Syrma SGS Technology Ltd

Electronics - Components

Emerging Market Leaders

CMP

Rs. 366.90

Rating:

Buy

May 24, 2023

Stock Info

BSE

543573

NSE

SYRMA

Bloomberg

SYRMA:IN

Reuters

Sector

Electronics - Components

Face Value (Rs)

Equity Capital (Rs cr)

177

Mkt Cap (Rs cr)

6,359.58

52w H/L (Rs)

378.00 - 248.10

Avg Daily Vol (BSE+NSE)

883,776

Shareholding Pattern

(as on 31-Mar)

Promoter

47.27

FIIs

4.61

DIIs

8.58

Public & Others

39.52

Source: Ace equity, StockAxis Research

Price performance

Return (%)

12m

Absolute

21.99

29.04

Sensex

3.21

3.99

14.17

Source: Ace equity, StockAxis Research

Indexed Stock Performance

Syrma SGS Technology Ltd Sensex

Source: Ace equity, StockAxis Research

Sector tailwinds and diversified business to propel growth for SYRMA

Company Profile
Syrma SGS Tech (SSTL) is a Chennai based engineering and Design Company engaged in turnkey electronics manufacturing services (EMS)specializing in precision manufacturing for diverse end-user industries, including industrial appliances, automotive, healthcare, consumer products, and IT industries. According to the F&S Report, among India’s large bouquet of EMS players, they are one of the fastest-growing Indian-headquartered ESDM companies. The company has a strong track record of technical innovation which involves working with the engineering teams of their marquee customers like TVS Motor Company, AO Smith India Water Products, Robert Bosch Engineering and Business Solution, Eureka Forbes, and Total Power Europe BV and Hindustan Unilever Limited.

The company’s product portfolio includes Printed circuit board assemblies (PCBA), Radio frequency identification (RFID) products, electromagnetic and electromechanical parts, motherboards, and memory products - DRAM modules, solid state, and USB drives.The company’s products are primarily focused on ODMs and OEMs serving end-user industries including the automotive, healthcare, IT, industrial appliances, energy management, water purification, power supply, and consumer products industries.

SSTL currently operates through 11 strategically located manufacturing facilities in north India (i.e. Himachal Pradesh, Haryana, and Uttar Pradesh) and south India (i.e. Tamil Nadu and Karnataka). Its presence in these states enables it to efficiently cater to the requirements of customers in north and south India. SSTL's manufacturing facilities in Tamil Nadu are in a special economic zone and a manufacturing facility in Haryana has been set up under the Electronic Hardware Technology Park scheme, which allows it to avail of certain tax and other benefits in respect of the products manufactured out of these facilities.

Investment Rationale

One of the leading design and electronic manufacturing services companies in terms of revenue
The company is among the large bouquet of EMS players in India & it is one of the fastest growing Indian-headquartered ESDM companies.Syrma is one of India’s leading exporters of electronics products. During FY20-22, it generated almost half of the consolidated revenue from overseas sales. The company provides integrated services and solutions to original equipment manufacturers (OEMs) from the initial product concept stage to volume production through concept co-creation and product realization. Syrma is the leader in a high mix low volume product management and application in high growth sectors like Industrial appliances, Automotive, Healthcare, Consumer products, IT etc. Further, Syrma is one of India's leading PCBA manufacturers, supplying various OEMs and assemblers in the market. The Company is also among the top key global manufacturers of custom RFID tags.

The wide product portfolio of Syrma finds application in various industries
The diversification and expansion of its product portfolio are primarily driven by the continuously evolving needs of its customers and technological advancements in the industry. Syrma’s wide product portfolio, which includes PCBs, RFIDs, magnetic, electromechanical products, etc, finds applications across diverse end-use industries. Its products are primarily focused on ODMs and OEMs serving automotive, healthcare, IT, industrial appliances, energy management, water purification, power supply, and consumer products industries.The evolution of their product portfolio and service offerings has been driven by their R&D capabilities. The company’s strong focus on R&D has helped them increase their wallet share by helping them widen their product offerings to the same customer. The company has three dedicated R&D facilities, two of which are in India at Chennai, Tamil Nadu, and Gurgaon, Haryana, respectively, and one is in Stuttgart, Germany.

