Kaynes Technology India

ESDM player catering to various industries

Presence across the spectrum of electronics system design and manufacturing services

Kaynes Technology India (KTI) is an end-to-end and IoT solutions enabled integrated electronics manufacturing player, having capabilities across the entire spectrum of electronics system design and manufacturing (ESDM) services.

It has proven experience in providing 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 (IoT), Information Technology (IT) and other segments.

In FY2022, the revenue mix in terms of verticals it caters was 33.56% from automotive, 29.80% from industrial, 10.08% from medical, 10.35% from railways, 8.37% from consumer, 2.52% from Aerospace/Defence/Outerspace/Nuclear, and 5.32% from IoT/IT & others.

Based on the stage of services KIL provide to its customers its business operations is classified into verticals of 1) Box Build turnkey solutions for OEMs (OEM – Box Build); 2) Printed Circuit Board Assemblies (PCBAs) turnkey solutions for OEMs (OEM – PCBAs); 3) Original Design Manufacturing (ODM),and 4) product engineering & IoT solutions for making smart consumer appliances or devices IoT connected.

In case of OEM Box Build it undertake Build to Print or Build to Specifications of complex box builds, sub-systems, and products across various industry verticals and in case of OEM – PCBAs it undertakes turnkey electronics manufacturing services of PCBAs, cable harness, magnetics and plastics ranging from prototyping to product realization including mass manufacturing. In ODM it offersoriginal design manufacturing services in smart metering technology, smart street lighting, brush less DC (BLDC) technology, inverter technology, gallium nitride based charging technology and providing IoT solutions for making smart consumer appliances or devices IoT connected.

In its Product Engineering and IoT Solutions business, it offers conceptual design and product engineering services in industrial and consumer segments. Its services include PCB cladding or electrical schematics to embedded design and submitting proof of concept to prototyping. It also offers connected product engineering and solutions. It has a portfolio of hardware, software accelerators and proprietary sensors along with cloud platform-based service and solution offerings in asset tracking, remote device management and smart product development

Of FY2022 consolidated revenue, about 62.81% came from PCB Assemblies (OEM turnkey solutions), 28.15% from Box Build (OEM Turnkey solutions), 3.94% from ODM and 5.1% from product engineering and IoT solutions.

The company, as of June 30, 2022, operate, eight manufacturing facilities across India of which four manufacturing facilities [ Mysuru Units 1&2, Parwano (HP) and Manesar (Haryana)]engage in manufacture of SMT components and PCB assemblies and balance four facilities [Chennai, BengaluruUnit 1 &2, Selaqui (Uttarakhand)] are engaged in ancillary placement/assembling activities.

The issue

The issue comprises both fresh issue of equity shares by the company and offer for sale by promoter selling shareholders. Fresh issue involves issue of equity shares aggregating upto Rs 530 crore. And the offer for sale involves selling of equity shares numbering 5584664 [2084664 equity shares by Ramesh Kunhikannan (Promoter) and 3500000 equity shares by Freny Firoze Irani (Investor selling shareholder)].

On post issueexpanded equity, the holding of the promoter selling shareholders will decline to 63.77% and that of ISS to about 3.09%.

Object of the Issue

Of the net proceeds from the fresh issue, about Rs 130 crore will be used for repayment of debts, Rs 98.93 crore for funding capital expenditure towards expansion of existing Mysure and Manesar facilities, Rs 149.3 crore for investment in Kaynes Electronics Manufacturing, a wholly owned subsidiary that is setting up a new facility at Chamrajnagar, Rs 114.74 crore for working capital funding and balance for general corporate purposes.

The capacity expansion project at existing facilities at Mysuru and Manesar are expected to be completed by April 2023 and June 2023, respectively, and commercial production are expected to commence one month from completion of the project.

The new manufacturing facility set up by KEMPL (WOS) for manufacture of Electronic Manufacturing Services (EMS) at Chamarajnagar (Karnataka) is expected to commence commercial production by March 2024. The new facility will have capacity to manufacture 12.55 million PCB assemblies per annum and 516.06 million SMT component placements per annum. Overall, the company propose to expand its PCBA capacity per annum by 34.04 million across 3 locations.

Strength

ESDM player with end-to-end design and engineering capabilities enabled with IoT solutions. It offers series across entire customer value chain, i.e., design services, industrialization services, manufacturing services, product maintenance services and end of life services. Possesses Canvas to Cloud IIoT engineering capabilities and is well poised to meet the requirements of the sunrise industries.

The order book as of June 30, 2022, stood strong at Rs 2266.264 crore which translates into 3.21 times of its FY2022 revenue. The order book is to be executed over the next 18 months.

Has long-term relationships with a large customer base diversified across verticals and geographies. In Q1FY2023 it served 229 customers in 21 countries globally and multiple industry verticals such as automotive, aerospace and defence, industrial, railways, medical and IT / ITES.

Manufacturing facilities of KIL have advanced facilities to undertake high mix and high value addition products with variable or flexible volumes. Moreover, it is also strategically located across India in the states of Karnataka, Haryana, Himachal Pradesh, Tamil Nadu, and Uttarakhand close to customers and SEZs.

A diversified business profile both in terms of end user industry catered as well as market presence with sizeable export business. It exports to customers in 20 countries and about 19.99% of FY2022 revenue came from exports.

Strong industry tailwinds to capitalize on.The Indian ESDM market is expected to register a CAGR growth of 41.1% to Rs 5978 billion.

Weakness

Availability of key materials (electronic components, wiring harness, plastic partsand process consumables) and at reasonable price are crucial for profitable operations of the company. Thus, shortage of its key materials may escalate the price as well as disturb the production of the company impacting its profitability.

Significant exposure to cyclical automotive industry. Further, certain of its products used in fans such as BLDC motor controllers and switch gear electronics are typically sold in the peak summer months in India.

Ramesh Kunhikannan, the promoter, has pledged 1019999 equity shares (2.75% of post issue promoter stake) in favor of Canara Bank. Any exercise of such pledge by the lender or enforcement of such pledge could dilute the shareholding of these promoters, which may adversely affect the business and prospects.

Contingent liabilities as end of June 30, 2022, stood at Rs 97.01 crore.

Had negative cash flows from operating activities of Rs 7.113 crore in the quarter ended June 30, 2022.

Valuation

Consolidated sales for FY2022 were higher by 68% to Rs 706.25 crore driven largely by growth across all client verticals, i.e., automotive, industrial, medical, and railway. With the operating profit margin expanding by 360 bps to 13.3%, operating profit jumped up by 129% to Rs 93.67 crore. Eventually, net profit was up 328% to Rs 41.68 crore.

For the quarter ended June 2022, consolidated net profit was Rs 10.05 crore on sales of Rs 199.27 crore. As there are no consolidated figures for Q1FY2022, consolidated TTM numbers could not be calculated.

The consolidated EPS for FY2022 on expanded post issue equity based on the upper price is Rs 7.2 and, thus, the PE works out to 81.9 times of its upper price band of offer price.

In comparison the Syrma SGS Technology, Dixon Technologies and Amber Enterprises are quoting at a PE of 166.6, 141.4 and 62.1 times of their consolidated FY2022 EPS.