Can EMS Cos Continue Their Stellar Growth For Next 3-5 Years? Will Reciprocal Tariffs Hit EMS Space?

Summary

In this discussion, executives from Dixon Technologies and GES Technologies delve into the EMS sector's impressive growth, with Dixon posting 40-45% revenue growth over five years and GES projecting a 40-50% CAGR. Both companies aim to sustain this momentum through strategic expansions into global markets, backward integration, and new revenue drivers like semiconductor assembly and PCB. While facing challenges like potential US tariffs, the executives express confidence in India's competitive edge due to lower manufacturing costs. They also highlight plans for future growth, including acquisitions and equity fundraising to maintain their upward trajectory.

Takeaways

• 😀 Dixon Technologies has seen consistent revenue growth of 40-45% over the past 5 years, with a positive outlook for continued growth, driven by both domestic and international markets.
• 😀 KES Technologies has experienced a strong 62% revenue CAGR over the last 3 years, with a 165% profit growth, and is optimistic about its future prospects.
• 😀 EMS (Electronics Manufacturing Services) stocks are gaining attention as the sector has growth opportunities, with analysts upgrading key companies like KES Tech, CMA SGS, Dixon, and Amber Enterprises.
• 😀 Dixon Technologies is confident it can maintain a 35-40% annual growth rate for the next 3-4 years due to expansion plans and backward integration, which will boost both revenue and margins.
• 😀 Dixon has successfully increased its return on equity (ROE), with recent reports showing a 42% ROE, and plans to maintain or improve it despite ongoing expansions.
• 😀 KES Technologies aims for a 40-50% CAGR over the next 3 years, particularly with new revenue streams from semiconductor assembly and PCB manufacturing.
• 😀 KES Technologies is also focusing on expanding its global reach and preparing for future geopolitical shifts to ensure sustainable long-term growth.
• 😀 Smart meter orders are expected to drive significant growth in the coming quarters, with the forecast of doubling deliveries in the next year, contributing to overall positive revenue growth for the sector.
• 😀 PCB projects are expected to generate significant revenue starting from the fourth quarter of FY26, with capital subsidies playing a key role in accelerating growth.
• 😀 Reciprocal tariffs between India and the U.S. may pose risks for the EMS sector, but Dixon Technologies feels that India still has a competitive advantage due to lower production costs and the ongoing tariff disparity with China and Mexico.

Q & A

What is the revenue growth of Dixon Technologies and KES over the past few years?

Dixon Technologies has experienced a revenue growth of about 40 to 45% over the last five years, while KES, which listed in 2022, has had a CAGR of about 62% in revenue growth over the past three years.

Can Dixon Technologies sustain its growth and return on equity (ROE) over the next 3 to 5 years?

Dixon Technologies is confident about maintaining a growth rate of 35 to 40% annually for the next 3 to 4 years. The company believes that focusing on backward integration will not only sustain growth but also potentially expand margins and strengthen their return on equity (ROE).

What is the expected revenue growth for KES over the next 3 years?

KES is confident about achieving a 40 to 50% CAGR in revenue over the next three years, driven by expansions in PCB and semiconductor assembly, with a focus on improving return on capital (ROC) by enhancing working capital management.

What are the expected challenges and opportunities for the EMS sector in the next few years?

The EMS sector is poised to see significant growth, but companies like KES are preparing for challenges related to geopolitical factors and market corrections. To mitigate risks, they are expanding geographically and enhancing their technology capabilities to ensure sustained growth beyond FY28.

How has the order activity been in Q4 for the companies discussed, particularly for smart meters?

Order activity for smart meters has accelerated, with a strong inflow of orders expected to lead to a good Q4 performance. The companies are anticipating a significant increase in smart meter deliveries next year, with expected growth in the 25 to 30% range quarter-on-quarter.

What are the timelines and incentives associated with KES's PCB project?

KES expects to start receiving significant revenues from its PCB project in the fourth quarter of FY26. The company is factoring in a 60% capital subsidy for the project, which will help speed up its execution.

How does the tariff situation in the US affect EMS companies, particularly in light of India's growing electronics exports?

India’s electronics exports to the US have been growing, but India's share remains small compared to China and Mexico. The implementation of reciprocal tariffs may not significantly affect India’s competitive advantage, as India’s electronics exports are still relatively low in tariff terms compared to those of China, and India's wage disparity with the US remains an advantage for manufacturing.

What is Dixon Technologies' exposure to the US market and how does the tariff situation affect it?

Dixon Technologies' exposure to the US market is relatively small, with only about 5% of its revenue coming from the US. Despite the US tariff situation, Dixon believes it will maintain a competitive advantage over China and Mexico due to India’s lower wage rates and favorable tariff terms.

What is the role of government support in the growth of the EMS sector in India?

The Indian government's initiatives, such as the Make in India push and duty reductions on components, have played a crucial role in driving growth in the EMS sector. These measures are expected to continue supporting the sector's growth, even as some challenges like tariffs arise.

How do companies plan to tackle potential risks related to geopolitical factors and supply chain disruptions in the future?

Companies in the EMS sector are aware of the risks posed by geopolitical tensions and supply chain disruptions. To mitigate these risks, they are diversifying their geographical presence, expanding into new technologies, and preparing for potential challenges, including changes in tariffs and international relations.