Buy Kaynes Technology India Ltd for Target Rs. 5,365 by Elara Capital
Disproportionate punishment for misdemeanor
Kaynes Technology (KAYNES IN) stock price has corrected by 41% over last three months (19% after Q2FY26 results and ~22% after corporate governance issues were raised) as concerns over cash flow generation were compounded by inconsistences in accounting disclosures. While we believe that upholding rigorous accounting standards and comprehensive disclosures is paramount, market reaction to recent events is disproportionate to the scale of disclosure and accounting inconsistencies raised as there is no material impact on growth prospects and fundamentals relating to revenue and margins. Given the strong growth prospects of the company (FY25-FY28 revenue and PAT CAGR 47% & 49% respectively), and post the recent sharp correction, we believe the stock remains a compelling ‘BUY’. We maintain our EPS target (127.7) and value the stock at 42x FY27E P/E(vs 70x earlier) with a TP of INR 5,365, converging with the recent moderation in EMS industry multiples. Key monitorable deliverables for the Kaynes hereon is the ability to turn cash flow positive and reduce working capital days, absent which the potential for downside stays alive. Our base case is that the company will be able to resolve its cash flow issues by Q4FY26.
Differences in goodwill reporting stem from differing opinions: Regarding the inconsistency in goodwill relating to the Iskraemeco acquisition, management clarified that the capital reserve arising from Iskraemeco of INR ~522mn has been netted off against goodwill arising from acquisition of Sensonic of ~INR 511mn, resulting in a net recognition of ~INR 10mn. The purchase consideration paid to Iskraemeco also includes recognition of intangible assets of INR 1.15bn for technical know-how. The differences in goodwill recognition stems from the differing opinion in valuing intangible assets and can be argued on both counts- for and against. The moot question is whether a sum of INR 510mn has a material impact on financials and warrants a correction of INR 153bn in the value of the firm. We believe it doesn’t.
No impact on growth; H2 sales better than H1: In FY25 (ex of Iskraemeco acqusition), H1 accounted for 33% of sales, and H2 67%, and we expect similar trend to continue in FY26. KAYNES has seen strong growth in orderbook of 49% YoY to INR 81bn in Q2FY26 (inclusive of Iskraemeco orderbook). As such, we believe that there is no meaningful impact on EMS growth prospects for KAYNES. We expect Iskraemeco revenue to sustain at current levels in the upcoming years with the non-smart meter revenue outgrowing the smart meter revenue.
Retain Buy with a lower TP of INR 5,365: While we agree a growing company like KAYNES must have better disclosure policies, the accounting issues raised are not material and do not have an adverse impact on the growth outlook. We welcome the clarifications issued by the management, along with commitment to strengthen internal controls. The company currently trades at 38x FY27E P/E (10% lower than the industry average), making it the most attractive in the EMS space. We retain Buy but lower our TP to INR 5,365 from INR 7,670 on 42x (from 60x) September FY27E P/E (converging with recent correction in EMS industry one-year forward P/E). We expect working capital concerns to ease by Q4FY26 and overall EMS growth outlook to remain unchanged. A key risk would be working capital days not reducing as per guidance, which may result in derating for the stock.
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SEBI Registration number is INH000000933
