your hands.
• Turnkey Solutions for PCBAs (Printed Circuit Board Assemblies): From the very first prototype all the way to the final product, they specialise in creating the “brains” behind a wide range of electronic devices—those vital PCBs that keep everything running smoothly.

2. ODM – Original Design Manufacturing: Ever wondered how new gadgets and gizmos come to life? They don’t just manufacture; they handle everything from the software that powers your devices to the circuit boards that connect all the parts. Innovation at its finest!

3. IoT Solutions: Now let’s dive into the Industrial Internet of Things (IIoT)! Kaynes is helping companies give their older products a smart upgrade by integrating sensors, microprocessors, software, and connectivity features to transform traditional systems into super-smart, connected devices.

With these three pillars, it is transforming into a full-service provider in the electronics supply chain, serving vast industries such as automotive, aerospace, industrial, railways, medical, and defense. Plus, they have a global presence, from India to the U.S., Europe, and Japan, where demand is really heating up.

Hot Off the Press: Kaynes Unveils Ambitious Semiconductor Plans!

On September 3, 2024, Kaynes received approval to build a semiconductor plant in Sanand, Gujarat. This facility will produce 6 million chips per day, targeting industries like electric vehicles (EVs) and mobile phones. It’s a major investment, totaling ₹3,307 crore, and places it at the core of an industry dealing with supply shortages.

This move couldn’t have come at a better time. With India pushing hard to become self-reliant in semiconductors, the company is positioned to take advantage of government support and subsidies to help with the upfront costs of the project. 

Where is the Industry Heading?

The Electronics System Design and Manufacturing (ESDM) market is evolving rapidly. What used to be focused on basic tasks like assembling PCBs has now expanded to include much more—product design, development, testing, and even after-sales services. ESDM companies are no longer just manufacturers; they’ve become essential partners for Original Equipment Manufacturers (OEMs), taking on more complex tasks like chip design and embedded systems.

In 2023, the global ESDM market was valued at $984 billion. By 2026, it’s expected to grow to $1,145 billion, driven largely by the increasing trend of outsourcing electronics production to specialized firms. Companies like Kaynes are benefiting from this shift, as more OEMs rely on ESDM partners to handle their manufacturing needs.

Why India is the New Electronics Hotspot?

China still dominates the Electronics Manufacturing Services (EMS) market, holding a strong 47% share. But recent challenges like supply chain disruptions, have pushed companies to reconsider putting all their eggs in one basket. That’s where the “China +1” strategy comes in—businesses are diversifying their manufacturing to other countries to reduce dependency on China. 

This shift is opening doors for countries like India, which is quickly emerging as a strong alternative with growing capabilities and solid government support. For many companies, India is becoming the "plus one" in this evolving strategy.

The Indian government has rolled out several initiatives aimed at boosting local electronics manufacturing, which directly benefits companies like Kaynes. These include:

• The PLI Scheme offers financial incentives for companies that meet specific production targets.

• The SPECS (Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors) provides financial backing for companies expanding in these areas.

• The EMC 2.0 promotes the development of electronics manufacturing clusters, helping companies like Kaynes tap into collaborative ecosystems.

Kaynes' Revenue Synopsis

• Electronics Manufacturing Services (EMS): This is the bread and butter, making up a whopping 75-80% of the total revenue! It’s not just about the volume, though—Kaynes is delivering full-scale services, from design to production, for major OEMs across various industries. Plus, the Average Order Value (AOV) is on the rise, now hitting ₹11 million in Q1 FY25.

• OSAT & Semiconductor Services: They are making exciting moves in semiconductor assembly and testing, which is a high-margin segment expected to contribute 20-25% of their revenue by FY28. 

• Printed Circuit Board (PCB) Manufacturing: This segment is also ripe with opportunity! With industries like electric vehicles (EVs), medical electronics, and telecoms expanding, Kaynes is seeing its order book grow steadily, currently standing at a staggering ₹50,386 million as of Q1 FY25.

What’s Next for Kaynes?

With a focus on expanding its capabilities in semiconductors and PCB manufacturing while continuing to strengthen its core EMS business, the company targets $1 billion in revenue by FY28, with EMS remaining the primary contributor and high-margin businesses like semiconductors and PCBs expected to drive growth. Kaynes is also increasing local sourcing of components from 40% to 50% to improve cost efficiency and supply chain resilience. To enhance margins, it is streamlining operations through its OSAT business, focusing on high-value semiconductor assembly and testing.

Kaynes reported ₹5,040 million in revenue for Q1 FY25, with an order book standing at ₹50,386 million. The company aims to reach margins of 15% by FY25, driven by its expansion into higher-margin segments like semiconductors and PCBs. Its financial structure has become more conservative, reducing debt through equity raises, while ROE increased from 5.41% in FY21 to 11.42% in FY24.

Let’s Talk Numbers!

Kaynes is currently trading at a Price-to-Earnings (PE) ratio of 148x, which is lower than the median PE ratio of 187x for its peers. This indicates that investors are paying less for each unit of earnings compared to similar companies, suggesting that Kaynes might be trading at a relative discount in the market.