Syrma SGS Tech: Dismal performance

8 Feb 2024 , 12:58 PM

Analysts of IIFL Securities downgrade Syrma SGS to ADD from BUY after 2 quarters of consistent miss in OPMs and thereafter downgrade in the medium term operating margin outlook, sub-par vs. peers. Analysts of IIFL Securities cut FY24/25/26 EPS by 31%/29%/26%, respectively. Despite ~50% growth in revenues in FY24, PAT is forecasted to drop 11% YoY with ~240 bps shave in net margins YoY. While Syrma has reported robust order book, ensuring 35-40% revenue Cagr in FY24-26, weakness in RFID portfolio, adverse segment-wise growth profile and prototyping for new customers has hit FY24 performance. Stock looks fairly priced to us at 42x FY25. Analysts of IIFL Securities revised TP of Rs559 (40x FY26 EPS), implies upside of 7%. 

Revenue deferrals hurt Q3 performance: 

Revenues deferrals (of Rs1.1bn) across multiple customers in the Consumer and Industrial segments resulted in QoQ drop in sales and dragged OPMs lower to 5.9% against higher overheads on commissioning of new capacities in Q3FY24. Syrma reiterated its FY24 revenue guidance of Rs30bn, implying 44% YoY in Q4FY24 and guided to sustain 40% growth in FY25 as well on the back of robust order book of Rs47bn, +55% QoQ. 

Medium-term OPM guidance lowered: 

Growth in automotive and consumer segments (60-65% of revenues & OB mix) is unlikely to materially alter before FY26. This along with ailing high margin RFID portfolio and expansion in industrial & railway offerings will keep Gross margins & hence OPMs under pressure. Disclosures on segment profitability too is discontinued for commercial reasons from Q3. FY24 OPM guidance cut to 7-7.5% and that for FY25 is expected to be in 7- 8% range, ~200-250bps shave from earlier levels. 

Downgrade to ADD:

Symra’s growth parameters indicate volume led focus on growth, at the cost of OPMs, though NWC cycle is favourably impacted (72 days), protecting RoIC. While FY24-26 EPS Cagr is pegged at 53%, FY24 performance has been sub-par. Efficacy of various management initiatives including deploying McKinsey needs to be seen.