Kaynes Technology India Ltd Management Discussions

Global Economy

According to the IMF, the global economy navigated a complex landscape in CY 2023, with growth moderating to 3.2% from 3.5% in 2022. The economy continued to recover from the Covid-19 pandemic, though progress was tempered by various challenges including elevated inflation, monetary tightening by central banks, ongoing supply chain disruptions related to pandemic aftereffects and geopolitical tensions. Advanced economies saw mixed results, with the US growing by 2.5% on robust consumer spending but the Eurozone lagging at 0.4% growth due to high energy prices. Emerging markets outperformed, collectively expanding at 4.3% driven by Chinas reopening and Indias domestic demand.

The CY 2024 global outlook remains stable, with a forecasted 3.2% growth. Advanced nations are projected to record a modest 1.7% expansion, while emerging markets are anticipated to experience a 4.2% growth. A significant and notable positive here is the expected decline in global headline inflation. It is expected to go from CY 2023 elevated 6.8% level to around 5.9% in CY 2024 and further down to 4.5% in CY 2025 as supply conditions improve. However, risks such as supply chain disruptions, geopolitical tensions, and challenges in controlling inflation without hampering growth persist.

While economic growth in CY 2023 occurred amid high inflation and tighter policies, the outlook for CY 2024 points towards maintained growth levels aided by easing inflationary pressures. This stable growth can potentially lead to more accommodative economic policies. Proactive management of risks and striking the right balance between fostering growth and controlling inflation will be crucial for sustaining solid economic performance going forward.

Indian Economy

Indias economy continued to prosper in CY 2024, with the GDP growth projected at 6.8% according to the IMFs April 2024 World Economic Outlook. This robust performance exceeds the global average and many other major economies. This stellar performance was driven by robust domestic demand, the Governments push for capital expenditure, vibrant economic activity across sectors, and a favourable policy environment. The Interim Union Budget for FY 2024-25 further emphasises infrastructure development, with a significant increase in capital expenditure allocation.

The manufacturing sector has been crucial in propelling Indias economic growth, creating jobs, spurring innovation, and contributing significantly to the countrys GDP. As of CY 2023 , the manufacturing sectors contribution to Indias GDP stands at approximately 17%. Government initiatives like Make in India, Aatmanirbhar Bharat, and the Production Linked Incentive (PLI) schemes have been instrumental in enhancing the sectors competitiveness and bolstering domestic manufacturing. Looking ahead, the primary focus will be on developing industrial corridors, enhancing logistics, fostering research and development, and upskilling the workforce to further strengthen the competitiveness of the manufacturing sector.

Outlook

Despite challenges such as food inflation and cost pressures, Indias economic prospects appear strong. This optimism is bolstered by robust domestic demand, digital transformation, and entrepreneurship. India aims to become the worlds third-largest economy and reach a GDP of US$ 5 Tn by CY 2027. To achieve these goals, integrating the manufacturing sector into global value chains and adopting Industry 4.0 technologies (such as artificial intelligence, the Internet of Things, big data analytics, and advanced robotics) will be crucial for boosting productivity and expanding exports. These efforts are expected to help India effectively navigate global uncertainties and maintain its growth momentum.

Source: [https://www.moneycontrol.com/news/business/markets/india-to-be-worlds-third-largest-economy-by-2027-with-gdp-at-5-trillion-jefferies-12325441.html]

. Global Electronics Industry

The global electronics industry is a massive and rapidly growing market, valued at a staggering US$ 2,763 Bn in CY 2023, accounting for 2.6% of the worlds GDP and a per capita consumption of US$ 478.3. Within this industry, electrical equipment is the largest segment, followed by electronic products. The industry experienced remarkable growth, expanding from US$ 2,266 Bn in CY 2018 to US$ 2,763 Bn in CY 2023, reflecting a CAGR of 4%. This growth can be attributed to increasing consumer demand, technological advancements, and the proliferation of digital infrastructure worldwide, driving innovation, communication, and efficiency across various sectors.

