EMS: Mixed bag of performance

20 Feb 2024 , 12:16 PM

Diversified EMS players serving B2B portfolios witnessed softness in key segments like auto and consumer segments while industrials and ramp up from new clients sustained growth in order books. With thrust on execution, revenue growth has kept pace while investments in new customers, products and factories has impacted profitability in the near term. B2C EMS activities continues to reel under weak consumer sentiments and muted growth in durables. Growth is driven by PLI led volume ramp-up in Mobiles and Telecom portfolios. Analysts of IIFL Capital Services have cut earnings forecasts for all companies, except Dixon and downgraded Syrma to ADD on consistent miss in profitability. Dixon & Kaynes are preferred. 

Dixon outperforms on the back of Mobiles while Amber disappoints: 

Ramp-up in mobile/EMS segment led to inline performance, despite muted consumer sentiments contracting TVs/ Washers revenues QoQ. Successful completion of trial runs for Xiaomi and ITEL will boost growth in mobiles Q4FY24 onwards while on-boarding of two new large Mobile phone brands in H1FY25 will drive further earnings upgrade. With revenues / PAT Cagr of 42/46% in FY24-26, Dixon remains best bet in the EMS space with proven track record. Seasonally weak quarter coupled with low inventory stocking & base of higher RAC FG in PY led to dismal performance for Amber, but diversification initiatives in Electronics & mobility to catapult growth in FY25-26. 

Margin outlook softens for diversified EMS; Kaynes outpaces Syrma: 

Robust offtake in industrial sustained Kaynes’ revenue growth while deferrals (of Rs1.1bn) in the Consumer/Industrial segments led to miss for Syrma. While GMs both missed with prototyping work for new clients, while Kaynes sustained OPMs driven by operating leverage while fixed overheads marred Syrma OPM outlook. Both peers retained revenue guidance, however Syrma shaved medium term OPM outlook by 200-250 bps to 7-8% given higher sales contribution from low margins segments. Analysts of IIFL Capital Services significantly cut EPS estimates for Syrma by 31%/29%/26% for FY24/25/26 and downgrade to ADD and continue to prefer Kaynes as a better quality bet on the Indian ESDM market 

Muted demand environment delays turnaround for Avalon: 

Continued weakness in the US operations led to dismal performance for Avalon. Series of guidance cut continues (8-10% vs 10-15% earlier) given inventory destocking by US customers leading to deferment of delivery timelines. Demand revival in the US to remain key for turnaround, even as the company is working to increase footprint of India EMS portfolio. Analysts of IIFL Capital Services steeply reduce EPS estimates by 40%/15%/2% for FY24/25/26 and await signals of turnaround.