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We initiate coverage on the Electronics Manufacturing Services (EMS) sector, with top3 high-mix-low-volume (HMLV) EMS players in India:

1) Syrma SGS with BUY (TP: Rs2,050; 35% upside), favoring its diversified organic and inorganic growth, margin expansion levers, and execution track record

2) Avalon with BUY (TP: Rs2,400; upside 24%) favoring its focused positioning as a mission critical box-build specialist with a strong moat built on customer relationships and qualification/ certification complexity

3) Kaynes with REDUCE (TP: Rs3,300; 12% downside) as its execution risks have outpaced its technology ambitions. We see a second wave of transformation building up in India’s EMS sector, which is favorably placed at the confluence of structural demand tailwinds, global strategic calculus, and national policy priority. HMLV EMS players are poised to benefit from the opportunity, delivering revenue CAGR of 40%+ over FY26-31E, and improving EBITDAM by up to 5ppts by FY31E.

Moving beyond assembly-led electronics manufacturing; HMLV EMS at the vanguard

Electronics manufacturing in India is transitioning from assembly to components and design. EMS companies benefit from this trend by:

1) deepening manufacturing capabilities backed by government capital subsidies ($20bn across ECMS and ISM2.0)

2) increasing domestic value addition (from ~20% today to >35% by FY30)

3) improving cost structure through domestic sourcing (~3-5% excluding duty arbitrage, per our estimates)

4) substituting imports to grow domestically (~90-100% imports for key components)

5) unlocking export opportunities (growing from ~1% national share in global electronics trade to 6-7% by 2030). HMLV EMS players are at the vanguard of this transition, leveraging global relationships, process know-how and execution capabilities

Cognification, electrification are the mega themes underpinning electronics, and EMS

Cognification and electrification will be the key drivers of innovation and growth in the first half of this century (possibly beyond) and both require electronification. Thematic support for the argument is well supported; we strive to identify the revenue/EBITDA opportunity for HMLV EMS players, based on 6 themes:

1) Datacenters – ~Rs16bnpa EBITDA opportunity over FY27-29E

2) Electricity Transmission – ~Rs2trn+ revenue opportunity globally to FY35

3) Automotive Electronics – ~Rs12-15bnpa revenue opportunity over FY27-30

4) Railway Electronics – ~Rs50bn EBITDA opportunity by FY30 from Kavach alone, additional from other programs

5) PCB manufacturing (PCB-M) – 90% import substitution in a ~Rs450bn market growing at >10% pa

6) Outsourced Assembly and Test (OSAT) – a play into the global semiconductor ecosystem.

Supply-chain relocations, FTA/CEPA aid India’s electronics manufacturing ambitions

Our analysis reveals there is a broad-based supply chain realignment toward India for electronics manufacturing, with Apple and Samsung leading in value share, but electronics majors in Automotive, Railways, Industrials, and other sectors are not far behind. India has taken share from not only China but also Vietnam/Mexico in some cases. India’s positioning is further aided by favorable treatment for electronics in the FTAs and CEPAs signed or under negotiations.

Electronics manufacturing key to economic policy; budget outlays have room to grow Electronics is key to the GoI’s aim of increasing manufacturing share of GDP to 25% and generating employment for the ~800-820mn, below-35YO population without college education. India currently exports ~$25bnpa worth electronics, representing ~1% of the electronics global share despite being ~4% share of global demand. Government policy think-tank NITI Aayog has set a $500bn electronics manufacturing target by 2030, comprising $350bn from finished goods and $150bn from components, targeting employment for 6mn people, and exports of $240bn. Through the ECMS and ISM 2.0 schemes alone, GoI has committed ~$20bn (Rs1.7trn) in investment support. We believe policy support will continue as India’s incentives package is still smaller than countries like Japan and South Korea and is a fraction of China’s

We favor Syrma SGS and Avalon; we sit out Kaynes till execution normalizes

Our top pick among HMLV EMS players are:

1) Syrma SGS (initiate with BUY; TP: Rs2,050; 35% upside) for its diversified organic and inorganic growth, margin expansion levers, and execution track record

2) Avalon (initiate with BUY; TP: Rs2,400; 24% upside) for its focused positioning as a mission critical box-build specialist with a strong moat built on customer relationships and qualification/ certification complexity. We are cautious on Kaynes (initiate with REDUCE; TP: Rs3,300; 12% downside) due to execution risks having outpaced technology ambitions in core EMS and high capital-intensity new businesses.

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