Syrma SGS Tech: Building capabilities and executing right

19 Oct 2023 , 11:37 AM

Recommendation: Buy; Target price: Rs 766

 

Syrma SGS Technology (Syrma), a technology-focused ESDM player and a leading manufacturer of PCBA in India, custom RFID tags globally — is leveraging structural tailwinds in the Indian ESDM market, to fortify its presence in high mix-low volume portfolios. The company is strengthening teams for design services and is refocusing to drive exports of RFID and other EMS solutions with greater proximity to customers. Improving profitability and ease in NWC cycle will strengthen balance sheet and drive healthy cash flows and RoCE of 24% by FY26. Analysts of IIFL Capital Services initiate coverage with BUY rating and TP of Rs766, at 38x FY26 EPS (implying 20% upside). 

Formidably placed in high-growth domestic EMS: 

Syrma operates in the Rs1,469bn (US$ 18bn) Indian Electronics System Design and Manufacturing (ESDM) market. The ESDM market is poised to grow at 32% Cagr over FY22-27, with India’s share increasing from <2% to 7% Key drivers include: changing global landscape of electronic design & manufacturing, strong domestic market with growing electronics penetration, favourable policy interventions & incentives, cost competitiveness, and China+1 Strategy. Its leadership in low-volume-highmix product management will drive 42% revenue Cagr in FY23-26, faster than the market. 

Diversified portfolio, backed by R&D and solid manufacturing: 

Syrma’s business model is well rooted from the product concept design and navigates the entire value chain through manufacturing, life-cycle management and support services. Three R&D centres (India & Germany) strengthen design & engineering capabilities alongside an expansive vertically-integrated domestic manufacturing footprint. Diversified customer profile with ~30% export mix, balance between B2B & B2C segments and healthy blend of ODM solutions — provide resilience to revenues. 

Proven track-record in M&As to drive 44% EPS Cagr in FY23-26: 

Inorganic expansions (SGS Tekniks, Perfect ID in 2021, Johri devices in 2023) have been a part of Syrma’s core growth strategy, thereby enhancing scale, portfolio offerings and customer base. Better mix and operating leverage should help OPMs breach 10-11% range, driving 52% Ebitda Cagr in FY23-26 and delivering 3x PAT from FY23.