Turbulent times for electronics stocks?

The hum of a factory floor is often the quietest soundtrack of a revolution.

For India, that sound is no longer the rattling of steel, but the precise and rapid assembly of circuit boards and the testing of advanced electronics.

This shift marks the rise of the Electronics Manufacturing Services (EMS) industry, which has quickly become the undisputed lifeline of Indian manufacturing.

The goal is to transform the nation from an assembly center to a global manufacturing center.

The story of Indian industry’s revival is rooted in an aggressive geopolitical and economic realignment.

As global giants sought to rid their supply chains of a concentrated manufacturing base, India, backed by ambitious government policies, stepped in.

The centerpiece of this transformation is the Production Linked Incentive (PLI) program.

By linking incentives directly to incremental production, the PLI program has done more than just attract capital. It catalyzed an entire ecosystem.

According to estimates, the Indian EMS market will grow at a staggering pace of 28% per year until 2031. Meanwhile, electronics exports are expected to nearly triple over the next decade.

The real champions of this megatrend are not the global brands whose names are on the devices, but the domestic contract manufacturers who build them.

Companies like Dixon Technologies and Kaynes Technology aren’t just factory operators. They are the strategic partners that make this production destination possible.

Dixon, with his focus on scale and volume in mobile phones, consumer electronics and home appliances, has become a master of efficient, large-scale production. It executes the high-volume, fast-paced contracts that support the country’s growing domestic and export capabilities in mobile phones.

Kaynes Technology, on the other hand, shows the shift towards high-quality niche specialization. The model is less about mass market volume and more about small, high-quality products for complex electronic devices. Demanding industries such as aerospace and defense, automotive, medical and smart infrastructure are among its key customers.

Kaynes is actively moving up the value chain, penetrating high-margin segments such as Original Design Manufacturing (ODM) and even the advanced domain of semiconductor packaging (OSAT). The company strives for higher added value and more customer loyalty to have a competitive advantage.

That story is one in which Indian EMS companies are building the infrastructure for the next decade of global electronics consumption. They benefit from the shift in the world’s largest manufacturing economy, China.

Kaynes is also tapping into the electric vehicle revolution through battery management systems, the anchor for government deployment of smart meters. It is also a participant in the indigenization of defense and aerospace electronics.

With India importing nearly 90% of its printed circuit boards (PCBs), domestic players are under pressure to localize production.

Amber Enterprises, Dixon Technologies, Kaynes Technology and Syrma SGS are undertaking unprecedented levels of capital expenditure to reduce import dependence and expand the value chain.

The companies are creating local supply chains, which will ultimately strengthen margins and provide long-term resilience to business cycles.

EMS Stocks for Your Watchlist

So, the best of Indian EMS players is essentially a bet on India’s transformation from a service-oriented economy to a global manufacturing hub.

But the main hurdle for investors interested in EMS stock has been valuations.

The ‘growth stock’ image of these companies has given them premium valuations over the past three years. So much so that the shares were priced to perfection.

However, the failure to meet near-perfect execution expectations and concerns about corporate governance have led to a sharp correction in recent weeks.

For example, in Kaynes’ case, a major correction was driven by working capital concerns and specific accounting disclosures related to a recent acquisition.

The market typically punishes the complexity and resource drain inherent in exponential growth unless management is completely transparent and accounting disclosures are impeccable.

While these concerns warrant careful examination and clarification by management, they are a common feature of rapidly scaling companies that implement aggressive capital expenditures and acquisition strategies.

For the patient long-term investor, such corrections in fundamentally sound companies can be an opportunity in disguise.

Such corrections provide an opportunity to evaluate the quality of management, focus on the structural story and look for mispriced valuations.

Therefore, the recent correction in EMS stock should be seen as the shift in perception from ‘growth’ to ‘value’.

So keeping such stocks on your watchlist can work well in turbulent times.