Kaynes Technologies India Ltd.
16 October 2024
By Majid Ahamed
About the Company
Kaynes Technologies India Ltd is a prominent electronics manufacturing company specializing in comprehensive IoT solutions, founded in 2008. The company offers various services including conceptual design, process engineering, integrated manufacturing, and lifecycle support. Its expertise spans key sectors such as automotive, telecom, aerospace, defense, medical technology, IoT, industrial solutions, and electric vehicles (EVs). Kaynes Technology provides manufacturing services that include plastics, wiring, cable harnesses, magnetics, PCB assemblies, and complete box builds. Led by promoters Ramesh Kunhikannan, Savitha Ramesh, and the RK Family Trust, the company operates across four distinct business verticals:
- OEM turnkey solutions – box build
- OEM turnkey solutions – printed circuit board (PCB) assemblies
- Original Design Manufacturing (ODM)
- Product engineering and IoT solutions
Investment Rationale:
- The company is well-positioned to capitalize on the strong industry tailwind
- The company has strong R&D capability with diversified suppliers
- The company’s strong focus on backward integration positions it to grow its profits significantly
History of the Company:
Source: Investor Presentation
Business Segments:
OEM turnkey solutions – box build
This division is one of the highest contributors to revenue contributing around 49% in Q1FY25, where the company has a comprehensive manufacturing infrastructure that includes customized production lines for box building, integration, and testing. Their facilities are equipped for manufacturing cable forms and harnesses, as well as plastic molding and fabrication.
OEM turnkey solutions – printed circuit board (PCB) assemblies
This division is again the major contributor contributing more than 45% of the revenue of the company, the company offers comprehensive turnkey solutions for PCB assembly manufacturing. Their services include prototyping, sourcing (including supplier development for bare PCBs), test jig construction, and PCB process design.
Original Design Manufacturing (ODM)
In this segment, The Company provides a comprehensive range of services for product design and development, covering software, PCB, and mechanical design. They specialize in creating customized technology solutions through their Embedded Systems division, catering to high-speed, multi-layer, mixed-signal, and RF PCB designing, with the added benefit of two-stage design reviews.
Product Engineering and IoT Solutions
Currently, product engineering and IoT solutions contribute less than 2% of the company’s total revenue. The company’s product design and prototyping services focus on Design for Manufacturability (DFM), Design for Serviceability (DFS), and Design for Testing (DFT). These services aim to ensure optimal performance, reliability, and ease of manufacturing.
The company specializes in canvas-to-cloud Industrial Internet of Things (IIoT) solutions, enabling OEMs to upgrade legacy products with smart capabilities. This involves the integration of sensors, microprocessors, software, and connectivity technologies, facilitating the transformation of traditional systems into intelligent, connected ones.
Geographical Classification
Most of the Income comes from India which contributes 90% of the total revenue in Q1FY25, Europe Contributes 5% of the overall revenue, 3% from North America, and 2% in other Countries in Q1FY25.
Management
The company’s management is led by Mr. Ramesh Kunhikannan, the Managing Director, who has been with the company for over 20 years. He completed his education at the University of Mysore. His wife, Ms. Savita Ramesh, is the Chairperson, leading the company’s strategic initiatives and serving as one of the key drivers of the business. She holds a B.Com degree from the University of Madras.
The Whole Time Director & CFO, Mr. Jairam Sampath, is a PGDM graduate from IIM Ahmedabad and has over 30 years of industry experience. The CEO, Mr. Rajesh Sharma, is a qualified Chartered Accountant with over 27 years of experience in finance.
The Board of Directors is diverse, with members bringing expertise in law, finance, operations, and consulting, ensuring that the company is strategically well-positioned for growth and receives comprehensive guidance across verticals.
The promoters’ stake currently stands at 57.75%. However, a notable concern is the reduction in promoter holding due to the issuance of QIPs, which has decreased from 63.75% to 57.75%. While this is not a major concern at present, continued dilution of the stake could become a significant issue, especially considering the company’s capital-intensive nature, both in terms of fixed and working capital.
Investment Rationale – A Deep Dive
Strong Industry Tailwinds in Semiconductor Manufacturing
The company is well-positioned to capitalize on the robust growth in the semiconductor manufacturing industry, particularly in the Electronic System Design & Manufacturing (ESDM) space. This sector is projected to grow at a remarkable CAGR of 35% over the next 3 to 5 years, driven by the increasing demand for electronic equipment and a rising trend toward outsourcing in industries such as automotive, healthcare, IT, and defense. This presents a substantial growth opportunity for the company.
Expansion Strategy and Capacity Building
The company is currently on an aggressive expansion path, investing heavily in capacity growth and mergers and acquisitions (M&A) to achieve scale and backward integration. One of its major initiatives includes an investment of INR 3,400 crores to set up a new semiconductor plant in Gujarat. With a strong focus on research and development (R&D), the company is positioning itself to drive long-term growth in the semiconductor sector.
