Electronic Manufacturing Services: Component PLI to aid backward integration; robust 4QFY25 from Kotak Institutional Equities
Component PLI to aid backward integration; robust 4QFY25
We expect the Rs230 bn component PLI scheme to increase the domestic value addition done by Indian EMS players. The key beneficiaries of the component PLI scheme are likely to be Dixon, Amber and potentially Kaynes. We forecast healthy sales growth and profitability in 4QFY25 for our EMS coverage. Continued growth in consumer electronics such as ACs, led by a strong summer, will support B2C players (Amber and Dixon). Among B2B EMS, Syrma, Kaynes and Avalon will see good growth, while Cyient DLM might face weakness due to a modest order inflow. Our preferred picks in the sector are Amber, Syrma and Kaynes.
Component PLI—developing non-semiconductor ecosystem in India
The Indian government has approved a component PLI scheme with a funding of Rs230 bn (link) and an aim to develop the electronic component ecosystem in India. This scheme is targeted toward non-semiconductor components, where incentives are (1) turnover-linked, (2) capex-linked, (3) hybrid (mix of turnover and capex) and (4) employment targets achieved. The total investment envisaged through this scheme is Rs594 bn with a cumulative production of Rs4.56 tn (over six years with one year gestation), implying an asset turn of 1.3X, significantly lower than another scheme (focus here would be higher value addition and higher margins). Further, an incentive payout of Rs230 bn against a production of Rs4.6 tn implies a 5% incentive as a % of sales (similar to mobiles). As part of this scheme, we expect Indian EMS companies to form JVs with global peers to manufacture components in India. Clarity regarding the participation of Chinese suppliers given their dominance in components and tie-ups with leading global vendors will be the key for Indian EMS companies.
Dixon, Amber and Kaynes to be key beneficiaries of component PLI scheme
We expect Dixon to participate in display modules, camera modules, mechanical parts and die-cuts. Dixon has announced a JV with HKC of China for display assemblies, and we expect announcements of further partnerships soon. We see Amber and Kaynes participating in the manufacturing of PCBs (multi-layered and HDI/Flexible PCBs). Amber has already acquired Ascent circuits and leading Indian PCB manufacturers and has a JV with Korea Circuit to manufacture HDI/Flex PCBs and semiconductor substrates. Kaynes has announced plans to foray into PCB manufacturing.
EMS players: Strong growth with seasonally high margins
We anticipate a strong 4QFY25 for our EMS coverage (77%/71%/93% yoy growth on revenue/EBITDA/PAT), driven by strong growth in ACs and mobiles benefiting B2C players such as Dixon and Amber. Among the B2B stocks under coverage, steady domestic demand (for Kaynes and Syrma) and continued recovery in the US market should boost Avalon earnings this quarter. For Cyient DLM, we expect a good 4Q performance; however, we expect weakness in 1HFY26 given the ramp-down of the BEL contract. Smart meter recovery and segmental performance of Kaynes and US policy for Cyient/Avalon remain key.
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