On 3 December 2025, the Indian stock market witnessed a corporate drama that would dominate headlines for days. Kotak Securities released a detailed report questioning the financial reporting practices of Kaynes Technology India Ltd (Kaynes)—a fast-growing electronics manufacturer that had become a market darling since its 2022 initial public offering (IPO). Kaynes' explosive growth story proves its status with 6.5 times increase in revenue from ₹420 crore in FY20-21 to ₹2,722 crore in FY24-25. The report alleged that the electronics manufacturer had employed aggressive accounting practices to artificially inflate its profits in the FY24-25 annual report. Following the release of the report, its stock price went down by around 30%, before bouncing back on Tuesday by almost 14%. The accusations centred on the Kaynes acquisition of Iskraemeco, a smart meter subsidiary, and raised red flags about related-party transactions, asset valuations and debt costs which painted a picture of either incompetence or deception.
Over the past three years, Kaynes has been transforming from a simple contract manufacturer into a more sophisticated player:
1. OSAT (outsourced semiconductor assembly and test): The company is building India's first private semiconductor packaging facility in Sanand (Gujarat). This involves taking raw silicon chips and packaging them into the final components that are used in phones, cars and computers.
2. PCB (printed circuit boards) Manufacturing: These are the green boards inside every electronic device. Kaynes is building a facility in Chennai to make advanced, multilayer PCBs—currently, India imports most of these.
3. Smart Meters: Through their acquisition of Iskraemeco (a Slovenian company's Indian subsidiary), the company has entered the business of making ‘smart’ electricity meters that can be monitored remotely—part of India's push to modernise its power grid.
The stakes could not have been higher. Kaynes had positioned itself as a champion of India's electronics manufacturing ambitions, expanding rapidly from automotive components into aerospace, defence, railways and semiconductors. It had raised ₹1,370 crore through a qualified institutional placement (QIP) in December 2023 and another ₹1,570 crore in June 2025 to fund its entry into semiconductor packaging and PCB manufacturing. We have covered it in detail here to be highlighted with link; problem regarding its cash-flows in that report.
Kotak Securities' Accusations & Kaynes' Responses
Kotak Securities presented four major concerns about Kaynes' fiscal 2025 financials, each suggesting that the company might be engaging in accounting gymnastics to conceal operational problems.
1. ‘Magical’ Profit at Iskraemeco
The first and most dramatic allegation involved Iskraemeco's contribution to group profits. According to Kotak's analysis, Kaynes claimed that Iskraemeco contributed ₹48.9 crore to consolidated profit after tax (PAT) in H2FY24-25, despite Iskraemeco's own standalone filings showing a full-year profit of only ₹0.6 crore. For this mathematics to work, Kotak argued, Iskraemeco must have suffered a massive loss of ₹48.3 crore in the first half of the year before acquisition, then suddenly achieved a miraculous 28% net profit margin in the second half after Kaynes took control. This volatility seemed suspicious for a hardware manufacturing business, suggesting either that the pre-acquisition losses were artificially inflated or that the post-acquisition profits were overstated.
The Kitchen Sinking Defence
The management's explanation for Iskraemeco's dramatic profit swing cantered on a standard but aggressive acquisition accounting practice known as ‘kitchen sinking’. Kaynes’ chief financial officer (CFO) explained that before the acquisition closed on 30 September 2024, the company had forced Iskraemeco to write off ₹50 crore worth of assets, including ₹44 crore of dead inventory accumulated over three to four years of product experimentation and ₹6 crore of other expenses. This clean-up created an artificial loss in the first half of the year. In H1FY24-25, when Iskraemeco was still operating independently before acquisition, the company generated only ₹8.5 crore in revenue while maintaining high fixed costs, resulting in a standard operating profit of just ₹2 crore. After subtracting the ₹50 crore in write-offs, the first-half loss came to ₹48 crore.
Once Kaynes took control in H2FY4-25, the business operated without the burden of these legacy liabilities. Revenue jumped to approximately ₹530 crore and, with the bad assets cleared from the books, the company generated ₹49 crore in profit.
The management corrected Kotak's margin calculation, noting that the actual net margin in the second half was approximately 9%, not the 28% that Kotak had estimated. A 9.7% margin is realistic and sustainable for a hardware manufacturing business, whereas 28% would have been extraordinarily high and difficult to defend.
This practice of absorbing all possible losses at once during an acquisition, often referred to as ‘taking a big bath’ or ‘kitchen sinking,’ is legal and even considered good practice by some acquisition specialists. The logic is straightforward: if you are going to recognise losses anyway, it is better to recognise them all at once before the acquisition closes so that future quarters show clean, growing profits.
Although critics argue that the practice can be abused to artificially depress pre-acquisition earnings and inflate post-acquisition performance, making the acquiring company's management look more effective than they actually are. But as long as the write-offs represent real impairments of actual assets, the accounting treatment is permitted under Indian Accounting Standards.
2. Goodwill Controversy and Conservative Accounting
The second concern involved accounting for the acquisitions themselves. Kaynes had acquired Iskraemeco and another company called Sensonic for a total consideration of ₹88.3 crore, recognising ₹114 crore in goodwill during the purchase price allocation process.
However, Kotak observed that the consolidated balance sheet did not show a corresponding increase in goodwill. Instead, it reflected a net negative adjustment of ₹1 crore alongside a ₹56.1 crore rise in general reserves. The analysts found this treatment ambiguous and potentially creative, noting that no additions appeared in intangible assets for contract or customer relationship-related items, despite the management's claims about acquiring valuable customer contracts. (When you buy a company, you often pay more than the value of its physical assets - factories, inventory, etc. This 'excess' usually goes onto the balance sheet as ‘goodwill’—essentially, you're paying for the company's reputation, customer relationships and future potential.)