Established relationships with marquee customers across various countries
The company’s product portfolio has helped establish strong relationships with major clients. It has demonstrated strong customer retention skills. Of over 200 customers catered in FY22, 16 customers are associated with the company for over 10 years. Syrma’s marquee customer base includes names like TVS Motor Company, A. O. Smith India Water Products, Robert Bosch Engineering, Eureka Forbes, CyanConnode Limited, Atomberg Technologies Private Limited, Hindustan Unilever, and Total Power Europe. It aims to continue strengthening its long-standing relationships with well-known customers across the end-use industries.

Pursue inorganic growth through strategic acquisitions
The company’s acquisitions include the acquisition of Tovya Automation Dec 2014, the merger of 3G Communications Pvt Ltd effective from April 2016, and most recently, the acquisition of SGS Tekniks in September 2021 and Perfect ID in Oct 2021.

The acquisition of Tovya Automation provided them access to various technical know-how for offering IoT-related products and allowed them to meet the pre-qualification criteria applicable to certain government tenders. To further expand its share in the domestic EMS market and to widen its geographical footprint, the company 2020-21 acquired a majority stake in SGS Tekniks Manufacturing Pvt. Ltd. (100% stake for a consideration of Rs. 366cr) and Perfect ID India Pvt. Ltd. (75% stake for a consideration of Rs. 34cr).

The acquisition of SGS Tekniks assisted Syrma in expanding its supplier’s network, customer base, and geographic reach. Syrma acquired the infrastructure and know-how through Perfect ID for manufacturing RFID label tags and passive inlay tags.Syrma plans to continue to increase its offerings in its current business segments as well as diversify into new products by tapping into segments, which have attractive growth prospects. The company may pursue similar opportunities to undertake acquisitions.

Q4FY23 Financial Performance
For the quarter ended Q4FY23, Syrma reported stellar earnings performance with consolidated revenues growing 83% to Rs.680 cr as against Rs.371 cr clocked in the same quarter of the last fiscal year spurred by strong growth in the autoand consumer segments. Consolidated EBITDA more than doubled YoY to Rs.59 cr. EBITDA margin saw an expansion of 190 bps on a Yoy basis. PAT surged to Rs.42.3 cr, an increase of a whopping 160% on YoY basis aided by healthy topline growth and better-than-expected operational performance.

Key conference call takeaways

Order book: The order book for FY23 closed at Rs 30bn vs. Rs 12bn in FY22 andRs 21bn in Q3FY23. Of this, exports account for ~26% (Rs 6bn-7bn). The companyexpects to execute 70% of the current order book in FY24 and the balance inFY25. Order inflows for the quarter summed up to Rs 16bn, broken down asfollows: auto (25%), consumer (30-32%), industrial (20%), and IT and railways(7-8%).

Capex: Capex was at Rs 700mn in FY23 with Rs 2bn-2.6bn planned for FY24.

Guidance: Management retained its 35-40% topline growth guidance for FY24 butexpects to revise the same upward in a couple of months to incorporate benefitsfrom the new IT policy. It has also guided for a double-digit EBITDA margin goingforward.

Risks and Concerns

Company’s customers do not make long-term commitments and may cancel or change their production requirements.
Operates in a highly competitive industry wherein some of its competitors have substantially greater financial, manufacturing, or marketing resources.

Outlook & Valuation

Thecompany is well positioned to capitalize on strong industry tailwindsMake in India, import substitution, PLI, adoption of China+1 strategy etc. We like Syrma because of its focuson R&D and innovation, its diversified and expanded product portfolio, its focus on high-margin products, and its strong relationship with clients.The strong FY23 print and upbeat guidance backed by a robust order book and expanded capacity affirm our positive stance on Syrma. Client additions offer long-term revenue visibility while strong domestic demand supports the short-medium term outlook.

At CMP of Rs.355, currently the stock trades at 25x FY25E (EPS - Rs.14). We recommend “BUY” Syrma SGS Techno Ltd.

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