The government’s focus on manufacturing in India has led many companies to come to the fore. Prominent among them are makers of electronic equipment for bigger companies.
Dixon Technologies and Amber Enterprises are two companies that have made money for investors. However, there are many buds that are yet to blossom.
One such name is Kaynes Technology India, which listed recently and is considered a small-cap company, going by Association of Mutual Funds of India norms, with a market capitalisation of about Rs 5,600 crore.
The stock debuted in November and has returned over 67 percent since then amid difficult market conditions. In comparison, Dixon Technology and Amber Enterprises have lost 34 percent and 5 percent, respectively, as of March 15.
Kaynes Technology India is an end-to-end and Internet of Things (IoT)-enabled integrated electronic systems design and manufacturing services company. The company’s core product is printed circuit board assembly, which contributes the most to its revenue.
However, it is moving to high-margin areas such as railways and defence. Besides, it makes smart energy meters, streetlight controllers, air data sensors, thermal imaging systems, glucose meters, ventilators, and programmable logic controllers.
According to analysts, the company has strong experience in conceptualising design, process engineering, integrated manufacturing, and lifecycle support. It operates eight manufacturing facilities, two service centres, and one packaging and dispatch facility.
Domestic focus
Kaynes is set to be a big beneficiary of the government’s Aatmanirbhar Bharat, or self-reliant India, initiative, which is aimed at cutting imports and narrowing the trade deficit.
For this, the government announced production linked incentives for domestic manufacturers of a range of products, including electronic items. Kaynes has received approvals under the PLI scheme for making white goods and telecom and networking products.
Under the PLI for white goods (read: air-conditioners), Kaynes will make control assemblies, plastic moulding components, and display panels, for which it has committed an investment of Rs 50 crore up to March 2023.
According to Harshit Kapadia, an analyst at Elara Securities, the company could achieve incremental cumulative revenue of up to Rs 750 crore from the PLI for white goods over the duration of the scheme.
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The company recorded net sales of Rs 766 crore and net profit of Rs 54 crore in the first nine months of FY23.
Analysts and fund managers estimate electronics manufacturing will grow 30-40 percent a year. Executives at Kaynes said the company will likely overshoot the sector growth rate.
Advantage over China
Another investment case for Kaynes is the China-plus one shift, where manufacturers want to diversify their production bases after facing supply chain problems during the Covid-19 pandemic. Vietnam and India are emerging as alternative manufacturing locations for such companies.
“China has become a middle-income country now,” said Ravi Dharamshi, founder of ValueQuest Investment Advisors, a portfolio management services provider. “The country is also facing demographic issues due to the one-child policy.”
China’s 1.4 billion population has declined and aged as a result of the one-child policy from 1980 to 2015.
At this juncture, India is a great option for manufacturing, with relatively lower labour costs thanks to a large, young population. Moreover, the domestic market is lucrative enough to attract companies that earlier preferred to make in China.
Company performance
Kaynes reported earnings before interest, taxes, depreciation, and amortisation of Rs 41.2 crore in Q3 of FY23, an increase of 87 percent from a year earlier. The EBITDA margin was 14.2 percent, 230 bps higher YoY.
The margin is the highest among peers, analysts said. The margin for Syrma SGS was 9.3 percent, Dixon Technologies 3.5 percent, Amber Enterprises 6.5 percent, and Elin Electronics 7.2 percent.
This could be attributed to Kaynes’ higher share in the defence and railways businesses, which are high-margin segments.
Over the past three years, the company’s sales have increased at a CAGR of 24 percent and profit at 64 percent. Company executives predicted an EBITDA margin of 13-14 percent in FY23 and a profit-after-tax margin of 9 percent, an increase of 310 bps YoY, owing to reduced interest after repaying Rs 130 crore of loans from the proceeds of the initial public offering.
The company’s order book – an indication of revenue visibility – surged 7.3 times to Rs 2,560 crore in December from Rs 350 crore in FY20. Large orders were bagged in the automotive and industrial segments – 39 percent of the existing order book is from automotives, 26 percent from industrial, 13.5 percent exports, and the balance from other sectors.
According to the company, the order book would be Rs 2,000 crore to Rs 2,500 crore in March 2023.
“Kaynes Technologies is like Gundappa Vishwanath,” said Dharamshi, referring to one of India’s top batsmen during the 1970s from Karnataka, where Kaynes is based. “Revenue profile is quite well-diversified and is moving to the value chain. Kaynes has clients across automotive, industrial, medical and railways.”
He said after four to five years of capital expenditure, the RoCE (return on capital employed) can jump to 25 percent-plus levels. The company’s year-to-date RoE (return on equity) and RoCE is at 15.41 percent and 13.6 percent, respectively, on a non-annualised basis, adjusted for unutilised IPO proceeds.
Key risks
The biggest risks for the company are its high net working capital (NWC), inventory days and receivables, which put Kaynes at a disadvantage over its peers.
NWC days increased to 135 in December from 98 in FY22. Inventory days jumped to 115 in December from 101 in March 2022. Receivables climbed to 91 days from 83, and payables reduced to 72 days from 86 in the same period.
The company explained that this was because Kaynes overstocked on components as the industry came out of huge shortages. The step was taken as a precautionary step so that it would not default on order delivery. The company said a lot of cash generated has gone into inventory.
“Kaynes is focusing on delivering value to its clients and is continuing to pay off as we now take on orders where we provide higher value-added services. This will help increase our average order value and ultimately lead to margin expansion too. Management is focused on areas like working capital and other areas. I'm sure and certain we will bring it down in the days to come,” said Ramesh Kannan, MD of Kaynes Technology.
Kapadia said the management aims to reduce net working capital by 5-10 days in FY24, led by planned inventory reduction by 15 days.
“Debtors also would be reduced by factoring in services being availed by a large customer,” he said, citing his talks with the management.
Another risk for investors is the high valuation of the Kaynes stock. Some fund managers said at a price to earnings multiple of 128 currently, it is relatively more expensive than its peers, which trade at 30-60 times.
“Kaynes has a superior margin and growth profile and hence the premium is there,” said a fund manager, who declined to be identified. “It is a great opportunity for long-term investors if bought on dips.”
Another fund manager said on condition of anonymity that he does not talk about individual stocks, but cited expensive valuation as a deterrent. The fund manager holds other stocks from the segment in his portfolio.
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