The treatment of goodwill and intangible assets in the Iskraemeco acquisition proved to be one of the more technically complex issues, requiring management to cite specific paragraphs of Indian accounting standard (Ind AS) 103 dealing with business combinations. Kaynes had classified ₹115 crore of the purchase price as an intangible asset representing customer contracts rather than as goodwill. This classification mattered because goodwill sits on the balance sheet indefinitely unless the acquired business suffers a permanent impairment, whereas intangible assets with definite lives must be amortised or expensed over time, which reduces reported profits in future years.
The management's defence is that their approach was actually more conservative than the alternative. By identifying specific customer contracts acquired from Iskraemeco and valuing them at ₹115 crore, Kaynes is forcing itself to take an amortisation expense every year going forward which would lower future reported profits. If the company's intent had been to artificially inflate earnings, it would have classified everything as goodwill which does not require annual expensing. The identification of these contracts as separate intangible assets was permitted under paragraph 13 of Ind AS 103, which allows acquirers to recognise intangible assets separately from goodwill if they meet certain recognition criteria.
The detailed breakdown provided during the call showed the logic. For Iskraemeco, the net assets acquired were ₹19.87 crore and the consideration paid was ₹42.99 crore, resulting in a total amount of ₹ 62.86 crore. After recognising ₹115 crore in intangible assets for customer contracts, the net result was a capital reserve of ₹52.15 crore rather than goodwill.
For Sensonic, net assets were negative ₹5.82 crore and consideration was ₹45.30 crore, resulting in ₹51.12 crore that was recorded as goodwill since no specific intangible assets were identified. When netted, the two acquisitions resulted in a negative ₹1.03 crore adjustment which explained why the consolidated balance sheet did not show a large increase in goodwill.
The management explained that presenting capital reserve from one acquisition and goodwill from another separately would not provide relevant and reliable information to investors, so these amounts were netted off in accordance with paragraph 17 of Indian Accounting Standard 1, which requires entities to present information in a manner that is relevant, reliable and comparable. While technically defensible, this netting approach created opacity that made it difficult for outside analysts to understand what was actually acquired and at what value.
3. The Missing Related-party Transactions
The third red flag emerged from examining related-party transactions between Kaynes' subsidiaries. Iskraemeco's financial statements showed purchases of ₹180 crore from Kaynes Electronics Manufacturing during FY24-25, but Kaynes Electronics Manufacturing's own related-party disclosures made no mention of these sales. Additionally, Iskraemeco showed year-end payables of ₹320 crore to Kaynes Technology and ₹180 crore to Kaynes Electronics Manufacturing, along with receivables of ₹190 crore from Kaynes Technology, none of which appeared in the related-party disclosures of the parent entities. Such mismatches in inter-company transactions are classic warning signs of "round tripping" where companies create fake sales between related entities to artificially boost revenue.
The Related-party Transaction Confession
On the issue of mismatched related-party transactions, management made a frank admission that became the focal point of the entire controversy. They acknowledged that while all the transactions were properly eliminated in the consolidated financial statements as required by accounting standards, the disclosure in the stand-alone financial statements of one subsidiary had been inadvertently omitted. The root cause was a mid-year change in status. Kaynes Electronics had been classified as a regular vendor to Iskraemeco in H1FY24-25, but after the acquisition, it became a related party. The accounting software failed to tag the transaction correctly for disclosure purposes in the notes to the stand-alone accounts, even though the underlying accounting entries were correct.
Its CFO explained that this was essentially a software failure rather than a deliberate attempt to hide transactions. Its internal systems did not properly handle the transition when an entity flipped from being a third-party vendor to a related party mid-year. While the transactions were recorded in both entities' books and properly eliminated during consolidation, the specific disclosure requirement for the stand-alone financial statements was missed. The management promised to implement new software controls to ensure that contra-entries for related party transactions would be automatically flagged and disclosed, going forward.
This admission was both reassuring and concerning. On one hand, it suggested that there was no actual missing inventory or fake revenue, since the consolidation process had correctly eliminated the inter-company transactions and the final group-level profit and revenue figures were accurate. On the other hand, it revealed that a company with a market capitalisation of tens of thousands of crores and ambitions to become a global electronics manufacturer was relying on accounting systems that could miss as big a transaction as ₹180 crore simply because of a status change.
For a company managing dozens of subsidiaries and handling billions in revenue, such a fundamental control weakness raised questions about whether management had the operational sophistication to match their growth ambitions. It suggests internal controls haven't kept pace with the company's rapid growth. Its management acknowledged this, stating: "We will use software to ensure contra entries for RPTs are properly done going forward."
4. The 17.7% Interest Rate Mystery
The fourth major concern involved the company's borrowing costs and financial health. Kotak calculated that Kaynes' average borrowing cost in fiscal 2025 was a whopping 17.7%, far higher than the 8% to 10% that would be normal for a manufacturing company of this size. This extraordinarily high rate suggested either that Kaynes was desperate for cash or that lenders viewed the company as a risky borrower. Combined with negative free cash-flow of ₹1,040 crore and rising contingent liabilities that reached ₹520 crore or 18% of net worth in FY24-25 compared to ₹270 crore or 11% of net worth in FY23-24, the picture that emerged was of a company under significant financial stress despite reporting strong profit growth and might be hiding significant off-balance-sheet obligations that could materialise into actual liabilities under adverse circumstances.
