EMS Sector Q2 Preview: Strong Revenue, Profit Growth Likely For Dixon, Kaynes

The electronics manufacturing services (EMS) sector, which has grown multifold since the pandemic, typically reports strong quarter 2, as most segments, such as mobile, consumer durables, home electronics, and lighting, among others, see inventory buildup before the festive season.

Over the past 1-2 years, the sector has experienced a massive valuation re-rating due to continued favourable government policies, incremental investments from global original equipment makers, contract manufacturers in India seeking to diversify their country's exposure, and the development of domestic supply chains.

Most companies in the sector, such as Dixon Technologies (India) Ltd. and Kaynes Technology Ltd., are expected to report robust second-quarter growth. However, a few companies, like Amber Enterprises Ltd. and Syrma SGS Technology Ltd., are expected to report lower growth compared to last year. However, the key focus will be the management's commentary.

Dixon Technologies and Kaynes Technologies are expected to report a strong revenue growth of 84% and 65%, respectively, in the second quarter ended Sept. 30. While Ebitda growth is upwards of 70% for both these companies, absolute margins for Dixon Tech will be 20 basis points lower compared to last year at 3.8%. Kaynes Technologies will see margins return to 14% after falling below the same range last year. Profit growth is expected to be strong for both, with Kaynes Tech leading by a whopping 88% growth compared to last year.

For Dixon Tech specifically, the company will see strong revenue growth led by a rampup in mobile customers acquired during the last year, along with the consolidation of Ismartu’s financials.

BNP Paribas sees Kaynes Technologies reporting strong revenue growth led by the industrial segment based on a strong exit run rate, smart meter orders, and new customer acquisitions for EV components. Kotak anticipates that the aerospace and medical segment orders will positively impact the company and lead to higher margins in the second quarter.

For Dixon, BNP Paribas anticipates a frequent narrowing of margins by 10 basis points due to a shift in mix towards the mobile phone segment, which is typically the lower margin segment.

Amber Enterprises, which is diversifying away from mainly being an air conditioner player, is expected to report 30% revenue growth and 41% growth in Ebitda but profits will fall due to a seasonally weaker quarter. This is partly driven by a very strong quarter for the company, led by bumper air conditioner demand.

Kotak Securities anticipates a 22% year-over-year increase in overall revenue, primarily due to a 15% surge in consumer durables, a 55% increase in electronics, and a 9% decrease in mobility. They anticipate a mix shift toward components in the durable consumer segment to drive margin improvement.

BNP Paribas expects AC component outsourcing to grow significantly, as most original equipment makers typically manufacture only some components in-house, with Amber being a key beneficiary.

PG Electroplast Ltd. and Syrma SGS Technology Ltd. are likely to report between 33% and 40% growth in revenue in the July-September quarter, but would diverge on Ebitda and profitability.

PG Electroplast's may report a 35% and 42% growth in Ebitda and profit; Syrma SGS may see a 18% and 3% growth in Ebitda and profit, respectively.

Kotak anticipates a 30% year-on-year growth for Syrma, with some moderation in the consumer segment. The healthcare segment is expected to be weak in the first half of fiscal 2025. Despite Syrma's lackluster margins, Kotak anticipates significant margin improvement in the second half once the healthcare segment experiences some improvement in execution.

The EMS sector had started on a strong note after having reported strong first quarter earnings. The primary focus for the second quarter will be the management's comments.

Other players, such as Cyient DLM Ltd., are also expected to report weak numbers, with margins expected to be lower by 220 basis points. However, their recent order wins in the aerospace segment will be the crucial going forward.

Another manufacturer of room air conditioners, Epack Durables Ltd., anticipates a slower quarter following a strong one.