India's electronics manufacturing services sector could see a multi-year growth opportunity as government spending shifts from mobile assembly towards component manufacturing, while defence indigenisation and the semiconductor push open new markets for EMS companies, according to PL Capital's Praveen Sahay.
Sahay, lead research analyst for consumer durables, building materials and EMS at PL Capital Group, pointed to Syrma SGS and Avalon Technologies for their order-book visibility and expansion into new segments. He also sees Dixon Technologies as a major beneficiary of the mobile manufacturing push.
The catch is valuation. Sahay said the sector is already trading at high multiples, leaving limited comfort at current prices.
Syrma Advantage
Syrma SGS has an order book of about Rs 6,800 crore, giving the company visibility for the next few years, Sahay said.
The company is expanding into industrial and mobility segments and has joint ventures that could contribute to revenue and margins over the next three to five years.
One of its joint ventures could provide an opportunity of $50 million-$100 million, with margins of 12%-13%, according to Sahay.
"These are also going to benefit them," Sahay said, referring to the opportunities emerging from the government's push across mobile manufacturing, defence and semiconductors.
Syrma also has exposure to defence, with about 10%-12% of its revenue coming from the segment, Sahay said. The company supplies PCB assemblies and box-build systems to larger defence suppliers.
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Avalon Visibility
Avalon Technologies has an order book of about Rs 2,200 crore, Sahay said.
The company has also tied up with a joint venture to enter export markets such as Europe, adding another potential source of growth.
Avalon is among the EMS companies that could benefit as the semiconductor push moves beyond fabs and outsourced semiconductor assembly and testing facilities towards a broader component ecosystem, Sahay said.
"The entire EMS space, not only those who are directly going to the fab or the OSAT facilities, but those who are going for the component ecosystem as well, like Avalon or the Syrma DLM, are going to benefit," he said.
Dixon Benefit
Dixon Technologies is also among the major listed beneficiaries of the mobile manufacturing scheme, according to Sahay.
The government has allocated about Rs 6.2 lakh crore under the mobile manufacturing scheme, with the focus extending beyond assembly to component manufacturing and exports.
"The focus is on deepening the ecosystem, going beyond assembly towards component manufacturing for mobile, even for exports," Sahay said.
He also pointed to the clearance of the BOJB as an opportunity for Dixon in domestic and export markets.
Sahay said Dixon has demonstrated efficient capital allocation and a strong return profile. However, he said its valuation remains high, at about 40 times FY28 earnings, while its concentration towards mobile manufacturing is also relatively high.
PL Capital does not cover Dixon and does not have a rating on the stock, Sahay clarified.
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Valuation Catch
The valuation concern extends across the EMS sector.
Syrma is trading at more than 50 times FY28 earnings, while Avalon is trading at more than 65-70 times FY28 earnings, Sahay said.
"That's giving me a discomfort at this price point," he said.
Sahay expects the opportunities created by government support to result in potential earnings upgrades, but said valuations remain the main concern for the sector.
Defence, Semicon
The opportunity for EMS companies extends beyond mobile manufacturing.
The Defence Acquisition Council has provided about Rs 1.1 lakh crore for indigenisation, which Sahay expects to benefit both large defence companies and component suppliers.
The semiconductor push could provide another source of demand. The allocation under Semicon 2.0 is about Rs 1.27 lakh crore, while the Electronics Component Manufacturing Scheme has been scaled up from Rs 22,000 crore to Rs 40,000 crore, he said.
Sahay expects companies involved in PCB assemblies and box-build manufacturing, including Syrma SGS, Avalon and, to some extent, Kaynes Technology, to benefit.
The next phase of the semiconductor programme is focused on creating a domestic component ecosystem and reducing dependence on imports, he said.
For the EMS sector, Sahay expects the opportunities from mobile manufacturing, defence and semiconductors to play out over the next five years. The key question for investors, however, is whether current valuations leave enough room for those opportunities to translate into returns.
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