Focus on Backward Integration to Enhance Profit Margins
The company is intensifying its investments in backward integration, particularly in OSAT (Outsourced Semiconductor Assembly and Test) and PCB (Printed Circuit Board) facilities. This strategy, combined with a solid order book growth of 22% on a QoQ basis and a 3.5x increase in order inflows over the past 3 years, is expected to significantly boost profitability. The operating margin has already grown from 10% in FY21 to 14% in FY24, and with continued investments in capacity and backward integration, margins are set to increase further. The company’s capital-intensive nature offers substantial operating leverage, which will drive profits as scale increases.
Tapping into the Smart Meter Market
The company is strategically entering the smart meter market, which is gaining momentum in India through the Revamped Distribution Sector Scheme (RDSS) launched in July 2021. This scheme aims to replace 25 crore conventional meters with smart meters by 2025, creating a massive INR 63,280 crore opportunity for Advanced Metering Infrastructure Service Providers (AMISPs) and System Integrators (SIs).
The company already manufactures smart meters for clients like Iskraemeco and L&T at its Mysore facility and recently opened a new, fully automated Hyderabad plant with an annual capacity of 4 million meters. It has also acquired Iskraemeco India for INR 49.28 crores, enabling it to offer end-to-end services, including installation and after-sales support. Plans to expand the Hyderabad facility to a capacity of 10 million meters annually will support the company’s growth in the smart meter market, potentially including meters for other utilities like gas and water.
Risk/Threats
Higher Working Capital Days: Kayens operations are working capital intensive in nature as the company caters to industries with a diverse product mix and the company’s orders have specific timeframes, requiring it to maintain high inventory levels to execute orders on time. Raw material constitutes a major cost of ~75% of the revenue, however, with strong relationships and a wide supplier base, the company has been able to secure the raw materials. The company has a robust supply chain with 1700+ suppliers within and outside India. At present, average working capital utilization is moderate though with increasing order book position and new upcoming projects, including OSAT, PCB, and smart meters, the group’s working capital requirements are anticipated to increase in the near to medium term.
Revenue Concentration: Another risk the company faces is that of higher customer concentration where the top 10 clients are 69% in FY24 and top 1 client alone contribtues to 25% of the revenue, as losing any major client could badly impact the revenue for the company in the coming years.
High Competitive Intensity: The company is currently operating in the semiconductor space, especially in the OEM Box-Builidng and looking into backward integration, of course, the company is working in the R&D and designing which gives them a competitive edge, but more semiconductor players coming and setting up plants makes the company’s pressure in terms of revenue growth and margin expansion. The company must invest strongly in R&D and focus on backward integration to ensure the product quality remains the same and be an edge going forward.
Foreign Currency Risk
The company faces significant foreign currency risk as many of its suppliers are from foreign countries. While the company is diversified with over 1,400 suppliers, its reliance on the export market exposes it to potential risks from foreign currency fluctuations. If the company is unable to effectively hedge this risk, any significant changes in currency exchange rates could have a substantial impact on its gross margins. Therefore, it is crucial for the company to manage and hedge its foreign currency exposure to mitigate this risk.
Financial Analysis & Valuation
If we look at the ROE of the company, the company has steadily grown its ROE from 9% in FY20 to the peak in FY 22 where the ROE was around 22% and now in FY24 it has decreased drastically to 7%, the primary reason they were not able to have a higher ROE primarily due to the fact the company was raising more capital in proportional to pace in the growth of the profits where the Equity has increased 15 fold in the past 3 years, whereas the net income has only grown 5 fold in the past 3 years due to which there is a significant contraction in both ROE and ROCE.
Valuation
As of October 16th, the company’s market capitalization stands at ₹36,865 Crores, with a trailing twelve months (TTM) P/E ratio of 176. While the P/E ratio appears extremely high and richly valued, investors should note that the company has grown its EPS at a CAGR of over 35%. In the coming years, the industry is expected to see significant revenue growth, with the company projected to grow at a 40-45% CAGR. This growth will be driven primarily by a strong order book, M&A activity in the semiconductor space, increasing demand, government support, and a focus on backward integration.
Moreover, as the company’s operating leverage begins to take effect, earnings growth is expected to accelerate, with forecasts suggesting a 60-70% CAGR. This results in a PEG ratio of around 2.5 to 3, which still seems expensive in the short term. However, with a medium to long-term investment horizon (3 to 5 years), the company’s potential for massive growth in the smart meter sector, along with strong demand inflows and its focus on R&D, presents a compelling investment opportunity.
That being said, investors should exercise caution. The pace of growth in the order book and sales must be carefully monitored, especially in light of increasing competition. Additionally, changes in the global macroeconomic environment, or a shift of business back to China or other countries, could slow the company’s growth. Given the high capital intensity and revenue concentration, it is crucial for investors to track the company’s growth and execution closely, with particular attention to its R&D focus.