Outlook

The growth is driven by the ever-increasing demand for electronic devices, technological advancements, and the proliferation of digital technologies across various sectors. Key sectors contributing to this growth include consumer electronics, industrial automation, and emerging fields such as artificial intelligence, 5G networks, and Internet of Things (IoT) applications.

Introduction to Electronic System Design and Manufacturing ) (ESDM) Industry

The global Electronic System Design and Manufacturing (ESDM) market was valued at US$ 984 Bn in CY 2023 and is expected to reach US$ 1,145 Bn by CY 2026. Accounting for approximately 35% of the overall global electronics industry, the ESDM market is projected to expand at a CAGR of ~5.4% from CY 2021 to 2026. This growth is likely to outpace the ~4.6% CAGR expected for in-house OEMs during the same period. This suggests an increasing trend of outsourcing electronics manufacturing to ESDM companies.

Historically dominated by firms assembling components for OEMs, the ESDM landscape is transforming, with OEMs recognising ESDM enterprises competencies beyond manufacturing. ESDM companies now participate in product design, development, testing, and post-sales services like repair and lifecycle management. Their design-centric capabilities include conceptualisation, chip design, VLSI, circuit board creation, and embedded systems development. With the benefits of production efficiency, reduced overhead, lower labour costs, and faster new product introductions, OEMs collaborate with ESDM partners, increasingly outsourcing design, and development processes.

Segments Driving the Industrial Electronics

Telecom

The rollout of 5G infrastructure and the deployment of advanced network equipment are driving the growth of the telecom sector. This segment is projected to experience substantial growth in the coming years.

Automobile

The rapid development of autonomous and electric vehicles is driving significant demand for advanced electronics in this sector. Along with the aerospace & defence sector, the automobile industry is projected to experience substantial growth in the coming years.

Aerospace and Defence (A&D)

ESDM providers are strategic partners for the aerospace and defence industry, offering cost reductions of 10-15% through their services.

This sector is anticipated to experience significant growth due to the increasing demand for advanced avionics, navigation systems, and defence electronics.

Medical

Constant innovation and the integration of cutting-edge technologies, such as robotics, artificial intelligence, and telemedicine, are propelling the medical electronics sector. This segment is expected to outpace the overall growth of the Electronics System Design and Manufacturing (ESDM) industry.

SWOT Analysis

Y Cutting-Edge Innovation: The ESDM industry thrives on continuous technological breakthroughs, enabling the development of cutting-edge electronic systems and components that push boundaries.

Y Worldwide Demand: A consistently high global demand for electronic devices provides a stable and lucrative market landscape for the operation of ESDM companies. This trend is exemplified by the projected growth in India, where the demand for electronic products is expected to rise from US$ 33 Bn in FY 2019-20 to US$ 400 Bn by FY 2024-25.

Y Specialised Talent Pool: The Pradhan Mantri Kaushal Vikas Yojana, launched in 2015-16, aims to provide industry-relevant skill training to Indian youth. With a budget of 12,000 Crores, it targeted nearly 1 Crores people. The scheme includes centrally and state-managed components and incorporates Recognition of Prior Learning. The complementary Pradhan Mantri Kaushal Kendra programme offers soft loans up to 70 Lakhs for creating district-level training infrastructure, supporting the main schemes implementation.

Y Streamlined Supply Networks: Well-established and streamlined supply chain networks allow ESDM companies to source components and materials, ensuring efficient operations seamlessly.

Y Modular Design Capabilities: Many ESDM companies have developed expertise in modular product design, enabling them to adapt to changing market demands and customer requirements rapidly.

Y Pricing Pressures: Intense competition within the ESDM landscape exerts significant pricing pressures, which can lead to squeezed profit margins for industry players.

Y Rapid Technology Cycles: The breakneck pace of technological advancements can quickly render electronic products obsolete, entailing continuous innovation and product updates from ESDM companies to stay relevant.

