Cash flow concerns remain for Kaynes Tech amid Q2 profit jump, chip sales

Kaynes Technology, an electronics manufacturer based in Bengaluru, has revised its timeline for achieving net cash positivity, now aiming for the end of the current fiscal year. This update follows a failure to meet earlier projections of generating free cash flow by September. In its recently announced second-quarter earnings, Kaynes reported a remarkable 35% increase in revenue, reaching ₹906 crore, along with a 61% rise in net profit after tax to ₹121 crore. However, the company faced a significant cash flow challenge, recording a negative cash flow of ₹218 crore, attributed to its aggressive growth strategy and a focus on acquisitions. One major move was the acquisition of August Electronics, a Canadian electronics manufacturing firm, for ₹347 crore earlier this year. While this acquisition is expected to enhance revenue and margins in the long run, its immediate impact on profitability has yet to be realized. Muthukumar Narayanan, the managing director, explained that they converted ₹60 crore of receivables into revenue during this quarter, which could improve cash flow if legacy receivables are expunged from the balance sheet. Analysts continue to regard Kaynes as a leading player in India's electronics manufacturing sector, despite the current cash flow concerns. Harshit Kapadia, vice-president at Elara Capital, pointed out that the company is in a robust growth phase, successfully expanding its customer base and product categories. He noted that the only pressing issue is the company's cash flow, which is under strain due to rapid growth. Investor sentiment around Kaynes' performance remains uncertain, as the company’s earnings announcement coincided with a market holiday. The real test will come when the market reopens and investor reactions become apparent. Additionally, a leadership change marks this quarter, with co-founder Ramesh Kannan transitioning to the role of executive vice chairman, while Narayanaswamy took over as managing director on September 24. Narayanaswamy remains optimistic, asserting that despite the current cash flow issues, Kaynes is on track to achieve an annual revenue of ₹4,500 crore with an EBITDA margin of 15.6% for FY26. Incorporated in its current form in March 2008, Kaynes specializes in the assembly, design, and manufacturing of enterprise technology infrastructure, including smart meters and printed circuit boards. The company is also set to benefit from the Union government's electronics components manufacturing scheme, planning to establish four factories in Tamil Nadu. Looking ahead, Narayanaswamy is confident that production volumes will increase significantly in the latter half of the fiscal year, leading to improved operating cash flow and profitability. Kaynes also shipped its first commercial multi-chip module from its semiconductor facility in Gujarat, further diversifying its revenue streams, which heavily rely on industrial electronics and automotive components.