The once-thriving sector that supported the ambitious “Make in India” initiative is now encountering significant challenges, with declining margins and reduced growth rattling investor confidence.
Electronics manufacturers, who produce a wide array of products from Samsung smartphones to air conditioning systems, are experiencing a notable downturn after several years of remarkable gains. Companies like Dixon Technologies India Ltd. and Kaynes Technology India Ltd. have seen their shares plummet over 15 percent this year, lagging behind the broader market’s performance.
This downturn signifies a crucial shift for a sector that was once pivotal to the optimistic forecasts surrounding India’s manufacturing growth. While businesses are ramping up their investments, some investors are beginning to question whether demand in the market is matching the surge in capital influx. Elevated valuations, increased competition, and the conclusion of government support programs are amplifying concerns.
This current trend follows a period of impressive gains, driven by the belief that India could emerge as a manufacturing competitor to China. This excitement, however, also propelled valuations to new heights, with most companies in the sector trading at over 50 times their one-year forward earnings, more than twice the rate of the NSE Nifty 50 Index. In contrast, Dixon’s counterparts in Taiwan, Hon Hai Precision Industry Co. and Wistron Corp., are trading at approximately 11 to 12 times future earnings.
Over the past two calendar years, stocks like Kaynes have skyrocketed 888 percent, while PG Electroplast Ltd. and Amber Enterprises India have surged by 771 percent and 291 percent, respectively.
However, sentiment is shifting, as Wall Street analysts adopt a more cautious stance. Jefferies recently cautioned that the risk-reward balance for Dixon appears unfavorable, maintaining an underperform rating. Additionally, Morgan Stanley has downgraded Dixon’s stock to a sell rating. Data from Bloomberg indicates that the sell-to-total recommendation ratio for Kaynes has reached its highest point since the company’s listing in 2022.
The change in sentiment is partly attributed to the impending expiration of the government’s production-linked incentive scheme, a critical component of Prime Minister Narendra Modi’s strategy to boost manufacturing. Although the government has not publicly mentioned any extensions, reports suggest that Modi may allow the program to lapse due to underwhelming results.
Dixon is expected to face challenges when the incentives for mobile phone manufacturers expire in the fiscal year ending March 2026.
In response to market pressures, some companies are pursuing upstream expansions by acquiring suppliers, which raises concerns among investors about potential long-term cost increases. Kaynes plans to invest ₹3,400 crore ($397 million) in a semiconductor assembly facility, while Amber has committed up to ₹2,400 crore over five years for its electronics segment.
Furthermore, other sectors that were once seen as vital to the manufacturing renaissance are also struggling this year. This includes shares of some renewable energy companies, such as solar panel and battery manufacturers, along with certain auto component suppliers. Recently, Foxconn Technology Group has instructed hundreds of its Chinese employees at iPhone plants in southern India to return home. Though India’s manufacturing sector is still poised for considerable growth, the uncertainty surrounding market demand has led many investors to adopt a more cautious approach.
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