Y Environmental Concerns: Increased scrutiny over the environmental impact of electronic waste has led to stricter regulations and a pressing need for sustainable practices within the industry.

Y Capital Intensive: The ESDM industry requires significant capital investments in research and development, advanced manufacturing facilities, and specialised equipment, posing a barrier to entry for new players. In India, setting up a bare PCB manufacturing factory with a monthly capacity of 5,000 SQM costs approximately 25 Crores. This high capital requirement is particularly challenging for domestic PCB manufacturers, most of which are MSMEs, limiting their ability to invest and expand quickly.

Y Internet of Things (IoT) Proliferation: The widespread adoption of IoT devices has unlocked ample opportunities for ESDM companies to develop and manufacture a diverse range of connected devices.

Y Growing Emphasis on Renewable Energy: Global renewable electricity capacity is projected to exceed 4,800 GW by FY 2025-26, a 60% increase from FY 201920, driven by robust policies and climate goals. China is expected to lead with 1,200 GW of wind and solar capacity, followed by India, Europe, and the US as major contributors. Solar PV is anticipated to be the dominant renewable technology across these markets. This growth in renewable energy will directly impact electronics demand, creating significant opportunities for the ESDM sector.

Y 5G Rollout: The large-scale deployment of 5G networks has opened up new avenues for ESDM companies to develop and manufacture advanced telecommunications equipment and devices.

Y Greater Emphasis on Electric Vehicles: The electric vehicle (EV) market is poised to dominate the automotive industry, offering significant opportunities for ESDM companies due to increased electronic content and charging infrastructure needs. Governments worldwide are incentivising EV purchases to reduce air pollution and promote sustainability. The higher number and complexity of PCBAs in EVs compared to ICE vehicles present a substantial potential for ESDM businesses to provide electronic manufacturing services to automakers.

Y China+1 Strategy: Global companies are diversifying supply chains away from China due to rising costs and regulatory changes, accelerated by the 2019 pandemic. This trend presents significant opportunities for Indias ESDM sector to attract foreign investment and expand its global market share. India, along with countries like Vietnam and Mexico, is poised to benefit from this shift in the global ESDM industry. The countrys supportive policies, skilled workforce, and growing domestic market position it as an attractive alternative manufacturing hub.

Y Smart City Infrastructure: The increasing emphasis on smart city initiatives worldwide has created opportunities for ESDM companies to provide advanced electronic systems and solutions for urban infrastructure development.

Y Inability to Compete with Chinese and Taiwanese Suppliers: Indian PCB manufacturers struggle to compete with Chinese and Taiwanese suppliers due to higher manufacturing costs, stemming from expensive imports, lack of scale, and skilled labour shortages. Despite trade tariffs, Chinese imports remain 20-25% cheaper, creating a vicious cycle that prevents Indian firms from entering high-volume markets and hinders industry growth.

Y Intellectual Property Infringement: Counterfeit products and intellectual property theft pose significant threats to ESDM companies, potentially impacting their revenue streams and brand reputation.

Y Changing Consumer Preferences: Shifting consumer preferences towards sustainability and environmentally friendly products may require ESDM companies to adapt their manufacturing processes and product offerings to remain competitive.

Y Cybersecurity Risks: As electronic systems become increasingly interconnected, ESDM companies face heightened risks of cyber threats, which can compromise product integrity and data security.

Y Talent Acquisition Challenges: Attracting and retaining highly skilled talent in areas such as electronics engineering, software development, and product design can be a major challenge for ESDM companies.

Global PCBA Market

The printed circuit board assembly (PCBA) market is expected to reach a significant valuation of US$ 145 Bn by the CY 2032. Thus, exhibiting an impressive compound annual growth rate (CAGR) of 5%. This substantial growth can be attributed to several key factors, including technological advancements, rising demand for consumer electronics, automotive electronics, and industrial automation, as well as the rapid expansion of the Internet of Things (loT) industry. PCBA, a crucial process involving the assembly of electronic components onto Printed Circuit Boards (PCBs), plays a pivotal role in electronic manufacturing. The surge in demand for PCBA services is driven by the aforementioned factors, which are collectively fuelling the growth of this industry.