The controversy over borrowing costs highlighted that analysts can reach dramatically different conclusions when dealing with off-balance-sheet financing arrangements. Kotak had calculated an average borrowing cost of 17.7% by dividing the total interest expense of ₹104.7 crore by the reported debt of ₹875.5 crore. The management countered that this calculation was fundamentally flawed because it ignored bill discounting, a common practice in manufacturing where companies sell their unpaid invoices to banks for immediate cash at a small discount.
The key issue is that bill discounting often appears differently in financial statements than traditional loans. When a company discounts a bill, the fee or discount is sometimes recorded as a cost of goods sold or another expense, rather than as interest expense. Meanwhile, the liability created by the arrangement may be categorised differently on the balance sheet or even off-balance-sheet entirely. If Kotak's calculation only looked at interest expense in the numerator but did not include all the bill discounting liabilities in the denominator, the resulting interest rate would appear artificially high.
The management claimed that when bill discounting volumes were properly included in the total debt base, the effective interest cost dropped to approximately 10% which is a normal and healthy rate for a growing manufacturing company in India. To support this claim, they pointed out that using Kotak's methodology, the FY23-24 borrowing cost would have been 25.3% which would have been absurdly high and should have served as a signal that the calculation method was flawed. The company also noted that the interest rate was closer to 12% on a closing basis, using year-end debt balances rather than averages
This technical dispute illustrated a broader challenge in analysing companies that use multiple forms of working capital financing. Supply chain finance, bill discounting, factoring and traditional bank loans all create obligations for the company, but they may be accounted for differently depending on the specific terms and structure of each arrangement. The management explained that much of its supply chain finance was actually funded by foreign banks at interest rates decidedly lower than domestic banks which could create situations where discounting receivables off the books actually improved the company's financial position rather than worsening it.
The management explained that the ₹250 crore increase in contingent liabilities stemmed entirely from the Iskraemeco acquisition and the resulting scale-up. Of this, ₹96.8 crore related to performance bank guarantees issued for Iskraemeco’s smart meter projects—standard requirements in utility and government contracting, where customers demand financial assurance that vendors will deliver on time and to specification. Another ₹132.5 crore comprised corporate guarantees extended to subsidiaries: ₹122.5 crore for Kaynes Electronics Manufacturing and ₹70 crore for Iskraemeco’s. These reflected normal parent-level support for funding needs within the group.
The CFO stressed that such contingent liabilities were routine for EMS and smart meter businesses, where large contracts typically require performance guarantees. Meanwhile, the ₹115 crore tied to bills discounted with banks—essentially receivables sold with recourse—remained broadly stable year on year and represented a potential obligation only if customers defaulted.
The management’s stance was that these contingent liabilities reflected business growth, not hidden risks. Performance guarantees would materialise only if the company failed to execute contracts, which they did not anticipate, while corporate guarantees were intra-group commitments that netted out on consolidation unless a subsidiary faced financial stress requiring parent support.
5. Intangible Assets Enigma: When R&D Becomes Capital
The controversy over Keynes' capitalisation of research & development (R&D) expenses represented one of the most technically nuanced aspects of the entire accounting dispute, touching on fundamental questions about when experimental work crosses the threshold from current expense to long-term asset. Kotak Securities had flagged that Kaynes capitalised ₹180 crore during FY24-25 as additions to technical know-how and intangible assets, representing 6.5% of the company's total revenue. To put this in perspective, the company had reported only ₹14.1 crore in total R&D expense, meaning it had capitalised approximately 94% of all R&D spending rather than expensing it through the profit and loss statement in the year incurred.
This aggressive capitalisation policy had profound implications for reported profitability. When a company incurs research costs as they occur, those costs reduce operating profit in the current period, allowing investors to see the true cash cost of developing new products and technologies. When a company capitalises those same costs as intangible assets on the balance sheet, current period profits appear higher because the expense is deferred and will only be reflected on the income statement gradually over future years through amortisation. Kotak's concern is that Kaynes might be capitalising routine operating expenses that should properly be recognised immediately, artificially inflating current profits while building up a pile of questionable assets on the balance sheet that might eventually need to be written off.
The management clarified that the ₹180 crore consisted of three components, each governed by different accounting rules. The largest, ₹115 crore, is related to customer contracts acquired through the Iskraemeco acquisition. These were not R&D costs but the fair value assigned during the purchase price allocation under Ind AS 103, which requires the valuation of identifiable intangible assets such as customer relationships, technology and contracts. The management argued that these contracts carried real economic value as they represented secured future revenues backed by long-standing relationships with utilities and government clients in the smart metering space.
Kotak’s confusion stemmed from the classification of these assets under ‘technical know-how’ rather than ‘customer relationships’. Kaynes’ management explained that the contracts are inseparable from the underlying technical competencies—design implementation, hosting infrastructure and communication protocols required to operate smart meter networks. The product’s complexity meant the commercial contract and its technical deliverables formed a single asset, justifying the classification under technical know-how.
The second component, ₹26 crore, comprised development costs associated with integrating Iskraemeco into Kaynes—specifically, adapting smart meter designs, upgrading platforms and creating new variants for broader markets. These costs were capitalised under Ind AS 38 because they met criteria such as technical feasibility, intent and ability to commercialise, availability of resources and measurable expenditure. They were distinct project-specific development efforts, not routine operations.
