Electronics manufacturing services (EMS) sector is showing signs of deteriorating accounting quality and weak cash generation despite strong reported earnings growth, according to a report by Ambit Capital. The study found a widening disconnect between profitability and cash flows, with rising working capital needs and aggressive capital expenditure leading to negative cumulative free cash flows across most companies, raising concerns about the sustainability of expansion.
Nuvama Institutional Equities recently noted that the majority of EMS firms posted improved margins y-o-y in Q3FY26. The sectoral revenue, EBITDA and PAT grew 13 per cent, 31 per cent and 39 per cent, respectively, it added.
Global brokerage CLSA has flagged rising risks for the EMS sector amid surging memory chip prices. It said the global memory industry is entering an early boom phase across DRAM, NAND and specialty memory, driven by AI-led demand and constrained supply growth from manufacturers.
Cash crunch
Ambit Capital report highlighted that accounting quality across EMS companies has weakened in recent years as cash conversion deteriorated and working capital cycles lengthened.
While revenue growth has been buoyed by structural manufacturing tailwinds and supply-chain diversification, increased inventory, receivables, and capital deployment have constrained operational liquidity. The findings suggested that the sector’s headline growth masks underlying pressure on cash generation, making capital efficiency and accounting discipline key variables for investors assessing long-term resilience.
Some of the key players in the segment are Dixon Technologies, Amber Enterprises, Kaynes Technologies, PG Electroplast. Avalon Technologies and Syrma SGS.
Among individual companies, Kaynes Technology drew the highest scrutiny on earnings quality, according to Ambit Capital. The report noted negative pre-tax operating cash flow relative to EBITDA and rising working capital intensity driven by higher receivable and inventory days.
‘Kaynes looks vulnerable’
Kaynes lags due to lower accounting score, low ID score (0), promoter presence in audit committee, auditor appointment practices, low audit fees and notable KMP churn, the report read.
While management initiatives such as bill discounting and supply chain financing are expected to improve collections, Ambit Capital stressed that cash conversion remains a key monitorable.
Ambit Capital viewed Amber Enterprises as the strongest performer on accounting metrics among EMS peers and the only firm within its zone of safety.
Avalon Technologies’ weaker cash conversion in recent years was primarily driven by higher working-capital investment linked to strong revenue growth and a rise in inventory days between FY20 and FY24. As per Ambit, this pressure is easing, with inventory days gradually declining and working-capital levels normalising.
For Dixon, Ambit flagged valuation concerns and risks tied to the expiry of mobile PLI incentives, emphasising thin margins, but high ROCE, driven by high asset turns and operating leverage. CLSA has downgraded Dixon from outperform to hold at a lower target price of 12,100.
Despite these concerns, the sector continues to benefit from strong demand visibility and manufacturing incentives. However, Ambit Capital cautioned that sustained expansion and ongoing working capital investments are likely to keep free cash flow generation subdued in the near term. Investors need to track accounting quality, governance standards and capital efficiency as key indicators of whether the sector’s rapid growth can be maintained on a durable financial footing.
Published on February 20, 2026
