Laptop import curbs lift EMS stocks but analysts warn of jumping the gun

In the June quarter, electronics became India's fourth-largest exported item overtaking chemicals, drugs and pharmaceuticals. This surge was led by mobile phones aided by 2020 PLI scheme

The government’s recent import restrictions on laptops, tablets, personal computers, and other similar data-processing units have led to a massive rally in stocks of related electronics manufacturers.

Investors lapped up shares of Dixon Technologies, Optiemus Infracom, Syrma, Netweb Tech, and HCL Infosystems, which surged up to 17 per cent over the last two sessions, riding on India’s push to promote domestic electronic manufacturing. In comparison, the S&P BSE Sensex and the Nifty50 were down around 0.4 per cent each. 

Analysts, however, warn that investors should not jump on the bandwagon until more clarity emerges on the likely benefit the development will bring to the sector. 

“The import curb may have a positive impact over a long period as more production-linked incentive (PLI) schemes and incentives get rolled out. But, this development will not translate into any major positive immediately for the companies. More such restrictions ahead can translate into much better opportunities. There is not much information known on the expected benefit yet. So, it is better to let the dust settle, more clarity emerge before taking an investment call,” said Gaurang Shah, senior vice-president at Geojit Financial.

The government’s decision to restrict imports of these items comes at a time when India is looking to establish itself as a major electronics manufacturer and reduce electronic imports from China.

Besides the import restrictions, the government has also approved the second phase of its PLI scheme for IT hardware with an outlay of Rs 17,000 crore.

Notably, in the June quarter, electronics became India’s fourth-largest exported item overtaking chemicals, drugs and pharmaceuticals. This surge was led by mobile phones, which have seen massive growth on the back of the 2020 PLI scheme.

“Now, other goods in the electronic space will get a boost from the import curbs and players such as Netweb and Dixon are already sensing the tailwinds”, said Divam Sharma, Founder and CEO, Green Portfolio PMS.

Meanwhile, Dixon Tech, in its June 2023 quarter earnings call, said the company will be a part of the second tranche of the IT hardware PLI scheme. It is also in advanced stages of discussions with some other large global brands to manufacture laptops and tablets.

Presently, it is making laptops for Acer India with an annual capacity of 500,000 units. The firm’s laptop and IT hardware segment revenue stood at Rs 86 crore in Q1-FY24 out of the total electronics manufacturing services (EMS) & mobile division revenue of Rs 1,795 crore.

Dixon also manufactures smartphones for brands like Motorola and Xiaomi, and has recently secured an order for Jio Bharat phones, which can bring in Rs 1500 crore worth of business for FY24.

Optiemus Infracom’s arm Optiemus Electronics is also actively considering applying in the latest IT hardware PLI scheme. It is aiming for production of up to 1.5 lakh laptop units a year, as per reports.

Besides the recent bumper listings of companies like Netweb Tech, IKIO Lighting and Cyient DLM signals that the EMS theme, which can entail products like mobile phones, consumer, industrial electronics to even medical devices, has been gaining traction with investors.

However, the sky-high valuations of these stocks remain worrying.

“The EMS theme is an attractive long-term investment option. But the recent high valuations of the stocks could be a concern and conservative investors may prefer to wait for a meaningful correction,” said Santosh Meena, head of research at Swastika Investmart. His top picks include Dixon Tech, Syrma, and Cyient DLM.

Notably, Dixon, Optiemus, Netweb and Syrma are trading at PE multiples of 55x to 138x their 12-month trailing EPS.