The remaining ₹39 crore was in-house R&D, the area that raised the most concern. The management acknowledged that classifying internal R&D involves significant judgement and can influence reported earnings. They, therefore, detailed their policy: research expenditures—early experimentation without defined product objectives—are expensed immediately; development expenditures—projects with a defined product, target customer and commercialisation pathway—are capitalised. Using the Kavach train-collision avoidance system as an example, the CFO noted that only once the project had a clear product definition and customer demand did capitalisation begin; amortisation starts only after commercial production begins.
This approach aligned with Ind AS, but the subjective boundary between R&D always carries financial implications. Classifying too early inflates profits; too late understates them.
The management then linked this to Keynes’ strategy. The company is transitioning from pure EMS manufacturing (characterised by low margins and customer-provided designs) to ODM, where Kaynes develops proprietary products and retains ownership of the intellectual property. ODM revenue has doubled from 10% to 20% over two years, giving Kaynes greater control over product architecture and margins. Capitalising on proprietary products is therefore both strategically and financially material, as it supports long-term differentiation. The Kavach system was cited as evidence of the successful commercialisation of capitalised development spend.
The concern was that Kaynes capitalised 94% of R&D spending—an unusually high ratio, far above most technology firms that expense the majority of R&D due to uncertainty of returns. Analysts noted that even semiconductor firms capitalize only in narrow situations like qualified software development.
The management’s defence is that Kaynes’ business model differs from speculative tech R&D. Projects are initiated only after clear customer interest—often with letters of intent or orders—significantly reduces technical and commercial risk, justifying higher capitalisation. Their development is driven by demand, not exploration.
It also emphasised that analysts were conflating acquisition accounting with ongoing R&D practices. The ₹115 crore from Iskraemeco was a one-time acquisition-related intangible, unrelated to R&D policy. Excluding it, the in-house capitalised R&D was just ₹39 crore—about 2.5% of revenue—well within industry norms.
Despite these explanations, the intangible asset issue remained one of the more troubling aspects of Kaynes' financial presentation. The company would need to demonstrate over time that the capitalised development costs were, in fact, generating the expected returns through successful product launches and customer adoption. Investors would be watching closely for any signs that products were failing in the market or that capitalised costs would need to be impaired and written off. And the amortisation expense that would flow through future income statements as these intangible assets were consumed would provide a reality check on whether the capitalisation had been justified, as healthy products should generate gross margins sufficient to cover not just direct manufacturing costs but also the amortisation of the development investment.
6. The Cash Conversion Conundrum & Persistent Working Capital Challenge
The most fundamental concern raised by Kotak was the widening disconnect between Kaynes’ strong reported profits and its persistently negative cash-flows—a divergence that raised questions about the sustainability of the business model. In FY24-25, while the company reported a PAT of ₹293.4 crore, operating cash-flow after interest was negative ₹90 crore, and once capex of ₹950 crore for the OSAT and PCB projects was included, free cash flow post interest and acquisitions stood at a staggering negative ₹1,040 crore.
This cash strain was driven primarily by working capital consumption and heavy capital intensity. Trade receivables increased by ₹220 crore and inventory by ₹270 crore, together, absorbing ₹490 crore of cash even as revenue and profits rose on an accrual basis. Kotak calculated the consolidated cash conversion cycle at 157 days, up 22 days y-o-y, driven by higher inventory days and receivable days—indicating that the company was collecting cash later and holding more stock relative to sales.
The management strongly disputed Kotak’s methodology, arguing that the correct cycle formula, as per the ICAI, is inventory days plus receivables days minus payables days, based on year-end balances. By this method, the working capital cycle was 87 days in FY24–25, only slightly higher than 83 days in FY23–24 and far lower than Kotak’s 157 days. Management states that Kotak likely used the cost of goods sold instead of revenue to calculate inventory days and may have included non-core items outside of standard trade working capital.
Even so, the trend remained adverse: working capital days were rising, not falling, and in Q1FY25–26 number had spiked to 132 days and in H1FY25-26 had reached 116 days. This deterioration occurred even as the company was reporting record profits and a strong order book, creating an uncomfortable situation for Kaynes. This raised a deeper question: why a company of Kaynes’ scale continued to struggle with working capital despite repeated guidance promising improvement.
The management attributed part of the deterioration to business seasonality and growth-related timing effects. Q1FY25-26, typically reflects weak April sales and strong June sales, and because receivables are typically collected 60 to 90 days after billing, and because June had particularly strong sales, the receivables balance at quarter-end reflected the high sales volumes from the end of the quarter rather than the lower sales from earlier month inventory is also intentionally built ahead of expected Q2FY25-26 with revenue ₹960 crore versus ₹673 crore in Q1FY25-26.
Beyond these timing factors, it says the balance sheet also included ₹35 crore of long-dated receivables inherited from the Iskraemeco acquisition under multi-year AMISP (advanced metering infrastructure service provider) style contracts that were not yet due. The management completed a pilot discounting of ₹6 crore of these in Q2FY25-26 and committed to discounting the remaining ₹24 crore in H1FY25-26 to eliminate their distorting effect on working capital metrics.
To address the structural working capital issues, Kaynes’ management outlined several initiatives.
• First, it is implementing vendor-managed inventory (VMI) programmes where key suppliers would hold stock in India on its behalf near Kaynes facilities, transferring ownership and payment only upon consumption—shifting substantial working capital burden to suppliers. It is also improving forecasting and production planning to reduce quarter-end demand spikes common in EMS, enabling smoother production and lower safety stock.
