Pros and Cons of Investing in Kaynes Technology

Kaynes Technology is leading end-to-end and IoT solutions-enabled integrated electronics manufacturer in India.

The company has garnered over three decades of expertise in providing comprehensive Electronic System Design and Manufacturing (ESDM) services.

It provides conceptual design, process engineering, integrated manufacturing, and life-cycle support for major players in the automotive, industrial, aerospace and defence, outer-space, nuclear, medical, railways, Internet of Things, and other segments.

The company specialises in the assembly of complex PCBs, ensuring high-quality and precision.

In this editorial, we will explore the pros and cons of investing in the stock of Kaynes Technologies.

Pros

#1 Big Semiconductor Venture

In November 2023, Kaynes Technology raised Rs 14 bn to set up a semiconductor OSAT (outsourced semiconductor assembly and test) manufacturing and compound semiconductor facility in Telangana.

The OSAT will be established under the umbrella of Kaynes Semicon, a subsidiary specifically created by Kaynes Technology to spearhead its entry into the OSAT/ATMP (assembly, testing, marking, and packaging) services.

With an investment of Rs 28 bn, the facility is set to occupy a 40-acre plot in the Ranga Reddy district of Telangana. This facility is designed to be a world-class plant, incorporating state-of-the-art technology and machinery.

Additionally, Kaynes Semicon will collaborate with IIT Bombay to establish an R&D centre focused on package research.

Then on 2 September 2024, Kaynes Semicon received approval to set up a semiconductor unit in Sanand, Gujarat. The proposed unit will be set up with an investment of Rs 33 bn. The fabrication unit will have the capacity to produce 6.3 m chips per day.

The chips produced will cater to a variety of applications which include segments such as industrial, automotive, electric vehicles, consumer electronics, telecom and mobile phones, among others.

50% of the investment, which is Rs. 16.5 bn, will come from the central government, 20% from the Gujarat government, which is Rs 6.6 bn, and the remaining 30% of the investment, which is Rs. 9.9 bn will be made by the company. Kaynes raised funds in December last year for the same.

#2 Trump Effect

Kaynes Technology stands poised to benefit from Donald Trump presidency, as his pro-India and anti-China stance aligns well with the company's strengths in electronics manufacturing.

The victory could intensify the China+1 strategy, which encourages global companies to diversify supply chains away from China and into countries like India.

As an established electronics manufacturing leader in India, Kaynes Technology is strategically positioned to capture this redirected demand, especially in the Electronic Manufacturing Services (EMS) space.

As an end-to-end, IoT solutions-enabled electronics manufacturing company, Kaynes has built a robust foundation in Electronic System Design and Manufacturing (ESDM) services.

Its expertise spans automotive, industrial, aerospace and defence, IoT, and IT industries, giving it a broad reach into sectors likely to grow under a Trump administration that promotes "America First" policies with a preference for partnerships outside China.

The company can readily scale production in high-demand areas like smart meters, consumer electronics, and even aerospace, meeting the demands of a potentially expanded client base.

With China+1 strategies gaining momentum, Kaynes' expertise in advanced IoT solutions and electronics manufacturing could attract US companies looking for reliable partners in India.

#3 Good Financials

Kaynes Technology's revenue grew at a CAGR of 37.7% from FY20 to FY24, while its net profit grew at CAGR of 79.9%. The company has maintained good financial health, with an average return on equity (RoE) of 10.8% and return on capital employed (RoCE) of 24.1%.

In FY24, its revenue and net profit grew 60.3% and 92.5% annually and generated Rs 701 million (n) cash flow from operations. The company has a low amount of debt on its books with an interest coverage ratio of 5.1.

It has a substantial order book - more than Rs 30 billion (bn) set for execution over the next 18-20 months. This provides good revenue visibility for its growth trajectory.

Cons

#1 Extremely Challenging Business

The company's core business is very competitive. Kaynes Technology has done well considering its relatively small size but it is still not an industry leader as far as technology is concerned. It's semiconductor venture is still in the early stages.

All this could change in the future as the company moves up the value chain. As the company scales up and starts designing and manufacturing more high-end products, it will also have to compete with large multinational corporations.

It's return ratios have fallen over the last two years. This is also an outcome of the complexities and fierce competition in the high tech space.

#2 Very High Valuations

No matter how good the fundamentals of the business may be, investors who may be interested in considering the stock should pay close attention to its valuation ratios.

The stock's price to earnings (PE) ratio and price to book (PB) ratio at the time of writing are 151.7 and 14.2, respectively. These numbers point to the fact that the stock's valuations are very high.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...