Indian Electronic Industry Overview

The Indian electronics industry, one of the fastest-growing sectors globally, is transforming lives, businesses, and economies. India is on track to become a US$ 1 Tn digital economy by FY 2025-26. Currently, the electronics market in India is valued at US$ 155 Bn, with domestic production accounting for 65% of this market. Technology transitions such as the rollout of 5G networks and the Internet of Things (loT) are driving accelerated adoption of electronic products. Initiatives like Digital India and Smart City projects have increased demand for IoT in the electronics devices market, promising a new era for electronic products.

Indias domestic production has seen a compound annual growth rate (CAGR) of 13%, growing from US$ 49 Bn in FY 2016-17 to US$ 101 Bn in FY 2022-23. The countrys electronics exports are projected to reach US$ 120 Bn by FY 2025-26. In May 2024, electronic goods exports were recorded at US$ 2.97 Bn, compared to US$ 2.41 Bn in May 2023, marking a growth of 23%. Additionally, 100%

FDI is allowed under the automatic route for electronics, with up to 49% allowed in defence electronics through the automatic route, and beyond 49% requiring government approval.

Source: [https://www.investindia.gov.in/sector/electronic-systems]

Indias ESDM Industry Overview

Indias Electronics System Design and Manufacturing (ESDM) industry was valued at US$ 29.41 Bn as of FY 202324 and is expected to reach US$ 71.89 Bn by FY 2026-27. Several Original Equipment Manufacturers (OEMs) have traditionally engaged in the development, design, and manufacturing of electronic products internally. Currently, OEMs with in-house capabilities account for ~75% of Indias total domestic electronics production market. However, there is a gradually increasing reliance on ESDM partners.

ESDM providers are progressively expanding their offerings to include comprehensive design services alongside contract manufacturing. This transition is advantageous for both ESDM providers and OEMs. It enables the providers to secure higher profit margins, while OEMs can benefit from outsourcing manufacturing and design functions, allowing them to concentrate on other expansion initiatives. Considering the vast, intricate, and highly competitive nature of the electronics industry, OEMs are now inclined towards focussing on marketing and post-sales services. As such, the manufacturing aspect is being delegated to ESDM partners. An ESDM entity equipped with economies of scale enjoys an advantageous position in adapting to frequent technological shifts, affording enhanced negotiating leverage with suppliers of raw materials.

Source: [https://www.investindia.gov.in/sector/electronic-systems]

Government Schemes for Propelling Industrial Growth

The Government of India prioritises electronics hardware manufacturing under the Make in India and Digital India initiatives. It aims to level the playing field for domestic manufacturers by rationalising tariffs, simplifying procedures, providing incentives, and upgrading infrastructure. The Government has introduced several schemes and policies to promote the electronics manufacturing sector in India, some of which are listed below:

Indias PCBA Market

The Printed Circuit Board (PCB) market in India is poised for substantial growth, having reached a value of US$ 5.4 Bn in CY 2023. According to projections by IMARC Group, the market is expected to expand dramatically, reaching US$ 21.3 Bn by CY 2032. This represents an impressive Compound Annual Growth Rate (CAGR) of 16.4% during the period from 2023 to 2032. PCBs serve as the essential foundation for electronic devices, incorporating crucial components such as flash memory, application processors, graphics processors, and various semiconductor-based active and passive sub-components. This robust growth trajectory underscores the increasing importance of PCBs in Indias rapidly evolving electronics manufacturing sector.