• On receivables, Kaynes is reshaping operating practices and financing structures: shipping more evenly throughout the month to reduce month-end receivable bulges; on-boarding large customers into supply chain finance (SCF) programs where global banks pay Kaynes upfront at lower foreign interest rates than domestic borrowing costs.; negotiating supply chain finance terms for new high-value aerospace and defence clients.
• Third, the company is implementing non-recourse factoring for some customers, meaning banks would buy the receivables and assume the collection risk. In Q2FY25-26, it had already onboarded customers representing 20%–30% of revenue into these programmes.
• Fourth, it is improving production planning and scheduling to enable more even shipments throughout each month and quarter, which would naturally reduce the spikes in receivables that occurred when sales concentrated at month-end and quarter-end.
However, even with these initiatives, growth would naturally require more working capital. If revenue reached the guided ₹4,500 crore in FY25–26 compared to ₹2,720 crore in FY24–25, flat working-capital-to-revenue ratios would imply an additional ₹600 crore–₹700 crore requirement. The management argued this would not occur because working capital efficiency would improve materially. They set a target to reduce net working capital days to below 70 days by the end of FY25-26—down from 87 days in FY24-25 and far below the 132 days of Q1FY25-26. Achieving this would not only halt cash consumption but also release working capital as revenues grew. The management maintained that Q1 numbers are distorted by seasonal patterns and acquisition-related legacy balances and that sustained improvements across inventory, receivables and supplier financing would structurally change cash-flows.
The credibility of this guidance, however, became a key debate. Investors noted that similar promises had been repeated for several quarters without visible improvement and working capital trends remained stubbornly negative. While Kaynes’ management insisted the path to below 70 days was realistic—supported by VMI rollout, SCF penetration, improved planning, factoring and elimination of legacy receivables—analysts remained sceptical. For them, future quarters would determine whether Kaynes could finally convert record profits into real cash, or whether working capital would remain the company’s Achilles' heel, despite its otherwise strong operational momentum.
7. Capital Expenditure: The ₹3,800 Crore Question
The second major component of Kaynes' cash consumption is the massive capital expenditure (capex) programme to build semiconductor packaging and PCB manufacturing facilities. Kotak's report had highlighted that these capital-intensive projects could significantly influence the company's funding requirements and capital allocation strategy over the next several years. The OSAT facility at Sanand had an estimated total project cost of ₹3,300 crore, while the PCB facilities, including the multilayer HDI plant in Chennai and future expansions for copper clad laminate and additional PCB capacity, had an estimated total cost of ₹4,680 crore. Together, these projects represented nearly ₹8,000 crore of investment, multiple times its current annual revenue.
Kaynes’ funding architecture for its OSAT and PCB megaprojects rests on a carefully balanced mix of company equity, government subsidies and limited debt—an approach designed to maximise incentives while avoiding excessive leverage. For the OSAT project, eligible capex totals ₹2,700 crore, with central subsidies covering 50% (₹1,350 crore) and state subsidies another around 20% (₹540 crore). This leaves a residual ₹1,410 crore to be funded through unspent proceeds from the December 2023 QIP, internal accruals, and a controlled level of transitional debt during the build-out phase.
By September 2025, the company had deployed ₹313 crore of QIP funds into the OSAT facility and retained ₹443 crore for future phases. The remaining around ₹1,030 crore requirement is spread over five years, implying an annual cash generation need of roughly ₹200 crore through operational cash-flow and working capital efficiencies rather than upfront funding pressure.
The PCB programme follows a similar blended model. The Chennai HDI multilayer PCB plant involves a project cost of ₹1,400 crore, partially offset by around ₹300 crore of central subsidies. Kaynes’ plans to combine ₹160 crore of remaining QIP proceeds with internal accruals and some debt to fund the balance. Additional PCB-related expansions—copper clad laminate, prepreg manufacturing and extra PCB capacity totalling around ₹3,280 crore—are still undergoing internal evaluation and awaiting state subsidy clarity before commitment.
A critical assumption across both programmes is the timely release of government subsidies. Under India’s production-linked incentive (PLI) and electronics and IT hardware schemes, Central subsidies are disbursed proportionately as eligible capex is incurred, typically tied to equipment purchases rather than land or building costs. State subsidies are usually released once commercial production begins and employment and operational milestones are verified. Any material delay in subsidy flow would sharply alter project cash requirements and introduce significant working capital strain. Kaynes says its management's recent experience, however, has been positive—central subsidies for land-related components were processed and released within a week of approval.
Recognising the operational complexity of managing thousands of crores in subsidies across multiple schemes, the company has formed a dedicated subsidy management team to oversee documentation, compliance, escrow requirements, and end-to-end coordination with relevant government bodies.
During the construction phase, liquidity will be managed through a mix of subsidies, internal cash generation, and limited ‘transitory debt’ to bridge timing gaps. Supplier credit plays a crucial role: most equipment vendors offer 180–360-day payment terms, meaning a substantial portion of capex is inherently vendor-financed. Kaynes’ project assumptions are deliberately conservative on supplier credit, ensuring flexibility even if actual terms tighten.
The OSAT project illustrates the mechanism in practice. Eligible expenditures have already begun and reimbursement submissions are being prepared under the highly structured semiconductor PLI framework. The scheme mandates that subsidies flow into ring-fenced escrow accounts dedicated exclusively to project use, minimising administrative delays. For the PCB project, formal government approval has been secured following detailed scrutiny of its technical and financial capabilities, covering the initial Chennai plant and future expansions.
