Q2FY24 Review: Syrma SGS Tech: Weak OPMs mar earnings outlook

6 Nov 2023 , 11:33 AM

Despite robust order book and industry leading revenue growth, weak OPMs led by adverse sales mix drove earnings disappointment. While Syrma was clear on revenue outlook, vague guidance for H2FY24 increases risk to earnings. Analysts of IIFL Capital Services forecast operating leverage led OPM expansion (10.4%, +340 bps vs H1) in H2FY24. But lower their OPM expectations prompting 6-8% cut in Ebitda over FY24-26. Focus to drive growth in ODM solution and revive export growth will take 12-18 months. While OPMs will weigh on stock valuations in the near term (30x FY25), analysts of IIFL Capital Services retain BUY with 41% EPS Cagr in FY23-26 and lower TP by 16% to Rs643 (implying 26% upside). 

Uncertainties on near term OPM: 

Mgmt highlighted that while gross margins across key verticals were intact, swift jump in short cycle consumer portfolio (led by telecom) has outweighed gradual ramp-up in higher margin portfolios of EVs (automotive) and industrial verticals (smart metering, renewables, refrigeration etc.), adversely hurting OPMs in the near term. Despite 250 bps contraction in OPMs in H1FY24 to 6.9%, Mgmt is hopeful of 9%+ OPMs for FY24 and double digit over medium term (incl. other income as referred by Syrma), but refrained from giving specific guidance for FY24. Transition to low tax regime w.e.f FY24 brings relief, capping earnings cut to 4-6% vs 10-11% cut in PBT over in FY24-26. 

Strong order book ensures 50% revenue growth in FY24: 

Syrma’s industry leading revenue growth of 53% in H1FY24 (led by consumer & automotive, >60% of sales), is likely to be sustained backed by robust order book of Rs38bn, of which Rs30-32 is executable in 12 months. Mgmt. guides for H1 revenue share at 40-45%, implying Rs29-31bn sales for FY24, in line with IIFLe. Industrial, though weak inFY24, should pick-up inFY25 with large export orders maturing. Healthcare too, aided by acquisition of JDHL is poised for robust growth in H2FY24 and FY24-26. 

Eyeing synergies from SGS: 

Mgmt. targets to drive synergy savings from amalgamation of SGS Tekniks, which had taken a back seat in pursuit of growth. NWC cycle at 70 days (+3 days QoQ) should be sustained led by consumer portfolio. Further, Syrma is now exploring possible opportunities in OSAT activities following aggressive plans announced by its peers.