Kaynes Tech Shares Jump 15%, Defying Market Skepticism After Correction

Shares of Kaynes Technology experienced a significant turnaround, climbing 15% after a prolonged period of correction. This surge challenges market concerns about potential flaws in the company. The upswing was fueled, in part, by a positive assessment from Elara Capital.

Elara Capital suggested that worries regarding accounting practices and cash flow generation were excessive and did not impact the company's long-term growth prospects. Kaynes Technology's stock has risen for three consecutive sessions, reaching a high of Rs 4,385.5 on the BSE. This rebound follows a sharp 41% drop in the stock price over the previous three months, which was triggered by anxieties related to cash flow and alleged accounting inconsistencies.

Elara Capital's report played a significant role in Monday's rally, with the brokerage firm stating that the market's reaction was disproportionate to the issues raised. The brokerage maintained a 'Buy' rating for the company, while adjusting the target price downward to Rs 5,365 per share from a previous Rs 7,670. This revised valuation translates to a forward FY27E P/E of 42x, a decrease from the earlier 60x, aligning with the broader moderation observed in EMS (Electronics Manufacturing Services) industry multiples.

The recent 19% drop in stock value after the Q2FY26 results, compounded by an additional 22% decline due to corporate governance concerns, primarily stemmed from inconsistencies in how Kaynes accounted for goodwill related to the Iskraemeco acquisition, according to Elara. Company management clarified that a capital reserve of approximately Rs 522 million from the Iskraemeco purchase was offset against goodwill from another acquisition (Sensonic), resulting in a net recognition of about Rs 10 million.

The core of the debate, according to the brokerage, revolves around differing opinions on the valuation of intangible assets, specifically Rs 1.15 billion attributed to technical know-how. Elara Capital believes this valuation does not significantly affect the company's financials. The brokerage emphasized that the company's fundamental business remains strong, citing a robust 49% year-on-year growth in the order book during Q2FY26, reaching Rs 81 billion, which includes the Iskraemeco order book.

In FY25 (excluding Iskraemeco), the first half of the year contributed 33% to total sales, while the second half accounted for 67%. Elara anticipates a similar trend to persist in FY26. Furthermore, the brokerage projects that revenue from non-smart meter sources will surpass smart meter revenue in the future, indicating promising growth prospects for the EMS sector.

Elara's analysis assumes Kaynes will resolve its cash flow challenges by Q4FY26, aided by improvements in working capital cycles. That said, the reality is a bit more complicated. the brokerage also cautioned that the primary risk to monitor is the reduction in working capital days, as failure to achieve this could lead to a potential derating of the stock.

Despite the lowered target price, Elara considers Kaynes to be attractively valued, trading at 38x FY27E P/E, which is 10% below the EMS industry average. Elara concluded that while Kaynes needs to improve its disclosure standards, the recent concerns do not fundamentally alter its long-term growth potential.