India's electronics manufacturing services sector is entering a new phase of growth as government support expands beyond mobile assembly into components, defence and semiconductor-related manufacturing, according to Praveen Sahay, lead research analyst for consumer durables, building materials and EMS at PL Capital Group.
The government's mobile manufacturing scheme, semiconductor programme and push for greater domestic defence procurement are expected to create opportunities for EMS companies over the next five years. However, valuations have risen sharply across the sector, making them a key concern, Sahay told NDTV Profit in an interview.
The government has allocated about Rs 6.2 lakh crore under the mobile manufacturing scheme, with the focus extending beyond assembly to mobile components and exports, Sahay said.
He expects large EMS companies with scale, as well as those operating in component manufacturing, to benefit from the programme. "The focus is on deepening the ecosystem, going beyond assembly towards component manufacturing for mobile, even for exports," Sahay said.
He also pointed to PCB manufacturing and box-build operations as areas that could benefit as the domestic electronics ecosystem expands.
Defence Opportunity
The defence sector is another opportunity for EMS companies as the government pushes to increase domestic procurement.
The Defence Acquisition Council has provided about Rs 1.1 lakh crore for indigenisation, which Sahay expects to benefit not only large defence companies but also component suppliers.
He cited Syrma SGS as an example, saying about 10%-12% of its revenue comes from defence and that it supplies components such as PCB assemblies and box-build systems to larger suppliers.
"These are all going to benefit the players who are already in this segment, not only the large defence players, but those who component supply," Sahay said.
Semicon Push
Sahay also sees opportunities from the next phase of the government's semiconductor programme.
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.
He expects companies involved in PCB assemblies and box-build manufacturing, including Syrma SGS, Avalon Technologies and, to some extent, Kaynes Technology, to benefit.
The next phase of the semiconductor push is focused more on building the domestic component ecosystem and reducing dependence on imports, 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.
Stock Picks
Sahay pointed to order-book visibility at Syrma SGS and Avalon Technologies as another factor supporting the sector's growth outlook.
Syrma has an order book of about Rs 6,800 crore, he said. The company is also expanding into industrial and mobility segments and has joint ventures that could contribute to revenue and margins over the next three to five years.
Sahay said one of Syrma's joint ventures could provide an opportunity of $50 million-$100 million, with margins of 12%-13%.
Avalon has an order book of about Rs 2,200 crore and recently tied up with a joint venture to target exports to the European market, he said.
These opportunities provide visibility for the next few years, according to Sahay.
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Valuation Risk
Despite the sector's growth prospects, Sahay said valuations remain a concern.
Syrma is trading at more than 50 times FY28 earnings, while Avalon is trading at more than 65-70 times FY28 earnings, he said.
"That's giving me a discomfort at this price point," Sahay said.
He expects the opportunities in the sector to support potential earnings upgrades, but said valuations remain the main concern across the EMS space.
Dixon View
Dixon Technologies is among the major listed beneficiaries of the mobile manufacturing scheme, Sahay said, while clarifying that PL Capital does not cover the stock and does not have a rating on it.
The company could also benefit from the clearance of the BOJB, which Sahay said provides opportunities in both domestic and export markets.
Dixon has a strong return profile and has demonstrated efficient capital allocation, he said. However, at about 40 times FY28 earnings, its valuation is also on the higher side for a contract manufacturer.
Sahay also flagged the company's relatively high concentration towards mobile manufacturing.
"The opportunities are good for them for forward growth," he said.
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