EMS cos bear brunt of rising costs, wage hikes, rupee fall

CHENNAI: Electronics manufacturing services (EMS) companies saw a sharp increase in costs during Q4FY26, as raw material cost inflation, extended working capital cycles, wage hikes and rupee depreciation squeezed margins. Prices of memory modules surged on the back of global AI-driven demand, while the West Asia conflict pushed up cost of key inputs such as copper laminates and increased logistics expenses. Higher inventory levels and the sector's heavy reliance on imported components further intensified cost pressures.

Two of the sector's largest players saw profits decline despite strong revenue growth. Mobile-heavy Dixon Technologies Q4 profit after tax fell 36% on a yearly basis, hit by softer demand, inventory rationalisation by customers, memory price inflation and geopolitical disruption. The company's margins are expected to be under pressure in FY27 as mobile PLI, which contributed Rs 250 crore in FY26, expired. Atul Lall, managing director of Dixon, in the earnings call, said margin will be slightly under pressure but guided a 40-50 basis point margin expansion after its backward integration.

Kaynes Technology's Q4 PAT declined 21% from geopolitical risks, leading to customer deferrals and a 90% order drop from a major EV two-wheeler customer, where it was the sole supplier. Amber Enterprises, despite profit growth in Q4, guided for 50-100 basis points of margin compression in FY27, citing minimum wage hikes in Haryana and Uttar Pradesh, commodity price inflation and currency depreciation.

Syrma SGS bucked the trend with its Q4 PAT growing 67%, driven by its diversified B2B segment mix and increase in its original design manufacturing business from 12% to 17% of revenue. Avalon Technologies' Q4 PAT grew 69.5%, aided by its US subsidiary.

Analysts expect the pressure to persist in the first half of FY27, with recovery likely in the second half. Kranthi Bathini, equity strategist at WealthMills Securities, said margins are expected to contract in the short to medium term due to inflation, geopolitical tensions and supply chain concerns. "The increase in cost of key raw materials and higher inventory and logistics costs are headwinds, but it is too early to gauge the full impact. Companies are expected to improve margins in the next couple of quarters," he said.

Chirag Jain, deputy head of research at Emkay Global Financial Services, said some companies have been conservative with guidance, which has driven these concerns. He added that continued demand, global supply chain diversification to India and policy support offer significant growth opportunities.

"EMS companies still have levers to improve margins with better segmental mix, operating performance and increasing backward integration," he said.

Chanpreet Singh, founder of investment advisory firm AltQube, noted that the EMS sector's pain was sharper than the broader market, with Nifty50 Q4 PAT growth at 8-9%. "EMS aggregate profits declined despite 30%-plus revenue growth. This is a growth-tax quarter with scale without earnings translation," he said.