Kaynes Technology India Limited (also referred to as Kaynes,

KTIL, Our Company or We), is a prominent player in integrated electronics manufacturing. With over three decades of experience in the industry, we offer end-to-end and IoT-enabled ESDM solutions spanning conceptual design, process engineering, integrated manufacturing, and life-cycle support. Our offerings cater tothe needs of diverse sectors like automotive, industrial, aerospace, defence, outer space, nuclear, medical, railways, IoT, and IT. KTILs state-of-the-art infrastructure allows our Company to handle high-mix, high-value, and variable- volume products, delivering optimised product realisation solutions for complex products.

In addition to our core ESDM business, we have recently venturedinto cutting-edge semiconductor assembly and testing (OSAT), and high-density interconnect PCBs (HDI PCBs). We have also formed strategic technology partnerships in cybersecurity, medical tech, AR/XR, and silicon photonics. These moves have positioned us as a single-stop solution provider with superior margins in complex product manufacturing.

An Overview of Our Business Verticals

Original Equipment Manufacturer (OEM) - Box Build

We have a comprehensive manufacturing infrastructure encompassing customised production lines tailored for box building, integration, and testing activities. Our facilities are well- equipped to manufacture cable forms, harnesses, and plastic moulding and fabrication products. To ensure product reliability, we maintain a dedicated burn-in/ soak-test facility. Furthermore, our Company holds expertise in designing and building customised testing hardware, which includes firmware flashing fixtures, PCBA fixtures, end-of-line testers, and product functional testers. Our efficient supply chain enables us to directly ship our OEM products to our customers warehouses, ensuring seamless logistics operations.

OEM - Turnkey Solutions - Printed Circuit Board Assemblies (PCBAs)

KTIL provides comprehensive turnkey solutions encompassing the entire gamut of PCB assembly manufacturing. Our services span prototyping, sourcing (including supplier development for bare PCBs), test jig construction, and PCB process design. Utilising our state-of-the-art SMT lines, we manufacture and deliver tested and validated boards to customers globally. Our forte lies in high-mix, high-technology, and flexible volume production, catering to diverse industries such as aerospace, defence and outer space, railways, medical, IT/ ITES, industrial, and automotive electronics. Moreover, KTILs value-added services for esteemed customers across these verticals further enhance our comprehensive solution portfolio.

Original Design Manufacturing (ODM)

We offer a comprehensive array of services, including product design and development, which comprises software, Printed Circuit Boards (PCBs), and mechanical design domains. Our forte lies in crafting customised technology solutions through our specialised Embedded Systems division, which excels in high-speed, multi-layer, mixed- signal, and RF PCB designing. Additionally, we provide the added advantage of conducting rigorous two-stage design reviews to ensure optimal quality and adherence to specifications. Our design capabilities enable us to deliver tailored solutions catering to the unique requirements of our esteemed clients across diverse industries.

Financial Highlights

On a consolidated basis, we achieved an exceptional financial performance during the FY 2023-24. Our total revenue soared to a substantial 18,046 Mn, marking a staggering 60% year-over-year surge from the 11,261 Mn recorded in FY 2022-23. Thus, reflecting our incredible growth trajectory. Our operational EBITDA demonstrated strong growth, climbing 51% to 2,542 Mn in FY 2023-24. Notably, our profitability witnessed a meteoric rise, with Profit after Tax (PAT) skyrocketing by a remarkable 93% compared to the previous fiscal, reaching 1,833 Mn. This robust performance was further bolstered by an impressive expansion of 170 basis points in our net profit margins, underscoring KTILs operational efficiency and financial discipline.

Opportunity

The ESDM industry presents a significant opportunity, driven by the localisation of the electronics supply chain in India. This localisation is fuelled by high domestic volumes, increased consumption, and enhanced outsourcing, influencing domestic manufacturers to procure components locally and strengthening the ecosystem. Currently, Tier-2 companies are leveraging ESDM services to offset high costs while focussing on product localisation, innovative design, and R&D. Meanwhile, India is undergoing transformative changes with policies like SPECS, PLI, and NPE 2019, enhancing preferential conditions, augmenting infrastructure, and increasing raw material accessibility. These initiatives are positioning the country to compete against Chinas current manufacturing cost advantage.