A central consideration is return on invested capital. While the management has avoided specific margin disclosures for OSAT and PCB, given that facilities are still under construction, guidance indicates that these businesses will generate margins ‘definitely higher’ and potentially ‘significantly higher’ than the current consolidated earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin of around 16%–17%. HDI PCBs and semiconductor packaging inherently command premium pricing due to the specialised equipment, engineering skill and reliability standards involved.
Strategically, backward integration into PCB manufacturing reduces dependence on imports for a component that currently accounts for around 10% of material costs, improving lead times, cost structure, and overall solution capability. Similarly, semiconductor packaging positions Kaynes among a very small group of Indian players able to support high-growth sectors such as electric vehicles (EVs), industrial automation and telecom infrastructure.
The broader strategic narrative emphasises India’s need to fill upstream capability gaps in electronics manufacturing. By building domestic PCB material ecosystems and advanced semiconductor packaging, Kaynes simultaneously strengthens its own competitive positioning and contributes to national supply chain resilience.
Despite these strengths, execution risk remains material. Both OSAT and HDI PCB manufacturing require a highly complex technical ramp-up, and global history includes several examples of delays, yield challenges, and cost overruns. Kaynes has targeted PCB plant commissioning for January 2026 and OSAT shipments for Q4FY25-26. Any slippage would delay revenue, extend the cash-consumption period and raise pressure on the balance sheet.
Overall, the capex programme marks a pivotal transformation for Kaynes—from a traditional EMS provider to a vertically integrated electronics manufacturer with capabilities spanning materials, advanced PCBs, semiconductor packaging and full product assembly. Successful execution could establish the company as one of India’s most strategically important electronics firms for the next decade. Underperformance, even if modest, could leave it carrying substantial leverage and struggling to earn adequate returns on exceptionally large capital commitments.
8. The Receivables Discounting Debate: Margins or Cash-flow?
Kotak’s report highlighted receivables discounting and provisioning as potential margin risks, reflecting the tension between accelerating cash-flows through financial engineering and preserving profitability. Kaynes had ₹120 crore of contingent liabilities from bills discounted with banks as of March 2025, confirming active use of this mechanism. More importantly, the management planned to discount about ₹240 crore of smart-meter receivables in FY25-26 to strengthen liquidity and improve the balance sheet.
Receivables discounting is operationally simple but financially nuanced. When Kaynes invoices customers, collections, typically, occur within 60–90 days. To access cash earlier, it may sell these invoices to a bank at a discount—receiving around 97–98% of face value—with the 2%–3% haircut representing the financing cost.
The accounting depends on whether the discounting is with or without recourse.
• With recourse: Kaynes retains credit risk; economically similar to collateralised borrowing. The receivable is removed from the balance sheet, cash is recognised, and a corresponding contingent liability is recorded. The discount is treated as interest expense or a financing cost.
• Without recourse: Credit risk transfers to the bank; economically a true sale. The discount appears as reduced revenue or higher COGS, and margins are directly affected.
Most of Kaynes’ discounting is with recourse, reflected in contingent liabilities and management commentary. Thus, the margin impact depends on how the discount is booked.
Margin impact, therefore, hinges on classification. If recorded below EBITDA as interest, operating margins remain intact. As reflected above, EBITDA, gross and EBITDA margins decline, even though the net profit effect may be similar.
Kaynes’ management clarified that the margin impact from discounting is not as adverse as feared. According to the management, the long-term smart-meter receivables are already factored into contract pricing, anticipating the cost of discounting. Thus, executing the discounting would not create incremental margin pressure. For routine EMS receivables, discounting was used selectively based on a cost–benefit assessment, not indiscriminately. It also noted that supply-chain finance from foreign banks was often cheaper than domestic working-capital loans, meaning discounting could lower overall financing costs relative to traditional bank borrowing.
Provisioning for doubtful debts added another layer of complexity. Provisions rose sharply to about ₹55 crore (3.5% of sales) in H1FY25-26, raising concerns about customer credit quality and the persistence of higher provisioning levels. The management attributed the increase to the company’s expected credit loss (ECL) policy, which requires provisions based on ageing and assessed risk rather than actual defaults, as well as auditor recommendations for specific customer accounts.
A key distinction was emphasised: provisioning does not equate to write-off. Provisioned receivables continue to be pursued and recoveries result in reversals on the profit and loss (P&L). Write-offs occur only when collection is deemed impossible.
The elevated provisions reflected a mix of factors—customer-specific credit concerns, aged receivables that required provisioning under policy, and cleanup of legacy receivables from acquisitions where histories were still being consolidated. Smart-meter receivables were viewed as fundamentally secure, backed largely by utilities and government entities with strong credit profiles. Here, provisions stemmed more from timing and documentation delays than from true credit risk, with management confident of eventual recovery once administrative processes were completed.
9. The Strategic Pivot Away from Capital-intensive Smart Meters
Beyond defending its accounting, the management announced a major strategic shift aimed at resolving the cash flow strain highlighted in the Kotak report. The company is exiting the AMISP model, in which it built and installed smart meters and recovered payments over five to eight years on an annuity basis. This structure created heavy upfront cash outflows and long, delayed inflows, resulting in negative free cash-flow, despite healthy reported profits and pushing the business toward working-capital-driven financial stress.
Going forward, Kaynes says it will operate purely as a device manufacturer, selling meters to firms that will handle installation and long-term service. Under this model, the company expects to receive payments within around 90 days of delivery, rather than waiting years. The management noted that this transition had been the intent from the moment it took over Iskraemeco and that it already had substantial device-only orders from new customers, confirming the model’s viability.
