A long-term growth story in the making; Initiate on Amber (Buy) and Dixon (Neutral)

As India moves away from import of electronics to domestic manufacturing, we anticipate a paradigm shift in the growth of its home-grown EMS (electronics manufacturing services) companies. Under the "Make in India" program, we expect the recent policy boosters for electronics and component manufacturing in India to first support assembly, but long-term success will depend on developing a globally competitive supply chain. The key advantages India brings are a large domestic market and low manpower costs. We initiate on India's two largest EMS players:

Amber Enterprises (Buy, 12m TP Rs3,950, 45% upside) – The Specialist: We estimate that India's air conditioning market will expand from US$4bn currently to US$10bn by FY26E, implying a 14% CAGR. Through acquisitions, Amber has backward integrated into components and other AC applications. Import substitution and Production-Linked Incentives (PLI), coupled with export opportunities, provide strong growth prospects for the company. Assuming a 25% revenue CAGR over the next 5 years and improving ROCE (from 15% in FY20 to 22% in FY25E), we see Amber's market share moving from 23% (as of FY20) to 31% by FY25E.

Dixon Technologies (Neutral, 12m TP Rs4,320, 6% downside) – The Generalist: Dixon is India's largest EMS for electronics, lighting, mobile phones, security systems and washing machines. We see significant growth opportunities for Dixon under PLI and import substitution. The company addresses a market of US$36bn which we expect to grow at a CAGR of 12% and reach US$73bn by FY26E. It is also a major beneficiary of the "Make in India" push across products. While the shares are up 314% over the last 12 months and trading at a FY23E P/E of 56.5X (vs. global peers at 11.8X), we believe Dixon's strong growth and returns profile (we expect a revenue CAGR of 42% over FY20-26E and ROCE of 30%+) warrants premium multiples to sustain, but we see limited upside from current levels.
- Goldman Sachs