Kaynes - Execution Superiority In A Favorable Ecosystem: HDFC Securities Initiates Coverage With A 'Buy'

HDFC Securities Institutional Equities

Kaynes Technology India Ltd. is one of the prominent players in electronics system design and manufacturing services with three decades of experience (mainly in B-B). It serves various industries such as automotive, industrial, aerospace, defence, outer space, nuclear, medical, railways, IoT, and IT.

Kaynes is one of the key beneficiaries of the Government of India’s focus on the ‘Aatmanirbhar Bharat’ initiative along with the global need of ‘China+1’. Covid was an inflection point for the ESDM industry and India has seen a massive trend change thereafter.

Top ESDM players have seen revenue compound annual growth rate of 14%-33% over the last three years, and Kaynes has clocked 45% CAGR.

The industry is expected to clock more than 30% CAGR over FY22-27E to reach Rs 6 trillion, and Kaynes aims to grow ahead of the industry.

We model a 42% revenue CAGR for FY23-26E to Rs 32 billion in FY26E (seven times of gross block). Kaynes has a superior operating margin (14-15%) and return on equity (~20%) metric among peers given B-B products, focus on value-added products, scale of operation, etc.

Besides traditional business, Kaynes has announced its forays into OSAT (phase-1 in Telangana, proof of concept by April 2024, phase-II in Karnataka), whose benefits will begin from FY25 onwards.

Major benefits will be back-ended but considering its potential to achieve more than Rs 30 billion revenue with ~18% Ebitda margin at full efficiency (with both phases), we assign Rs 23 billion value in our SoTP (with discounting of 18%).

We value the traditional business at 45 times price/earning on Dec-24 earnings per share and add Rs 400/share value of OSAT.

We initiate coverage on Kaynes with a 'Buy' rating and a target price of Rs 2,850.

Risk:

The industry tailwinds are strong with enough investments in setting up the ecosystem. We do not expect much business reversal risk due to the change in government (a key risk for many B-B stories, particularly after seeing a sharp stock run-up).

However, we do see risks which are associated with the nature of the business (particularly when growth assumptions are very bullish along with rich valuation multiples).

We see business risks such as-

1. client forfeit,

2. order execution delays,

3. change in policies,

4. delays in payment,

5. global supplies of key raw material,

6. cost of funds and

7. intervention of state, bodies, etc. in key approvals.

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