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India is swiftly emerging as a manufacturing and exporting hub, propelled by advantageous government policies such as Production Linked Incentive (PLI) and Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), cost competitiveness, robust infrastructure, and a skilled labour force. The "China+1" strategy is further catalysing India's manufacturing landscape.

In global EMS industry, India's share is poised to surge from c.2% in FY21 to c.7% by FY27. Indian Printed Circuit Board Assembly (PCBA) market shall see CAGR of c.39% over FY22-26. As of FY23, the Indian PCBA market (ex. mobile phones) was c.INR 800bn, while the revenue of top-5 listed players was only c.INR 58.70bn, which means there is significant opportunity for them to increase their market share.

Until FY23, most complex Printed Circuit Boards (PCB) were manufactured outside India. In FY23, usage of multi-layer PCBs increased to 55%+ in terms of value vs. just 6% in FY19. We expect with imposing of import duties, to boost component manufacturing; India will accelerate the production of multi-layer PCBs (4-8 layers) which will broaden the TAM of EMS players by c.INR 300bn and also increase export opportunities.

India is strategically aiming to ascend the semiconductor value chain by seizing c.INR 1,000bn Indian Outsourced Semiconductor Assembly and Test (OSAT) opportunity. Although this sector typically yields low margins and asset turnover, it shall offer high returns due to the government's incentive of c.75% capital subsidy. With Kaynes, CG Power and SPEL (in listed space) already announced plans for an OSAT, it is anticipated that other players like Syrma and Cyient DLM will also venture into fab packaging within the next 1-2 years.

Kaynes Technology India Ltd – on a journey of value addition

Kaynes has significantly expanded its PCBA business across various high margin sectors, achieving a remarkable Order Book CAGR of 96% from FY20-23 (current order book INR 37.9bn; 2.4x TTM revenue). The company has also prioritized backward integration, including PCB manufacturing and venturing into the semiconductor value chain. Kaynes has announced plans for OSAT, which is expected to augment its TAM by c.INR 1,000bn. Considering these factors, we initiate coverage with a BUY rating and a target price of INR 3,410 - upside 20% from CMP (EMS: 2,269, P/E 45x + PCB: 277, P/E 30x + OSAT: 865, P/E 35x). 

Syrma SGS Technology Ltd– riding on high growth sectors with leadership in the RFID business and exploring new sectors, OSAT

Syrma SGS has witnessed strong revenue CAGR of 27% over FY19-FY23, mainly led by sectors such as consumer (42%) and automobiles (31%). However mix has impacted the margins in FY24. We expect over next 2-3 year the share moving towards high margin segment like aerospace, defence, healthcare, smart meter, railways etc, will lead to margin improvement of 130bps over FY24 to FY26. Moreover, we foresee Syrma venturing into the OSAT business within the next 1-2 years, tapping into semiconductor value chain. Considering these, we initiate coverage with a BUY rating and TP of INR 675, valuing at 35x its FY26 EPS.

Cyient DLM Ltd– continues focus on aerospace and defence, margins to follow in 2HFY25

Cyient DLM operates within complex and highly regulated sectors such as aerospace and defence, positioning itself as a high-value business entity. Despite margins impacted by legacy pricing contracts with a key defence customer, which we anticipate will be revisited in 2HFY25. It boasts top-notch facilities, SMT lines along with high customer concentration. Within the next 1-2 years, we expect it to venture into the OSAT opportunity. Given these factors, we value Cyient DLM at 45x on FY26 EPS, our TP at INR 925 - upside 10% from CMP, hence initiate with BUY rating.

Avalon Technologies Ltd– de-risking USA business by exploring domestic opportunities

Avalon, traditionally a major exporter to the USA, is now shifting focus towards domestic growth opportunities. The company has steadily reduced its export exposure to below 55% from 60% in FY23. Its domestic-focused segments, including EV, energy, and railway sectors, offer significant growth potential. Despite its current growth rate in the domestic market trailing the industry average, Avalon is expected to align with industry growth rates by FY25. Furthermore, a revival in the USA business is anticipated from H2FY25. Based on which we value Avalon at 36x FY26 EPS to arrive at a TP of INR 620 and initiate with BUY rating.

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