JPMorgan has reiterated its preference for Dixon Technologies and Amber Enterprises among India's electronics manufacturing services (EMS) stocks, arguing that investors should consider return on capital employed (ROCE) alongside earnings growth and valuations when evaluating companies in the capital-intensive sector.
The brokerage prefers companies with high ROCE and strong earnings growth trading at relatively lower price-to-earnings (P/E) multiples over those offering similar growth but lower capital returns at higher valuations.
JPMorgan's order of preference is Dixon Technologies, Amber Enterprises, Kaynes Technology, Syrma SGS Technology, Avalon Technologies and Cyient DLM. It has an Overweight rating on Dixon with a target price of Rs 16,200, and Amber with a targer price of Rs 8,350. The brokerage has Neutral rating on Kaynes with a target of Rs 3,150, and an Underweight rating on Syrma, Avalon and Cyient DLM, with targets of Rs 1,300, Rs 1,650 and Rs 530. respectively.
Why JPMorgan Prefers ROCE Over Growth Alone
JPMorgan believes that while earnings growth remains a key driver of valuations in the EMS sector, investors cannot overlook ROCE given the industry's capital-intensive nature and high net working capital (NWC) requirements.
The brokerage expects investors to focus more closely on capital efficiency when companies miss earnings expectations, growth slows or elevated working capital requirements begin to weigh on free cash flow.
JPMorgan cited a similar trend late last year, when Kaynes Technology missed revenue growth expectations and its working capital days expanded, putting pressure on cash flows. This prompted investors to reassess balance-sheet strength, cash-flow generation and ROCE across the sector.
Cyient DLM Share Price Correction: What Went Wrong?
Cyient DLM shares declined 27% over two trading sessions after the company missed expectations on revenue and margins in the second quarter and cut its FY27 margin guidance.
The stock had rallied 148% year-to-date (YTD) before the earnings announcement, while the Nifty was down 12% over the same period, according to JPMorgan.
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The brokerage noted that a 12% cut to FY27 EBITDA estimates triggered a share price correction of more than twice the percentage reduction in earnings estimates, reflecting the elevated expectations priced into the stock.
JPMorgan also questioned Cyient DLM's valuation premium over Dixon Technologies, given its lower earnings growth and ROCE.
Dixon, Amber Remain Top Picks
Dixon Technologies stands out in JPMorgan's comparison of earnings growth, FY28 estimated P/E multiples and FY28 estimated ROCE. The brokerage believes its combination of earnings growth and capital efficiency justifies a premium valuation.
Amber Enterprises is the brokerage's other preferred stock, reflecting its preference for companies that can deliver earnings expansion while generating attractive returns on capital.
Meanwhile, JPMorgan remains Neutral on Kaynes Technology and recommends avoiding Syrma SGS Technology, Avalon Technologies and Cyient DLM.
EMS Stocks Under Pressure
Indian EMS stocks have declined 6-22% over the past month, compared with a 2% fall in the Nifty. Among the stocks highlighted by JPMorgan, Cyient DLM, Avalon Technologies and Syrma SGS Technology have fallen 22%, 17% and 10%, respectively.
The brokerage's key takeaway is that investors should evaluate EMS companies on earnings growth, ROCE and valuation together, rather than relying on growth prospects alone.
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