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* Kaynes Technologies (KAYNES) is one of the fastest-growing EMS companies in India, with diversified exposure to end-user industries across seven high-growth sectors. With ~62% revenue CAGR over FY21-24, the company is deepening its presence within existing sectors. Further, KAYNES continues to improve its margin profile (~15% in FY25E from ~9.7% in FY21) backed by a rising share of high-margin businesses.

* KAYNES is likely to maintain its robust revenue growth trajectory in FY25 (up 67% YoY) and is confident of sustaining this high growth going forward, fueled by the contributions from new and upcoming segments, such as smart meters (~INR615b domestic TAM along with export opportunities), Aerospace, and Kavach (targets ~INR20b revenue over the next 4-5 years), et al.

* In addition, KAYNES’ backward integration initiative for OSAT/PCB manufacturing is on track, boosting overall growth (likely to contribute ~17%/6% of its FY28 revenue) and margin profile (EBITDAM of ~25%/27% at optimum utilization).

* These new businesses will bring in additional benefits, including improved operational efficiency, lower dependency on third-party suppliers, reduced lead times, and the ability to capture higher wallet share.

* To sustain high long-term growth, KAYNES is eyeing the export and international markets (through recent acquisitions). We project exports to reach 20%/33% of its revenue by FY26/FY28, fueled by large-scale export orders and expanding presence in international geographies.

Reinventing the EMS model to sustain long-term growth trajectory

* KAYNES has rapidly evolved over the last few years to become a fully diversified EMS company. It has not only expanded the breadth (distributed revenue mix across multiple large-scale sectors) but also deepened its presence across end-user industries (charging infrastructure and components in EVs; smart meters, power electronics, Industry 4.0 in industrials; and "Kavach" in railways).

* The company’s growth in FY24 was largely driven by the EV segment. However, demand slowdown has led to a moderation in this space in FY25. Despite this, KAYNES has maintained its revenue growth guidance of over 60% YoY for FY25, supported by strong contributions from other sectors, particularly smart meters.

* KAYNES is well-positioned to capitalize on the growing smart meter market; leveraging advanced technology (recently acquired Iskraemeco) and robust execution (Phase 1 of the Telangana factory is already operational). With huge domestic opportunities (~INR 615b) and export approvals from a European MNC, the segment ensures sustained high growth going forward.

* Apart from this, Railways is likely to be another key growth driver in the longer run, led by accelerated traction within Kavach. KAYNES aims to position itself as an ODM player in Kavach, capturing ~15% market share. It targets ~INR20b in revenue within the space over a four-to-five-year timeframe. Currently, its Kavach system is in the proof-of-concept stage, with the company anticipating an approved product by the end of FY25.

Backward integration to drive operational efficiency and build a moat

* The semiconductors and printed circuit boards are some of the most critical raw materials for any EMS company. Both these products enjoy a huge market (global TAM of ~USD43b and USD80b, respectively), which is growing at an accelerated pace (~9%/5% CAGR over the next 5-7 years) propelled by improving demand for electronics.

* Considering the strong traction within the space and favorable synergies with existing business, KAYNES has announced its entry into OSAT and PCB business, positioning itself as a fully integrated EMS player.

* These initiatives will bring in multiple benefits for the company, including improved operational efficiency, lower dependency on third-party suppliers, reduced lead times, and will enable the company to grab the higher wallet share of the customers.

* The company has earmarked a capex of ~INR45-47b for these businesses (~INR33b for OSAT and ~INR12-14b for PCB), with over half of the same to be covered by central and state government subsidies. The company will fund the rest through the mix of equity funds (raised ~INR14b through QIP in Dec’23), debt, and internal accruals.

* KAYNES has already partnered with some of the global players, such as 7Rays Semiconductors, Globetronics, and Ponni Tech, providing it with a range of packaging technologies and a global distribution and sale network.

* Both these projects are expected to start generating commercial revenue by 4QFY26 and will ramp up over the next few years.

* We expect KAYNES’ OSAT/PCB businesses to generate revenue of ~INR17.9b/INR6.7b by FY28 (~17%/6% of its consolidated sales), with EBITDA margins of ~22%/23%. The business will continue to post a robust growth rate over the next few years, with margins likely to expand to ~25%/27% at peak utilization levels.

Exports and revenue from international geographies to drive the next leg of growth

* KAYNES, as one of India’s leading EMS players, is well-positioned to benefit from the growing domestic demand. However, to sustain its robust growth rate over the long term, the company has set its sights on the much larger global EMS market.

* The global Electronic System Design and Manufacturing (ESDM) market was valued at USD984b in CY23 and is likely to reach USD1.15t by CY26, clocking ~5.4% CAGR over the period. India currently accounts for just ~3% of the global ESDM market, offering significant potential for growth.

* Export sales contributed ~9.3% to KAYNES’ total revenue in FY24, a mix expected to remain steady in FY25. However, the company’s efforts to accelerate traction in export markets are likely to yield results going ahead, with a substantial pickup anticipated from 4QFY25/FY26.

* Management expects the export mix to improve notably, reaching ~20% of total sales by FY26 and about one-third of the total revenue during the next 2-3 years, driven by large-scale export orders.

* Beyond exports, KAYNES is actively expanding its presence in key global markets, like the US and Europe, via strategic inorganic growth initiatives.

* In Dec’23, KAYNES acquired a 100% stake in a US-based EMS company, DigiCom Electronics, for USD2.5m, establishing a strong last-mile presence in the US market.

* Moreover, in Dec’24, it has acquired a 54% stake in Sensonic GmbH, Austria, expanding its presence in global infrastructure technology markets by acquiring cutting-edge capabilities in railway safety and efficiency.

* Going forward, we believe that revenue from exports and international geographies will be one of the key drivers for the company, supporting its robust growth rate.

Valuation and view

* KAYNES is the only rapidly growing (over 50% growth guidance), well-diversified (catering to over seven end-user industries) and backward-integrated player (OSAT/PCB facilities to commence by FY26) within the EMS space, with a strong focus on value addition (~42% box-build share in FY24).

* We expect the company to continue its robust earnings momentum on the back of: 1) a strong revenue growth supported by a large order book (~INR54b; ~3x FY24 sales) and continuing robust order inflows (~INR24b in 1HFY25) and 2) margin expansion driven by the rising share of high-margin businesses coupled with operating leverage.

* We estimate KAYNES to register a revenue/Adj. EBITDA/Adj. PAT CAGR of 60%/67%/74% over FY24-27. We reiterate our BUY rating on the stock with a TP of INR9,100, based on 60x FY27E EPS.

* Key risks to our call: 1) an increase in working capital can deteriorate cash flows, 2) supply chain issues can hamper business operations, and 3) a delay in order execution can moderate the growth trajectory

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