First red flags for electronics firms as Kaynes goes under the lens

Brokerage Kotak Securities’ ratings on the company this month have had a cascading effect on the broader industry. Since December 1, shares of Dixon, Syrma and Kaynes have fallen 11-30% as analysts highlight problems with cash flow, availability of working capital and the ability to expand production to receive government incentives.

A Dec. 3 note from Kotak Securities reported “vague accounting” of revenue from one of Kaynes’ acquisitions and “inconsistencies” in related-party transactions. The note also questioned whether the company’s current operating cash flow would allow for planned capital expenditures on new projects.

Despite investor confidence being weak, analysts remain optimistic in the long run as India’s four largest electronics firms have maintained the exponential returns they have delivered to investors since their listing.

Following Kotak Securities’ rating last week. Companies such as JM Financial and JPMorgan gave similar signals, raising concerns about Kaynes’ financial disclosures and operating cash flow. They raised questions about the company’s accounting inconsistencies and whether it had enough capital to grow at the pace it intended.

On December 5, Kaynes filed a response with the BSE acknowledging that related party transactions were “misdisclosed” in its financial statements. And on December 8, company management, headed by vice president and founder Ramesh Kannan, addressed these concerns in a call with analysts.

But investors seemed uneasy. Shares of Kaynes fell 10.5% on Wednesday and recovered 3.5% on Thursday. Overall, Kaynes’ share price is down 30% since December 1 and 44% from its 52-week high.

Industry is under stress

So far, electronics manufacturing services firms have relied heavily on building scale driven by central and state government incentive schemes. This has worked very well so far for both companies and investors. Kaynes has delivered a 10x return to investors over three years since its IPO in November 2022. Even now the share price is at 5.4x since listing. The 30-share BSE Sensex is up 37% during this period.

Similarly, Dixon, Amber, and Syrma have delivered returns to investors of 6x, 5x, and 2.5x, respectively, since their listings in September 2017, February 2018, and August 2022.

Now, a new set of incentive programs aims to boost ingredient production, which will require these companies to invest in building factories before they can get those sauces and reap the rewards. Analysts are now questioning whether the sector can really make such investments.

“We note management responses to our report; however, some issues related to intangible accounting and increased working capital remain unclear. We believe generation of positive OCF (operating cash flow), improvement in internal controls, and timely implementation of PCB (printed circuit board) and Osat (outsourced semiconductor assembly and testing) expansion in FY2026 will be crucial,” Kotak Securities analysts Deepak Krishnan said in a second note by Aditya Mongia on Dec. 9. Naman Jain and Kartik Kohli.

“There was no change in fundamental data on revenue and margins, but one of the key concerns for the stock has been the expansion of working capital and receivables post-2Q,” JPMorgan brokerage analysts Bhavik Mehta and Ankur Rudra added in a note.

The sector is, of course, capital intensive. On November 14, Mint All of India’s leading electronics companies, including the privately held Tata Electronics, are pursuing acquisitions to enter component manufacturing and other sub-segments that are better rewarded in electronics, it said.

Concerns about Kaynes have had a cascading effect on the entire electronics manufacturing services sector. Since Dec. 1, Dixon Technologies, the only major EMS company, saw its share price fall 15% before recovering 5.3% on Thursday. Shares of Syrma SGS and Amber Enterprises have fallen 10% and 8%, respectively, over the last nine business days.

So at the heart of the issue are questions about the ability of EMS companies, which rely heavily on high-volume, low-value electronics, to generate sufficient operating cash flow to invest in their businesses.

long term outlook

In response to a survey sent by MintKaynes Technology’s chief financial officer, Jairam Sampath, reaffirmed his assertion from the previous quarter’s earnings release, saying: “We remain committed to achieving positive operating cash flow by March 2026.”

“Kaynes has always ensured that new projects are implemented. Among various organizations given capital support approval by the government, we were the first to produce and ship ICs (integrated circuits) made in India,” he said. “Similarly, significant progress has been made in both Osat’s new projects and HDI/Multilayer PC (printed circuit) Board manufacturing. We have taken into account comments from various individuals during our media and analyst interactions and are confident of delivering the desired improvements in each of the key issues facing the business.”

Sampath added that the company “expects to generate higher revenues in non-industrial sectors such as railway electronics, aerospace, electric vehicles, automotive, etc., which will lead to an increase in ESDM (electronic system design and manufacturing) revenues to offset Kaynes’ smart meter revenues.”

The company also plans to start supplying packaged chips from its Osat plant in Sanand, Gujarat, this fiscal. But he denied any need to raise more capital, at least in the near term.

In this regard, analysts said that despite the concerns, Kaynes can remain a stable company for investors in the long term.

“The company’s overall business model is solid and there is no reason for Kaynes to fail at any stage when it comes to expansions. It may consider raising more funds for future acquisitions or entering more new categories,” said Harshit Kapadia, vice president at brokerage firm Elara Capital. “Overall, it will be important to see if it can actually meet tighter internal controls on financial reporting and positive operating cash flow guidance this financial year.”

“We maintain OW (overweight) and expect improved receivables and NWC (net working capital) to be key drivers for the stock in the next two quarters,” JPMorgan’s Mehta and Rudra said. he added.