EMS has huge growth prospects for next five years; 5 direct & ancillary plays to bet on: Narendra Solanki

Economic Times

01-07-2025

Narendra Solanki, Head Fundamental Research-Investment Services, Anand Rathi Shares, says India's Electronic Manufacturing Services (EMS) sector is poised for substantial growth. Consumption of electronic goods is expected to triple by FY28. EMS share will also increase significantly. Government support is boosting chip manufacturing and ODM. Supply chain shifts from China are underway. New manufacturing plants are being established, focusing initially on high-volume, low-margin products but gradually shifting to high volume, low margin businesses.
Further, Solanki says among EMS companies, likes three direct plays like Kaynes, Dixon Technologies and CG Power. In terms of ancillary plays, also likes PG Electroplast and Epack Durable.
The India EMS sector some projections say that for the next five years or till FY28, the CAGR growth stands at close to 34%. What as per you will drive this hyper growth phase for this industry and how do you see the growth panning out in the years ahead?
Narendra Solanki: Definitely, there is a huge growth prospect for EMS companies in India. If you see the existing numbers, we have currently almost 10 trillion consumption of electronic goods in India which is expected to grow to 30 trillion, of which EMS right now has around 3.5 trillion share, which is also expected to rise to 9 trillion by FY28. So, the CAGR is approximately 30% plus.
So, definitely, as an industry we see huge growth prospects for the next five years. Import is expected to decline and export expected to surge. With the support of the government, a lot of companies have also set up different facilities, like chip manufacturing facilities or facilities. Even the ODM, design development and manufacturing, is also picking up pace. There has been a lot of growth available for most of the companies in different areas – be it product design development, outsourcing, manufacturing, contract manufacturing, as well as after sales service space is also opening up with a lot of these companies making inroads into different aspects of this sector. The sector is in a high growth phase and we would expect it to have high growth for the next five to seven years.
The other thing I also wanted to figure out was the China factor because that is not helping growth. How are Indian firms emerging as credible alternatives as of date?
Narendra Solanki: As far as supply chain shifts related to China are happening, it would be a slow process, but definitely things have started moving. There are already six manufacturing plants coming out including one from Tata Electronics, one from CG Power facility and one from Kaynes. Four of these plants are coming up in Gujarat. So, a lot of these facilities have started to come up.
Initially, we expected things would start from high volume and low margin chips and then gradually we would pick up into low volume and high margin chips, which would be less than 30 nm chips. So, right now, we are trying to build capacities ranging from 28 nm to 45-50 nm kind of chips and gradually, we will improve over the next few years. So, definitely within the next five to seven years, we would see a significantly greater shift from China happening, but initially, we would start off with high volume, low margin products and gradually start shifting. We would see shifts happening for high margin and lower volume products as well. Kaynes keeps on diluting. The Dixon promoter has just about sold out. Why are some of these growing EMS companies hitting the market either with a stake sale or a QIP or a fundraise?
Narendra Solanki: As a technology, all these businesses are very capital intensive and initially you need to have very high capital cost to set up these facilities. For a chip manufacturing facility, you have to have efficiency of more than 90% and even in some cases you have to have efficiency of 95% to 98% in order to just breakeven. So, if you need that kind of a high capital intensity and that kind of efficiency, it becomes very difficult to find the capital and hence initially, they have to raise a huge amount and then invest into acquiring technologies and building partnerships in order to secure long-term customers and to achieve the returns. Which is your favourite in terms of pecking order? Is it Kaynes? Is it Dixon? Is it Amber? Which is your preferred bet?
Narendra Solanki: It depends on the kind of exposure. We like Kaynes right now. We like Dixon Technologies as well and CG Power. These three are the direct plays which we like and in terms of ancillary plays, we also like PG Electroplast and Epack Durable.
Some would argue that while EMS is growing, where are the margins? Margins are 2%, 3% on a net level. That means it is one of those businesses, where the top line is great, but on the bottom line, either there is a huge currency risk, or a huge client risk. If margins are 2-3%, that is not a great business to be in.
Narendra Solanki: That is what I have said. Initially when we have to start, it has to be high volume, low margin products and gradually when we build up our technologies and ramp up our scale and efficiency, then gradually we would see that all these high volume, low margin business would start converting into a low volume and high margin businesses and gradually will pick up from there.
So, this is the transition we have to make and it would take around two to three years and when that transition happens, we would see margins improving significantly for these companies.
I believe you retain a buy call on Dixon Technologies, with a target price of over Rs 18,000. But some of the reports recently suggest that one of their biggest clients – Motorola – is now diversifying in terms of their suppliers. Firstly, it was only Dixon Tech, but some of the other companies are now getting into the foray and will be supplying to Motorola as well. What is your take on this particular news flow? Will it change anything for Dixon Technologies?
Narendra Solanki: Not immediately because they have other strategies as well. They have partnerships into camara modules, lithium-ion batteries as well, which is coming up. A lot of different business would come up for Dixon and we do not see any immediate threat in the near term from this.
What is the right PE multiples to look at these businesses? 50, 60 are the PE multiples in the sector now. I can say that the growth is great, but the stock prices are priced to perfection?
Narendra Solanki: In the case of Dixon, we model in around 45% CAGR for the next two years and if you factor that in, the valuations with such high growth would adjust significantly and the PE would also come lower. So, right now, it could be around 54-52 PE for FY27 and with such high growth, I think it is still at a decent stage and gradually the margins will also improve going ahead as within two to three years, we will transition from low margin to high margin business.