To address the immediate liquidity crunch, Kaynes plans to sell or discount around ₹240 crore of old long-term receivables—currently classified as other non-current assets—stemming from legacy AMISP-style contracts. Converting these multi-year receivables into near-term cash would relieve the balance sheet and reduce working capital pressure. The company had already piloted this approach by discounting ₹6 crore of such receivables in Q2FY25-26, demonstrating that the documentation and process were operational.
This strategic pivot reflects the management’s recognition that while the AMISP model may appear profitable, it is incompatible with the company’s growth aspirations and limited access to patient capital. The model suits large incumbents with deep balance sheets and low financing costs—not a rapidly scaling manufacturer simultaneously investing in semiconductor packaging and PCB capacity. For Kaynes, the working capital-intensity of AMISP was structurally unsustainable, making a shift to a device-led model essential.
10. The Cash-flow Statement Mystery: Where Did the Money Go?
One of the more technical but ultimately revealing questions in the Kotak report concerned apparent discrepancies between asset additions reported in the balance sheet schedules and fixed asset purchases reported in the cash-flow statement. This type of analytical reconciliation is precisely what forensic accountants and sophisticated investors conduct when seeking signs of accounting manipulation or off-balance-sheet arrangements. The numbers matter because if a company is spending more cash on capex than appears in asset additions, the difference might be going to related parties, might represent poor project execution with cost overruns, or might indicate other problems that would not be visible from looking at the balance sheet alone.
Kotak noted that Kaynes' FY24-25 cash-flow statement reported purchases of fixed assets totalling ₹950 crore, but this did not fully reconcile with the ₹770 crore of additions to property, plant and equipment, capital work-in-progress, intangibles and intangible assets under development after adjusting for capital advances and payables for capital goods. Where had the extra ₹180 crore gone? Was it sitting in some intermediate account? Had it been paid to subsidiaries? Had construction costs exceeded original estimates? The lack of clear reconciliation raised flags about whether all capital spending was being properly reflected in asset values on the balance sheet.
The management clarified that the reported ₹950 crore of fixed-asset additions reflected several accounting components associated with large construction projects, leased assets, government subsidies, and acquisitions. The largest portion—₹780 crore—related to additions to property, plant, and equipment (PPE), capital work in progress (CWIP), and intangibles, after adjusting for capital advances and capital goods payables. This aligned with balance-sheet movements, with minor timing or classification differences.
A key reconciling item was ₹170 crore of right-of-use (ROU) assets recorded under Ind AS 116 for long-term land and building leases, including 99-year government-allotted land at facilities such as the Sanand OSAT project. These ROU assets were recognised upfront even though the associated cash outflows were minimal, since lease payments were spread over decades and often accompanied by subsidies. Under state incentive schemes, land could be granted at below-market rates or free, with these subsidies recorded as reductions in the ROU asset value. For example, Kaynes Semicon recognised a ₹42.9 crore reduction in fiscal 2025 for subsidies against Gujarat land allocations. This created situations where the cash-flow statement showed limited outflow while the balance sheet reflected a much higher gross asset value.
Another component came from fixed assets acquired through business combinations. When acquiring entities such as Iskraemeco and Sensonic, the company assumed their PPE and leasehold improvements at fair value. Approximately ₹40 crore of fixed-asset movement arose from these acquisitions. These additions did not appear as standalone ‘asset purchase’ cash outflows because the cash had already been recorded as consideration under investing activities.
The treatment of leased land raised the broader question of asset mix. Although 99-year leases created long-term balance-sheet liabilities, they were effectively equivalent to ownership for operational purposes while preserving cash for revenue-generating equipment. When subsidies offset most or all of the land cost, leasing allowed the company to secure long-duration infrastructure at negligible upfront outlay while keeping capital free for core manufacturing investments.
Ongoing construction of OSAT, PCB and other facilities added further layers of accounting complexity. Expenditures during the build-out phase accumulated in CWIP and intangible assets under development. These amounts did not generate depreciation or amortisation until the assets were ready for use and transferred to the fixed-asset category. As a result, profit from existing operations could grow during the construction period without bearing the depreciation burden of the new projects. Once operational, these facilities would begin incurring significant depreciation before achieving optimal utilisation, temporarily pressuring margins.
All components were consistent with accounting standards, but the interaction of these elements made the capital-spending profile more complex to interpret, underscoring the need for clear disclosure and robust internal accounting processes.
11. The Broader Business Performance and Strategic Initiatives
Amid the accounting controversy, management emphasised that the underlying business performance remained strong and that the company was executing on its strategic plan to transform from a pure electronics manufacturing services- provider into an integrated electronics system design and manufacturing company.
Revenue in the Q2FY25-26 grew 58% year-on-year (y-o-y) to ₹906.2 crore, with operational EBITDA growing 80% to ₹148 crore and profit after tax reaching ₹121.4 crore. The EBITDA margin expanded 190bps (basis points) to 16.3%, reflecting both operating leverage as volumes increased and improvements in gross margins across all business verticals. The order-book had grown substantially to ₹8,099 crore, providing visibility into future revenue growth.
The management maintained guidance for FY25-26 revenue of about ₹4,500 crore, consisting of ₹4,250 crore from the traditional EMS and ESDM business, ₹10 crore from the new OSAT semiconductor packaging facility, and ₹175 crore from the recently acquired August Electronics business in Canada. The EBITDA margin was expected to remain at or above the 16% to 17% achieved in recent quarters, potentially exceeding the earlier guidance of 15% plus 50bps (basis points). We have covered it in detail in our
recent quarterly update.
