Outlook on EMS sector: Avalon & Kaynes could give 20-40% return in 2024
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Three EMS players namely Kaynes, Avalon, and VVDN entered into Transfer of Technology (ToT) licensing with the Central government for the development of Advanced Computing (CDAC) for developing ‘high performing computing servers (HPC)’.
The supply chain has still not come up in India and EMS players are dependent on component imports. The government has recently given approvals for defence acquisitions/procurements amounting to ~INR78b.
In the long term, combined revenue for the MOSL EMS coverage basket is poised to register a 38% CAGR over FY23-26E, aided by an improvement in high-value product mix (box builds) and increasing order flows from high-margin industries such as A&D, Clean Energies, Industrials, etc.
Consequently, combined EBITDA margin is likely to expand by a few basis points more to reach ~14.0% by FY26, with EBITDA CAGR of ~40% to reach INR19.8b over FY23-26 from INR7.3b only in FY23
The Jul-Sep quarter is a seasonally weak period for the EMS industry.
However, 2QFY24 witnessed a strong growth trajectory with minor roadblocks in the form of margin pressure due to company-specific factors.
EMS companies registered a strong revenue growth of 29% YoY, driven by healthy order inflow, up 54% YoY and 15% since Mar’23 (order book growth excludes Dixon and Amber).
The order book-to-bill ratio for the basket (excluding Dixon and Amber) has been stable at 1.9x for the last three quarters.
EBITDA margins, however, contracted by 30bp YoY/60bp QoQ. The major drag was on the gross margin for the EMS basket, which declined 550bp YoY/160bp QoQ.
Overall, the Indian EMS industry is witnessing strong
