Headroom For Upside In EMS Stocks Like Kaynes Tech And Dixon Tech, Says IIFL Capital Analyst

At a time when electronics manufacturing services (EMS) space has been under pressure due to lofty valuations, concerns around working capital and institutional selling, IIFL Capital's Vice President of Research, Renu Baid Pugalia believes there is headroom for upside in certain stocks like Dixon Tech and Kaynes Tech.

In an interview with NDTV Profit, Pugalia explained that there is a favourable risk-reward emerging for some of the market leaders in the EMS space, including Kaynes, which has been the talk of the town in recent days.

The shares of Kaynes have been under immense pressure following a Kotak Institutional Equities report that highlighted lapses in accounting and strain in cash flow. The stock has fallen up to 40% in the last month.

However, Renu Baid Pugalia still considers Kaynes as well as Dixon Tech as top picks in the EMS sector. She further explained that the recent drawdown in Kaynes makes it an attractive option.

“We like Dixon and Kaynes in this space. Given the recent sharp correction in Kaynes, we are now in a much more comfortable zone in terms of valuation multiples. The stock provides headroom for anywhere from 35-40% upside," she said.

This is more or less in tune with a JPMorgan note earlier in the day, which pointed out that valuation for Kaynes Tech is quite cheap and therefore, the stock could be set for a significant upside, with the firm expecting long-term upside of almost 100%.

In fact, Pugalia believes the correction in the entire EMS sector has a whole has brought valuation back to attractive levels.

"Bottom-up growth is looking very comforting, and there is favourable risk reward," analysts stated. "We have names like Dixon Tech or Kaynes, which have a strong franchise. Both stocks have gone through sharp corrections, and there is good headroom for upside in the medium to long-term," she concluded.