Bullish on EMS industry, HDFC Securities initiates coverage on Dixon, 2 other stocks; see targets

HDFC Securities is bullish on the country’s electronics manufacturing services (EMS) space citing a host of government initiatives that are poised to propel growth in the segment. Analysts at the domestic brokerage estimate the domestic EMS industry to register growth at a CAGR of at least 30 per cent to reach Rs 9 lakh crore over the FY23-FY28 period.

Why is HDFC Securities upbeat on EMS businesses?

Here are the four primary factors behind the brokerage’s take on the space: 

>> Populous base and rising aspiration levels ensure large captive electronics demand

>>Low per capita electronics consumption

>> Government push for making India a global hub for electronics manufacturing

>> China Plus One strategy adopted by many nations post-COVID-19 can help India's EMS market to flourish.

Currently, around 30 per cent of the country’s total local consumption is imported, which could fall below 10 per cent by FY28, according to HDFC Securities.

It also expects the increasing share of exports, at 35 per cent of total production by FY28, to help transform the country into a net exporter of electronics.

On the valuation front, even though the domestic EMS industry is relatively young and at 2-3 per cent of the global EMS market, it has grown in prominence only over the past 6-7 years and possesses multi-year growth potential, according to HDFC Securities.

Based on reverse discounted cash flow, at the current market price, the implied revenue CAGR across is 15-30 per cent over the next decade, given India’s EMS industry is at an inflection point, according to HDFC Securities analysts.

The brokerage does not expect any significant de-rating for the stocks, while acknowledging that the stocks are commanding rich valuations.

Key risks

The brokerage has listed the following factors that could affect the industry:

>> Any adverse change in government policies

>> Subdued demand leading to order delays

>> Competition from global EMS players setting up shop in India

>> Global supply chain constraints

-- Other competing countries rolling out incentives

What should investors do? 

The brokerage has initiated coverage on Dixon Technologies with an 'add' rating and a target price of Rs 7,700 apiece, and assigned a 'buy' rating to Amber with a target price of Rs 4,200 apiece. 

It has so assigned a 'buy' rating to Syrma SGS Technology with a target of Rs 620 apiece.

However, it has downgraded Kaynes Technology from 'buy' to 'add' with a target of Rs 3,000 apiece.) 

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