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Syrma SGS

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Brief Introduction

Syrma is a technology-focused engineering and design company engaged in turnkey electronics manufacturing services (“EMS”), specializing in precision manufacturing for diverse end-use industries. They are leaders in high-mix low volume product management and are present in most industrial verticals
Its clientele includes TVS Motor Company Ltd., A. O. Smith India Water Products Pvt. Ltd., Robert Bosch Engineering and Business Solution Pvt Ltd., Eureka Forbes Ltd Limited, CyanConnode Ltd., Atomberg Technologies Pvt. Ltd., Hindustan Unilever Ltd., Total Power Europe B.V.

Detailed Results:

  1. Sales grew by 73% YoY while PAT increased by 70% YoY.
  2. GPM dropped significantly from 34.7% to 27.1% YoY.
  3. EBITDA margins stood at 11.4% Vs 12.8% YoY.
  4. Export Revenue stood at 26% of Revenue from Operations.
  5. Net debt stood at (559.6) Crs.
  6. Net working capital days improved from 96 days to 80 days YoY while ROCE pre & post adjustment for Unutilised IPO proceeds & Goodwill stood at 13.4% & 22.5%.
  7. Revenue growth for the segments stood as:- 
  1. Margins for the reported segments stood as-

Investor Conference Call Highlights 

  1. The company is building more ODM-type development with current and new customers.
  2. As of December 31, 2022, the company has an order book of Rs.2100 Crores, which would be executed during CY2023 spilling over to CY2024. 
  3. The growth in a few sectors like healthcare and exports has been muted because of the recessionary conditions and inflation in Europe, however, the management continues to be bullish on the long-term prospects.
  4. The gross material cost increased by 300 basis points to 73% quarter on quarter as a factor of softening of the export healthcare business coupled with higher growth & contribution of the consumer segment.
  5. The company has deployed around Rs.35 odd Crores of capex during this quarter and expects to incur another Rs.40 Crores to Rs.60 Crores in Q4 of this financial year.
  6. The. Inventory days have increased to 121 days from 108 days last quarter mainly on account of higher inventory built-up, as the company was expecting a Chinese New Year in the initial first two weeks of January. While On the receivables side, there is a saving of almost 12 days on a quarter-on-quarter basis & with trade payables stay flat.
  7. The management expects a rebound to happen in Q1 of FY24 on the export front. 
  8. The consumer biz grew due to its entry into the fiber-to-home devices and the telecom PLI scheme. The management explains this growth is sustainable & that the industry is price sensitive leading to lower margins, but higher turnaround times ensure good returns on capital deployed.
  9. The company sees good opportunities in EV mobility as well as the charging station segment & is witnessing good inquiries.
  10. The margins in consumer materials have deteriorated due to a lower proportion of ODM (exports) from 26% to 11%.
  11. The company’s gross block currently stands at 400 Crs & expects to do a capex of 200-250 Crs in FY24.
  12. The  Gurgaon facility has a utilization of 50% while the Chennai facility was commissioned recently.
  13. The company targets a ROCE of 25% internally.
  14. The current asset turns to stand at 5.6X times while they are expected to be at 6-8X for the new biz.
  15. Order book split involves 35-40% of exports. Industry-wise split involves 35%- 40%  from the consumer sector, 20% plus from the auto sector,18% to 20% from the industrial and about 7% to 8% from the Healthcare sector.
  16. The company targeted ODM contribution is 25%+.
  17. The management expects to receive PLI benefits by Q3FY24.
  18. Out of the total raise of around Rs.800 Crores, the company is expecting to use around Rs.300 Crores in the next year towards capex, 100 to 150 Crs towards working capital, and the balance for general corporate purposes.
  19. The company doesn’t expects Q4 to be the biggest quarter always since this is the case only for companies more dependent on Govt. orders.
  20. The top 10 client concentration stands at 46-50%.
  21. The consumer business comprises fiber-to-home telecom, wearables for ‘Firebolt’, controllers for water purification & ODM businesses like controllers for energy-saving devices, brushless DC motors, etc.
  22. The major risk for the healthcare biz remains the recession in the West owing to its products being a discretionary spending types product coupled with possible dumping of products by China.
  23. The current box build as a percentage of total sales is hovering at about 14% to 15%.
  24. The management states that the stickiness of the customers is evident from their 20-30 years of relationships with the customers & the exports growing by 50% on a 9M basis despite a global slowdown is a testament to its superior biz model.
  25. PCBA contributes 70% of revenues.
  26.  When new customers come in, it takes 12 to 18 months for high-volume production to start.
  27. The management explains that in the semiconductor space, The passive components pressures have eased out, but microcontrollers continue to be a challenging area because passive components have a wider manufacturing base whereas microcontrollers and active components have a smaller manufacturing base.
  28. The management is seeing freight costs easing YoY.
  29. The company is outsourcing the products for box-build from outside vendors since they have been in a relationship for 20 years & haven’t faced any problems due to this arrangement, further management believes doing backward integration is not a major issue however, the demand should offset the higher capex.
  30.  In the Short term, margins are lower because of the capex cycle which has been set in because of front loading of the expenses to make the organization future-ready however, the management targets low double-digit margins in the long term.
  31. The company believes that Energy storage would be one of the biggest growth drivers for EV-related sectors &  On the energy part energy conservation and energy efficiency are well placed with their own design on controllers for brushless DC motors for the fans and migrating it to other applications.

Analyst’s View

The company reported a strong quarter with revenue growing by 70% despite exports remaining subdued due to global economic issues. The company has a strong biz model with exposure to different industries. It is also doing major capex which will further give impetus to growth.However, it remains to be seen how the company will be able to grow sustainably at this rate given the high valuations which seems to have baked in this underyling growth expectations, coupled with weak global demand scenario owing to war & semiconductor issues looming. However, given its strong growth prospects, it remains an interesting stock to keep track off.