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Kaynes Technology India Limited looks strong for further growth with increasing order-book and onboarding of new potential customers.
Kaynes is expected to see a strong growth due to Favourable industry tailwinds, development of component/chips ecosystem in India leading to improving supply chains, in turn benefiting Indian EMS companies in terms of margins and working capital improvement, strong product mix and focus on adding high- margin segment, and on-boarding of new value-added customers.
Kaynes is a fully integrated IoT (internet of things) enabled company that specialises in Electronics System Design and Manufacturing (ESDM). Kaynes offers conceptual design, process engineering, integrated manufacturing, and life-cycle support for the automotive, industrial, aerospace and defence, medical, railways, IoT, IT, and other segments. Kaynes also assists other businesses with the design, production, and testing of their electrical products. It runs through eight facilities spread across India in key locations. It uses a strategic low-volume, high-mix, high-margin business model. It is run by highly skilled promoters and has a history of working with clients. Due of its broad clientele, Kaynes is less vulnerable to a slump in any one industrial area. Most of the industries it caters to are on a high-growth trajectory, led by supply-chain diversification by global giants, increased government spending, and pick up in private CAPEX. It is expected that strong growth for EMS players will be due to increasing electronics content in these industries. Presence across various end-user industries allows the company to tweak its manufacturing in case of disruption in any one industry and also allows it to take strategic calls to cater to industries that provide high margins. Kaynes is also entering in to new emerging industries such as electric vehicles, in which electronics usage is much higher than other types of vehicles. These types of moves will ensure strong revenue visibility for the company ahead. Kayne operations comply with global standards and it has 10 global accreditations making it the most certified ESDM company in India. It is certified for critical electronics repair and maintenance of commercial, private and military aircrafts. Since A&D is a high-barrier segment, this certification will hugely benefit Kaynes, as this industry will grow strongly, take the company’s order book along. Over 350+ customers use Kaynes in 26 different countries. Fortune 500 corporations, MNCs, top domestic brands, and start-ups are evenly distributed, demonstrating the company's impressive customer base diversification. In order to protect its company operations from the negative effects of a customer- or industry-specific downturn or disruption, it will continue to expand this base while reducing its dependence on any one industry vertical or on a small number of clients. One of the few EMS providers with such a big customer base and low customer concentration is Kaynes.
Shareholding:
Industry Research:
India’s electronics industry is poised for strong growth over the coming years because of low penetration levels, rising disposable incomes, increased localization, which will increase affordability, as well as various policy initiatives taken by the government such as PLI, Phased Manufacturing Programme (PMP), and Aatmanirbhar Bharat – which should incentivize local manufacturing in India. The total market was Rs 12,564bn in FY23 which should touch Rs 23,540bn by FY27, at a CAGR of 24%, with 93% domestic production. India has the potential to be one of the most attractive manufacturing destinations in the world, supporting the objective of “Make- in-India for the world” – in line with our sector view as highlighted in our Ground View report. The Indian government has taken a series of steps towards attaining this goal such as M-SIPS (Modified Special Incentive Package Scheme), PLI (Production-Linked Incentive Scheme), Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), etc. In FY21, domestic electronics production in India contributed to 3.8% of its GDP – which should increase to 6.4% by FY27. Total imports value of electronics (finished goods) in India was estimated at Rs 1,885bn in FY18 and Rs 4,040bn in FY23. China and Hong Kong accounted for nearly 75% of India’s imports in FY20. The top-three imported products in India were laptops and desktops, FPD (flat panel display) televisions, and storage devices. Most components used in building notebooks and laptops were imported as SKD (semi-knocked down) units from China and Thailand. Total exports value of electronics from India was Rs 512bn in FY18 and Rs 1,934bn in FY23. India’s electronics exports should see substantial CAGR of 48% from FY23-27. The top-3 products in exports are mobile phones, engine control units, and industrial machinery. Globally, India ranks second in mobile phones manufacturing, which involves design, assembly, and manufacturing processes. There are nearly 750 EMS companies in India, ranging from large, to mid-sized, to small-sized players. Mobile phones, consumer electronics, and industrial electronics contribute to 78% of the market. Original Equipment Manufacturers (OEMs)/brands are increasingly embracing the Original Design Manufacturing (ODM) model of partnership and venturing into new product segments. OEMs increasingly prefer to engage on an ODM basis. Under this, EMS companies design products as per the specifications provided by OEMs. They source components, carry out fabrication and assembly, test the final product and undertake logistics and after-sales services. This is a high-margin business and comes at a premium for good designs. Under contract manufacturing model, OEMs provide design and specifications to EMS companies, which in turn source components, manufacture and/or assemble components and supply the finished products to OEMs.
EMS market segmentation by HVLM vs. LVHM
High volume low mix (HVLM): In this type of process, the volumes are higher since the product requires very less assemblies of the mix of components. In short, low value addition, so margins are also very low.
Low volume high mix (LVHM): In this type of process, volumes are lower since these products need high/critical assemblies of the mix of components. In short, high value addition; so margins are very lucrative.
