Avalon, Dixon Tech, Kaynes Tech, Amber, Syrma SGS, PG Technoplast: 2 top EMS picks

360 One Capital in a note on Electronics manufacturing services (EMS) said it is positive on the structural growth story of the sector, with themes such as increasing room air-conditioner (RAC) penetration, backward integration, value-added manufacturing and semiconductors providing a strong runway for growth. 

In the Industrial EMS space, 360 One Capital likes Avalon Technologies Ltd, an end-to-end box-build player with a dual manufacturing edge (India-US), focus on high growth sectors like Clean energy, Industrial and Mobility, and optionality from semiconductor box-build manufacturing.

In the Consumer EMS space, the brokerage likes Dixon Technologies (India) Ltd, the market leader in smartphones, with focus on backward integration to enhance margins and multiple emerging growth drivers like IT Hardware and Telecom network products. The company is well positioned to benefit from India's ongoing shift toward value-added manufacturing.

"There is a structural shift underway in the Indian EMS sector, from being a mere manufacturer/assembler to becoming a value-added player through backward integration into components and value-added manufacturing of PCBs and OSAT," 360 One Capital said in a note.

The brokerage said the government's push to make India self-reliant and a global manufacturing hub is evident from policy initiatives such as ECMS and ISM 2.0. These supportive policies are expected to lay a strong foundation for the industry in the years ahead, enabling players to undertake increasingly complex manufacturing activities, it said.

The brokerage said EMS sector continued its growth trajectory in Q4, albeit at a lower pace as the consumer EMS space witnessed subdued growth, whereas industrial EMS companies continued to see strong growth. 

EMS space grew 7 per cent YoY in Q4, mainly driven by Syrma SGS Technology with 69 per cent YoY growth followed by Avalon Technologies (40 per cent), Kaynes Technology India (26 per cent), Amber Enterprises India (11 per cent), Dixon Technologies (2 per cent) and PG Electroplast (down 10 per cent). 

It said weak growth in Dixon Technologies (India) was attributable to subdued demand for mobile phones, driven by a sharp increase in prices resulting from a supply crunch in memory chips. Meanwhile, a weak summer season for cooling products dented growth for Amber Enterprises India and PG Electroplast.

"Ebitda for the EMS industry grew 3 per cent despite 11 per cent increase in gross profits, as other income came lower. Ebitda margin contracted by 30 bps YoY despite 40 bps expansion in gross margins. Margin contraction was witnessed across the industry except for Amber Enterprises India (+78 bps YoY) and Syrma SGS Technology (26 bps YoY)," the brokerage said.

PAT for the EMS industry recorded decline of 7.3 per cent due to weak revenue growth and operating profit, as consumer EMS space reel under demand pressure. Key contributors to profit growth was being Syrma SGS Technology (68 per cent) and Avalon Technologies (61 epr cent).