12. Investor Relations Failure
The episode exposed a deeper structural weakness: an investor-relations framework that failed to match the company’s scale, resulting in communication gaps that amplified operational issues into credibility risks. The company repeatedly projected confidence about improving working capital, cash-flows, and revenue visibility.
However, the reported numbers continued to move in the opposite direction. This mismatch—not the numbers themselves—created uncertainty about whether leadership had reliable internal visibility into receivables, cash cycles and margin sustainability. Explanations regarding seasonality, business mix, and acquisition effects were present, but the absence of consistent, data-backed communication weakened the management's narrative. Disclosures often lacked sufficient granularity. Breakdowns of receivables, ageing, income components, and expense movements were presented in broad strokes instead of structured, reconciled explanations. This left ambiguity around whether improvements were one-time or structural and whether short-term distortions reflected deeper system-level issues. The communication gaps created unnecessary room for speculation.
The communication failures became most evident in the controversy triggered by the Kotak report that prompted the December clarification call. Kaynes’ management admitted that analyst queries had been answered with delay, that internal processes for disclosures (including related-party contra entries) were inadequate, and that the company had not proactively engaged to correct factual inaccuracies before the report was published. The result was a situation where misunderstandings escalated into public controversy, damaging sentiment and forcing the company into reactive crisis management.
Ironically, several accounting practices criticised in the report—such as conservative booking of intangible assets instead of goodwill, or favourable payable positioning in acquisitions—are actually prudent decisions. But because the investor relations function failed to pre-empt misinterpretations, the company’s conservative actions were misread as aggressive or opaque.
A core constraint was the company’s internal systems: the information flow, consolidation processes, and review mechanisms had not evolved in tandem with its expansion across products and geographies. This lag meant that external communication often arrived late, reactive, or without the depth expected from a company of its size. Requests for more detailed insights were often declined due to confidentiality or system limitations, reinforcing the perception of opacity.
Ultimately, the incident demonstrated that the company’s communication architecture—not its financials—was the real source of concern. Management later admitted the need for stronger internal controls, clearer narrative structure, and more rigorous data-backed disclosures. They committed to enhancing processes, documentation protocols and communication clarity. But the core lesson was evident: a fast-growing organisation cannot rely on outdated IR practices without facing credibility challenges, even when its underlying operations are sound.
The Exchanges Step in
Shortly after Kaynes’ morning conference call on 8th December, the BSE and NSE issued a joint notice seeking clarification on a Moneycontrol article titled “Kaynes Tech to change auditor as it admits to reporting lapse, clarifies goodwill and receivables.” This public query signalled that regulators were taking the governance concerns—first amplified by Kotak’s critical report—seriously. It also placed Kaynes under fresh scrutiny at a moment when the company was already working to restore investor confidence.
The timing was awkward because management had not announced any plan to change auditors during the call. They had only acknowledged a question about whether larger audit firms might be appointed in the future, with its management clarifying that the board routinely evaluates opportunities to strengthen audit resources but that the current situation stemmed from “one small error,” now being addressed through new software controls and deeper analytical collaboration with international firms. No decision, discussion, or proposal regarding a change of statutory auditors had taken place.
In its formal filing under Regulation 30(11), Kaynes reiterated this point. The company stated that the media report was based on a misinterpretation of management’s general remarks and that no negotiations, evaluations, or board-level considerations of auditor change were underway. The statutory auditors continue in office for the duration of their approved tenure under the Companies Act and SEBI regulations.
Kaynes further confirmed to the exchanges that:
- No undisclosed information existed that could explain recent trading volatility.
- No regulatory or legal proceedings had been initiated or were being contemplated related to this matter.
- The news report had no material impact on the company, since no auditor-related decisions or negotiations were in progress.
The exchange notice nonetheless underscored that until Kaynes convincingly demonstrates stronger controls and clearer disclosures, it will continue to face heightened regulatory oversight—adding yet another pressure point during a period in which management must stay focused on executing its ambitious transformation strategy.
A Company at the Crossroads
Kaynes exemplifies the tension between rapid industrial growth and lagging governance. Its achievements are genuine: India’s first commercial semiconductor package, marquee OSAT customers (Infineon, Alpha & Omega), expansion into aerospace and defence, and industry-leading growth and margins.
Yet accounting controversies exposed weak systems. An ₹180 crore related-party disclosure error, opaque goodwill treatment, legacy receivables, and working capital volatility revealed a finance function struggling to match global standards.
The path forward requires two tracks:
• Operational: Ramp OSAT and PCB facilities, win new customers, pivot from capital-heavy AMISP to device manufacturing.
• Governance: Upgrade ERP, strengthen controls, improve disclosures, possibly engage a larger auditor and rebuild investor trust post-Kotak report.
The management’s emergency call with the auditor, explanations of kitchen sinking/intangible recognition, and long-term strategic focus reassured investors that issues were not fraudulent. Still, concerns linger: stretched bandwidth, delayed self-correction, uncertainty over auditor changes, aggressive fundraising, capital-intensive expansion, and persistent negative free cash-flow, despite profits.
Transparency has earned credit, but the real test lies ahead: proving working capital improvement, turning cash-flow positive, ramping up new facilities, and avoiding new disclosure surprises. Kaynes remains at a crossroads—its future hinges on whether governance and cash-flows can keep pace with its breakneck operational expansion.
This is the first than Indian Equtiy Research Firm has questioned the financials of a company. Kudos to Kotak group.
This is very good development and is the way other equity firms should do.
Most of them write volumes praising the management and give big photos of MD or CEO and make them super heros.