PCBA will be the game changer:
PCBA stands for Printed Circuit Board Assembly. It is the process of placing electronic components such as resistors, capacitors, integrated circuits, connectors, and other devices on their designated locations on the Printed Circuit Board, and then soldering them in place to create a functional electronic circuit. PCBA is a crucial step in the manufacturing of electronic devices as it transforms the bare PCB into a fully operational electronic product.PCBA is at the core of every electronic device – whether it is mobile phones, tablets, computers, routers, televisions, washing machines, refrigerators, or air conditioners. It has applications in many other industries such as automotive, railways, medical, power electronics, telecom, industrial, aerospace, and defence. To develop India as electronics manufacturing hub, it is imperative to bring in as many manufacturing operations as possible, and PCBA is a key manufacturing activity. At the start of PCBA operations, value addition should be about 3-5%, which can climb to 20-25% within two years. The government’s efforts towards increasing localisation of electronics in India has led to more assembly work taking place in India than earlier. India has rapidly scaled down its imports of mobile phones and increased domestic manufacturing significantly in the last 3-4 years. As a result, import of populated PCBs used in mobile phones and telecom equipment has declined and exports are rising y-o-y. The National Policy on Electronics (NPE) in India has set an objective of encouraging localization and exports in the entire value chain of ESDM, thus achieving a turnover of US $500bn by 2025. As PCBA manufacturing gains momentum, backward integration will be a natural outcome. Catalysing manufacturing of PCBAs is a step in the right direction. Once the capacity is built for import substitution, it could become a big exports category from India, if suitable support is provided by the government. The large scale of operations will positively influence the manufacturing environment and help to bring in vendors supplying inputs to PCBA manufacturing, such as components, PCB, solder paste, cleaning agents, and other raw materials. If the scale gets sufficiently large, the design and manufacturing of multilayer PCBs in India could get a major boost. Electronic manufacturing is gaining momentum in India, and since a PCB is the backbone of any electronic product, there will be rapid surge in demand for PCBs in India. Majority of the demand for PCB will be in the form of bare printed circuit boards, and their assembly will happen in India. India already has strong capabilities in PCB assembly and designing, which will help the country to become the biggest beneficiary of the China +1 strategy vs. other EEs. With its entire focus on domestic manufacturing (Make in India), India has the potential to become a global manufacturing powerhouse, competing with China.
Investment Rationale:
With India's increased domestic focus and the expansion of developing industries, Kaynes will prosper:
India is a top priority market for Kaynes, which is not surprising given the significant traction in sectors like railways, electric vehicles (EVs), industrials, and automotive (which, incidentally, contribute the most to its revenues) that are being driven by rising government efforts to promote more localization as well as higher infrastructure spending and a pick-up in private capex. These emerging industries are going through significant technological and modernization changes. We think that as newer technologies are adopted and more electronics are used in products, there will be more need for EMS players like Kaynes. India is moving towards economic development, and manufacturing's contribution to GDP as a whole should rise significantly.
Order book rising rapidly and order value increasing, demonstrating capabilities:
With a rise in average order value, Kaynes saw a dramatic growth in its order book from Rs 3.8 billion in FY21 to Rs 29.2 billion in FY23, demonstrating the strength of its execution. In the upcoming years, Kaynes will continue to have robust order-book build-up due to the addition of new customers and increased wallet share with current customers, which will increase revenue visibility. The following will help Kaynes the most: (1) its substantial domestic presence (almost 80% of its revenues come from local markets); (2) the increase of capacity across Indian industries; and (3) the growth of sectors like the automotive, industrial, rail, aerospace, and military.
India's automotive industry is expanding quickly, and over the next two years, the EMS market for this industry is expected to increase at a 27% CAGR. Value-added goods are in greater demand in this market sector. In this market, Kaynes is gaining wallet share and bringing on new clients. It has made a name for itself as a significant provider of electronics to OEMs for applications such as passive entry passive start, door switches, clusters, sensors, convertors, passive entry passive start, and electronic control units (ECUs). With a solid order book of Rs 14.2 billion/18.3 billion in FY24 and FY25, and stronger margins due to an increase in the share of box builds, we anticipate Kaynes to have a 45% CAGR in the automotive sector over the next three years. Kaynes expects significant growth in industrials, driven by electric vehicles. Kaynes has started manufacturing for leading 4-wheeler brands and contributed 11.2% of BOM of that company’s product. The company recently completed production audits with a large European customer to whom it will start exporting EV chargers. In addition, Kaynes wants expand its customer base in LV power switchgear and in large-volume ODM electronics, where revenue will grow based on rising electronics content in the automotive segment, along with high focus on EV adoption across the country will accelerate growth of ESDM (electronics system design and manufacturing).
