India's PLI scheme for electronics components: Is it a new growth chapter for EMS stocks?
On March 28, the Union Cabinet approved a Rs 23,000 crore PLI scheme for electronics components manufacturing.
Several EMS players that experienced exponential growth over the past five years are now looking at backward integration strategies to sustain their high valuations. Among them are Dixon Technologies and Kaynes Technology India.
However, the two stocks fell 28% and 47%, respectively, in the first three months of 2025 as a temporary slowdown in revenue and earnings made investors cautious. These stocks were trading at over 200x price-to-earnings (P/E) ratio as of January 3, 2025. Such stretched valuations prompted several analysts to downgrade their ratings despite the firms' strong revenue and earnings growth.
Several developments unfolded during the fourth quarter of FY25. Investors and industry were anticipating the launch of a new PLI scheme or high-budget outlays for electronics components and semiconductors. However, uncertainty over the rollout of the new PLI scheme, combined with the existing electronics PLI nearing the end and no signs of any extension, led to investor unease. Meanwhile, Dixon and Kaynes started investing in manufacturing capacities to build electronics components.
All these factors pulled down EMS stocks. The situation improved after the March 28 approval of the new Electronics Components Manufacturing Scheme (ECMS). However, market sentiment remained cautious due to concerns around potential retaliatory tariffs from the US under President Donald Trump. Hence, when retaliatory tariffs were paused for 90 days on April 8, the share price of Dixon and Kaynes jumped 32% in two weeks.
The 2020 PLI for large-scale electronics manufacturing made India the second-largest mobile phone manufacturer in the world in FY 2025. According to a PIB press release on March 26, the scheme attracted a cumulative investment of Rs 10,905 crore, a cumulative production of Rs 7.16 lakh crore, and cumulative exports of Rs 3.9 lakh crore as of February 2025.
Apple's contract manufacturers (Foxconn, Tata Electronics, and Pegatron), Samsung, and Dixon were the biggest beneficiaries as they opened facilities and produced Made in India mobile phones. The 5-year PLI scheme helped them set up manufacturing capabilities. While the scheme will end next year, PLI incentives account for a small portion of the profits.
Despite domestic electronics production jumping from Rs 5.54 lakh crore to Rs 9.52 lakh crore in FY21-FY25, India does not make phones from scratch. Most components are imported from the US and other countries, assembled in India's over 300 manufacturing units, and used domestically and for exports.
Hence, the materials cost of Dixon and Kaynes accounted for 89% and 70% of their revenue in FY25. However, these companies grew exponentially on the back of strong volumes. With the sector maturing, they ought to look for the next growth driver, and a promising alternative is electronics components, which they import.
The Electronics Industries Association of India (ELCINA) highlighted that non-semiconductor electronics components constitute 60% of the total cost of finished products. The new ECMS PLI scheme will give EMS companies the boost they need to build electronics components in India and reduce their reliance on imports. The new scheme will give incentives based on turnover, investments in factories, and job creation.
Like the 2020 PLI, the 2025 ECMS PLI will be open to both domestic and international stakeholders and is expected to attract Rs 59,350 crore in investment, generate Rs 4.56 lakh crore in production, and create 91,600 direct jobs.
While it is too early to gauge the value the ECMS PLI will bring to India's electronics manufacturing sector, we can keep a watch on the possible beneficiaries.
Apple's contractors, Samsung, and Dixon got a boost from the 2020 PLI, and now they are self-sufficient to make smartphones profitably and stay competitive. Apple is at the forefront of building a supply chain in India. Its manufacturing contractor, Foxconn, has announced plans to invest $1.5 billion in a display module plant in India.
Meanwhile, Dixon is building a display module plant for mobile phones, laptops, and TVs it manufactures, and later expand to cater to external market requirements. It is also looking to apply for the new PLI scheme to manufacture camera modules, mechanical enclosures, and lithium-ion batteries, and use them in the electronics it makes for end clients.
Dixon Technologies has been rapidly growing in the smartphone space, with its mobile and other EMS divisions' revenue up 203% to Rs 33,043 crore in FY25. It now accounts for 85% of the company's revenue.
Dixon manufactures smartphones for Motorola, Xiaomi, Oppo, Realme, Vivo, Transsion, and Nothing. According to the company's CEO and Managing Director, Atul Lall, Dixon plans to double smartphone production from 28.3 million in FY25 to 40-44 million in FY26 and 60-65 million by FY27, and export a significant portion to North America. To achieve this target, the company is constructing a one-million-square-foot facility in Noida.
With the 2020 PLI scheme coming to an end, Dixon will lose production incentives and could see a temporary slowdown in margins. It is likely to make up for it by taking a higher share of customers' wallets, new customer additions, and margin expansion through operational efficiencies and backward integration.
Dixon has ventured into laptop manufacturing for HP, ASUS, and Lenovo. However, the volumes are yet to pick up, and investors have already priced in high growth. The stock trades at a 116x P/E ratio, which is supported by its high return on equity (ROE) of 33% and a 110% growth in profit.
While laptops are a good business, their volumes may not be as high as smartphones. However, electronics components and display modules could help Dixon reduce material costs and supply chain risk. A push to higher margins could bring more upside, but share price growth would be moderate because of stretched valuations.
Dixon Technologies
Revised Price Target (Rs)
Previous Price Target (Rs)
Upside Potential from Market Price Rs 14,849
Ratings
Nomura
21,202
22,005
42.8%
Buy
Motilal Oswal
20,500
38.1%
Buy
CLSA
19,000
28.0%
Buy
Anand Rathi
18,775
26.4%
Buy
BNP Paribas
17,910
20.6%
Buy
Yes Securities
15,741
16,566
6.0%
Reduce
JM Financial
15,650
16,500
5.4%
Hold
Source: Brokerage Reports
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