Kaynes Technology has execution superiority in a favourable ecosystem. Buy for target price of Rs 2850: HDFC Sec

Execution superiority in a favourable ecosystem

Kaynes Technology (Kaynes) is one of the prominent players in electronics system design and manufacturing (ESDM) services with three decades of experience (mainly in B-B). It serves various industries such as automotive, industrial, aerospace, defence, outer space, nuclear, medical, railways, IoT, and IT. Kaynes is one of the key beneficiaries of the GoI’s focus on the ‘Aatmanirbhar Bharat’ initiative along with the global need of ‘China+1’. COVID was an inflection point for the ESDM industry and India has seen a massive trend change thereafter. Top ESDM players have seen revenue CAGR of 14%-33% over the last three years, and Kaynes has clocked 45% CAGR. The industry is expected to clock >30% CAGR over FY22-27E to reach INR 6trn, and Kaynes aims to grow ahead of the industry.

We model a 42% revenue CAGR for FY23-26E to INR 32bn in FY26E (7x of gross block). Kaynes has a superior operating margin (14-15%) and RoE (c.20%) metric among peers given B-B products, focus on value-added products, scale of operation, etc. Besides traditional business, Kaynes has announced its forays into OSAT (phase-1 in Telangana, proof of concept by Apr’24, phase-2 in Karnataka), whose benefits will begin from FY25 onwards. Major benefits will be back-ended but considering its potential to achieve >INR 30bn revenue with c.18% EBITDA margin at full efficiency (with both phases), we assign INR 23bn value in our SoTP (with discounting of 18%). We value the traditional business at 45x P/E on Dec-24 EPS and add INR 400/share value of OSAT (link). We initiate coverage on Kaynes with a BUY rating and a TP of INR 2,850.