The Indian market in signalling innovations is presently controlled by global OEMs such as Siemens, Thales, Hitachi, Alstom and Bombardier. Kaynes intends to tap into installation and maintenance of electronics equipment, branch out to traction electronics, on-board electronics, rolling stock lighting and information systems. It will also look to strengthen market share in signalling, and explore potential strategic acquisitions, thus bringing new-gen technologies into India in passenger safety, passenger comfort and internet connectivity. The entire business is mostly box-builds for this segment, which provides higher margins. A higher budgetary outlay and increased traction in the railways space will help the company increase its order book to Rs 14.2bn by FY25; we expect 2-year revenues CAGR of 44% in this segment.
Personal-electric devices: Kaynes will solidify its position in personal-electric devices such as consumer radios, wearables, lighting components and controls, and components for consumer appliances.
Leveraging ODM capabilities: It intends to leverage its ODM capabilities in wireless technologies, BLDC motor controllers, and IoT-driven smart solutions by working with customers from concept, design, product realization, to bulk manufacturing. Focus on box-build solutions, which typically command higher margins: It has capabilities in providing full-box-build solutions, including PCBAs, plastic injection moulding and wiring and metal fabrication – which will help its customers for localizing their manufacturing vs. being dependent on international vendors earlier.
Kaynes will set up infrastructure and develop skills to address complex avionics assembly and testing. By focusing on key customers and emerging as a key system integrator it will gain wallet share and move up the value chain to manufacture complex products for space electronics. It has qualified as an aerospace OEM for a long-term contract with an annual value of Rs 450mn. We expect 48% revenue CAGR from this segment over the next two years with revenue at Rs. 458mn/589mn and order book of Rs 880mn/1271mn in FY24/FY25.
India has developed into a key centre for high-end diagnostics services because it’s a large market (sizeable population) and as a result of substantial capex in this field. Kaynes intends to focus on this segment by creating additional teams in product realization, leveraging existing relationships with customers, and acquiring larger businesses in the hospital-equipment sub-segment. Kaynes is associated with a number of healthcare start-ups. In this segment, the biggest challenge is taking an idea from the concept stage tothe complete-product-realization stage. It also proposes to tap existing relationships with customers that have presence across multiple industry segments.
Diversified end-user industries with greater focus on the high-margin segment: Kaynes has increased its product offerings across industries due to which its target market size has increased to Rs 646.1bn in FY23. It enjoys industry leading margins because of its large presence across high-margin industry segments. Kaynes has a strong customer base It has gained expertise in complex sub- assemblies, which has resulted in strong customer relationships, customer stickiness, and a competitive edge. Its average relationship with top-10 customers is 7+ years and with not more than 15% revenue from a single customer, its core focus stays on customer de- risking and value addition. Over the next 2-3 years, we expect Kaynes to on-board key leading brands in the high-margin segment. Domestic focus; exports opportunity is yet to be captured, Kaynes derives c.85% of its revenue from the domestic market while for other players 50% comes from exports. With Kaynes strong domestic presence coupled with the government’s “Atmanirbhar Bharat” theme, the company will benefit more than the industry. Additionally, we expect Kaynes to explore exports opportunities ahead, which will also add to its growth. Capex due to strong order-book visibility, Kaynes’ order book saw a meteoric 96% CAGR over FY20-23; its current order book is at Rs 29.4bn, 3.4x its FY23 revenue, from Rs 4.5bn three years ago, providing strong revenue visibility. Kaynes will almost double its current SMT lines to 10+ over the next two years, also it will do capex for value addition and backward integration (bare PCB board and OSAT based on this strong order visibility. High focus on value added mix will benefit margins, 35% of Kaynes’ revenue comes from higher-margin box-builds; it is also increasing its ODM share, which will also add to growth in margins.
Kaynes operates eight strategically located manufacturing facilities in the states of Karnataka, Haryana, Himachal Pradesh, Tamil Nadu, and Uttarakhand. Some of the manufacturing facilities are approved under the Electronics Hardware Technology Park Scheme of Software Technology Park in India. As of 2023, Kaynes had the capacity to assemble 600mn components. Facilities in Manesar (Haryana), Chennai (Tamil Nadu), and Parwanoo (Himachal Pradesh) are close to customers – which helps it to reduce its logistics cost, increase efficiency, and ensures that capex stays minimal. Its facilities are scalable within a short period without incurring significant capex due to short procurement and installation times for SMT lines. All manufacturing lines are fungible and with flexibility to service customers across industry verticals and across diverse product requirements.
Management Profile:
Financials:
Balancesheet
Profit & Loss
Cash Flow
Valuation:
Kaynes is expected to see a strong growth due to Favourable industry tailwinds, development of component/chips ecosystem in India leading to improving supply chains, in turn benefiting Indian EMS companies in terms of margins and working capital improvement, strong product mix and focus on adding high- margin segment, and on-boarding of new value-added customers. With all these positives, the company’s is expected to show revenue/EBITDA/PAT CAGR of 58%/52%/73% over FY23-24 with OPM of 15.6%/16.5% in FY24/FY25 and earnings growth of 83%/57% in FY24/25. We value the company at 54x FY25 EPS based on strong financials, improved ROCE/ROE of 28%/22% in FY25, and better working capital improvement visibility. At CMP, the stock trades at a PE of 32x on FY24 EPS.
Investment Risks:
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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