- Avg. turnover growth: 30%
- FY27 PE multiple: 41-43x
- FY28 PE multiple: 30-33x
The outperformers: Amber and Syrma set the pace
Amber Enterprises: the success story of diversification
Amber Enterprises has emerged as a standout, delivering results that significantly exceed both analyst estimates and peer performance. The company’s success story spans multiple business segments, demonstrating the strength of its diversified strategy.
Consumer durables division: RSC’s core contract manufacturing business (Room Air Conditioner) posted impressive growth of 26-27% with notable margin improvement, demonstrating robust demand despite broader consumer weakness in other categories.
EMS extension: Driven by inorganic expansions, the EMS segment achieved exceptional revenue growth and achieved double-digit margins for the first time. Management is committed to continued double-digit margins going forward, with inorganic acquisitions expected to be meaningfully accretive in the coming years.
“In terms of growth, looking to the future, Amber looks promising,” Sahay said, highlighting the company’s strong positioning in its verticals.
Syrma SGS: Order book momentum and margin expansion
Syrma SGS Technology delivered an impressive quarter that exceeded expectations, supported by fundamental improvements in business quality and future visibility.Symma’s most important achievements
- Strong quarterly results that exceed analyst estimates
- Order book growth of 10% consecutively, providing insight into turnover
- Margin guidance is increased by 100 basis points due to the improvement in segment mix
- Segment shift towards the higher margin industrial and automotive sectors, from consumer electronics
The strategic pivot towards industrial and automotive segments represents a crucial turning point for Syrma. These segments tend to have premium margins compared to consumer electronics, and their increasing contribution is expected to drive sustainable margin improvement over the medium term.
Performance after results: Syrma’s shares have already rallied significantly following the earnings release, leaving little room for an immediate valuation catch-up, according to Sahay’s analysis.
Avalon Technologies: The consistent outperformer
Avalon Technologies continues its track record of exceeding conservative guidance after delivering three quarters of consecutive outperformance. The company’s management maintains a deliberately conservative approach to guidance and consistently delivers results that exceed expectations.
Valuations: Premium but supported by growth
The EMS sector trades at a significant premium to broader market valuations, reflecting investor confidence in the structural growth story. However, Sahay emphasizes that companies that demonstrate superior order book growth and margin improvement are likely to continue to outperform current levels, justifying their premium valuations.
“Those who have outperformance in their order book and the guidance on margin improvement, I think they will also start to outperform from now on,” Sahay noted, identifying the key differentiators for investment selection within the sector.
Dixon Technologies: the comeback story
While PL Capital does not officially cover Dixon Technologies, Sahay provided perspective on the company’s recent performance and prospects given its significance in the EMS landscape.
Dixon’s valuation compression
The stock has undergone a significant price-to-earnings decline over the past five years, creating a potential margin of safety for investors. The correction in the third quarter was driven by below-estimate numbers, but management commentary suggests fundamentals will improve going forward.
Most important positive developments:
- Customer-specific issues are expected to be resolved next year
- The growth of the mobile segment is expected to accelerate in the future
- Margin improvement, especially in the mobile division
- Upturn in margins visible in the third quarter results, with management showing confidence in continued improvement on the trajectory
Management maintained expectations despite the third quarter miss and expressed confidence that the challenges in the mobile segment are temporary and that margin expansion remains on track. The combination of valuation compression and improving fundamental prospects has captured investor attention.
The story of structural growth: why EMS remains attractive
The sector’s tailwinds are driving growth
Advantages of the PLI scheme: Production Linked Incentive programs for electronics, IT hardware and telecom create sustainable demand
China+1 strategy: Global brands are diversifying production from China to India
Domestic consumption: Rising demand for consumer electronics and appliances in India
Improving the margin mix: Shift from consumer electronics to industrial and automotive segments, increasing profitability
Economies of scale: Leading players achieving operating leverage as volumes grow
Inorganic Growth: Strategic acquisitions that add capabilities and expand the addressable market
Investment strategy: picking winners in a premium sector
With the sector trading at high prices, Sahay’s framework for identifying outperformers focuses on three critical metrics:
The 3 pillars of EMS stock selection
1. Order book process: Consecutive order book growth provides revenue visibility and indicates an increase in market share. Companies that demonstrate consistent order book growth are better positioned to maintain growth momentum.
2. Guidance for margin improvement: Management’s ability to deliver on margin expansion promises separates leaders from laggards. The shift to segments with higher margins should translate into actual EBITDA improvement.
3. Execution track record: Consistent performance against guidance demonstrates operational excellence and management credibility. Companies that typically exceed conservative guidelines warrant premium valuations.
Risks to monitor
While the outlook for the sector remains constructive, investors should remain aware of potential headwinds:
- Valuation risk: With FY27 earnings of 41-43x, the sector offers limited margin for disappointment
- Execution risk: The margin expansion thesis depends on a successful segment mix shift
- Customer concentration: Some EMS players remain highly dependent on a few large customers
- Consumer demand: Weakness in consumer durables could impact volume growth for contract manufacturers
- Competition: New capacity additions across the sector could put pressure on pricing power
Selective opportunities in a warm sector
The EMS sector’s 30% growth rate and improving margin profile justify premium valuations, but stock selection is critical. Amber Enterprises offers the most attractive risk-reward for new investments, while Syrma and Avalon suit different investor profiles. The compression of Dixon’s valuations creates an interesting recovery play for opponents willing to bet on management’s turnaround story. As the industry matures, the winners will differentiate themselves through order book growth, margin execution and the ability to benefit from the structural shift to higher value segments.
#EMS #roars #growth #Amber #Syrma #lead #charge #margins #expand #Praveen #Sahay