The megatrend of outsourcing manufacturing to ESDM companies is inevitable as OEMs are focussing on their core competencies. Moreover, with the surge in consumption across automobiles, consumer durables, industrial machinery, and telecommunications segments, the demand for electronic components and systems is poised for substantial growth, presenting a compelling opportunity for the ESDM industry.

Threats

The Electronic System Design and Manufacturing (ESDM) industry in India grapples with formidable threats that could hinder its growth trajectory. Fierce competitive intensity, with over 12,000 players vying for a market share, has intensified pricing pressures and necessitated hefty investments in R&D for product differentiation. Compounding this challenge is an inefficient supply chain heavily reliant on imported high-value components.

The dependence has been fuelled by trade agreements that render imports more cost-effective than domestic production, underscoring the urgent need to bolster indigenous capabilities. Furthermore, the industrys rich valuations, fuelled by an optimistic ~33% growth outlook, could prove precarious in case of market disruptions or unmet expectations. Other threats include insufficient government support, competition from low-cost countries, vulnerability to global supply chain shocks, and the imperative for continuous innovation to stay abreast of disruptive technologies like loT, AI, and ML. To address such multifaceted challenges, there is a need for industrywide collaboration, strategic foresight, and a steadfast commitment to innovation. These efforts can help strengthen competitiveness in the industry and ensure sustainable growth.

Risk & Mitigation

At KTIL, we highly prioritise risk management and continuously evaluate and improve our risk management practices to change business environments and emerging risks. Our Board of Directors is responsible for establishing and overseeing our Companys risk management framework to effectively identify, manage, and mitigate these risks.

Supply Chain Disruptions

Human Resources

At Kaynes, we go beyond mere words to create an exceptional employee experience. We are dedicated to fostering an inclusive and engaging work environment, attracting, and retaining top talent through innovative recruitment strategies. We emphasise hiring skilled professionals who are passionate about delivering exceptional services and conduct comprehensive training programmes for their professional growth.

We prioritise employee well-being and satisfaction through several wellness initiatives, employee assistance programmes, and open communication channels. Our approach of providing regular feedback, coaching, and performance evaluations ensures our employees effective contribution towards the organisational objective. As of 31 March, 2024, our employee strength stood at 1,567. Our human resources practices are centred around developing and retaining top talent, fostering engagement, and driving organisational success through effective workforce management.

Internal Controls

At Kaynes, our management is committed to ensuring that our internal control systems are in line with our strategic objectives and implemented consistently throughout the organisation. Our Company has developed a comprehensive internal control system consisting of policies and procedures aimed at facilitating efficient management of operations, safeguarding of assets, optimal resource utilisation, and accurate financial reporting, while ensuring compliance with applicable laws and regulations. The internal control systems cover all areas of KTILs operations and are reviewed and tested periodically to ensure their effectiveness. We greatly emphasise the continuous improvement of our internal control systems to mitigate risks and improve operational efficiency.

Quality Control Statement

Our Companys quality policy is centred on meeting customer needs by delivering dependable products and services that conform to regulatory requirements while continuously enhancing our quality management systems. We ensure the quality of our products through a qualification process that covers the entire value chain, thereby guaranteeing that customers receive quality products. Our Companys quality control programmes are subjected to regular evaluations and monitoring at most of our manufacturing facilities to ensure adherence to high- quality standards. Additionally, both third-party agencies and customers conduct compliance audits of our Companys manufacturing facilities regarding quality management.

Cautionary Statement

Certain statements made in this report, including but not limited to the Companys objectives, projections, expectations, and estimates, may constitute forwardlooking statements within the meaning of applicable laws and regulations. Actual results may differ materially from those expressed or implied. Various factors could make a significant difference to our Companys operations and actual results, including but not limited to changes in government regulations, tax laws, economic developments in India and other countries where our Company conducts business, litigation, and other related factors. This report serves as a cautionary statement, and our Company takes no responsibility for any decisions made based on the information contained herein.