Syrma SGS an Export Substitution opportunity in EMS sector

[Vic_tor]

SGS Syrma is technology-focused engineering and design company engaged in turnkey electronics manufacturing services (EMS), specializing in precision manufacturing for diverse end-use industries, including industrial appliances, automotive, healthcare, consumer products and IT industries. The company provides high-mix, flexible volume, precision OEM manufacturing.
It caters to both Indian and international market (with presence in over 24 countries, including the USA, Germany, Austria, and UK). Domestic business accounts for ~70% of revenue.

The products offered include Printed circuit board assemblies (“PCBA”), Radio frequency identification (“RFID”) products, Electromagnetic and electromechanical parts and other products, which include motherboards, DRAM modules, solid state drives, USB drives and other memory products

Printed circuit board assemblies (“PCBA”): Our PCBAs are used in products manufactured in the automotive, medical,industrial, IT and consumer products industries, and shall include box-build products.
Radio frequency identification (“RFID”) products: Our RFID products are used in products manufactured in the shipping, healthcare, manufacturing, retail and fintech industries.
Electromagnetic and electromechanical parts: which include magnetic products like chokes, inductors, magnetic filters, transformer as well as high volume manufacturing assemblies. Company’s electromagnetic and electromechanical parts are used in products manufactured in the automotive, industrial appliances, consumer appliances and healthcare industries, among others.

PCB assembly accounts for 66% of the revenue, Box build accounts for 18% of the revenue and RFID accounts for 16% of the revenue.

As of FY22 SGS Syrma has installed capacity to manufacture 10,120 Million CPA of PCBA, 300 M tags RFID, 6 M Coils of magnetics, 7.2 M modules of IT products, 180M CPA for zone of autonomous creation and 1,500,000 RFID label tags per month

Some of the customers they cater to include TVS Motor Company Limited, A. O. Smith India Water Products Pvt. Ltd., Robert Bosch Engineering and Business Solution Pvt Ltd, Eureka Forbes Ltd, CyanConnode Limited, Atomberg Technologies Private Limited, Hindustan Unilever Limited and Total Power Europe B.V.

Syrma SGS presence accross verticals and their margin profile

Growth Triggers
Technological advancements, China + 1 Strategy, System Automation and Analytics, Schemes like Production Linked Incentive (PLI) Scheme and Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors and Import Substitution.

Large addressable import substitution opportunity for domestic EMS players –The non-mobile domestic EMS market is estimated to be ~Rs. 400- 500bn in size, with the current revenue contribution from the well-known large players(both listed/unlisted) in India amounting to only ~Rs. 100bn. The remaining ~80% of the market demand is being met through imports, either in the form of direct PCB/PCBA or indirectly as complete box-build or equipment. The Indian government’s initiatives, such as PLI and EMC/SPECS, aimed at promoting domestic manufacturing in the electronics industry
and end-user sectors like telecom equipment, air conditioners, are resulting in a reduction in imports, an increase in domestic sourcing, and an expansion of the addressable market for EMS players.
Global firms shifting sourcing from China to benefit EMS players – In an effort to reduce the risk of dependence on China, global firms (especially US & European) have started to source electronics/electronic products from other countries including India. The higher labour costs in China compared to India, coupled with the recent govt. incentives aimed at encouraging Indian companies to establish manufacturing operations and achieve scale, are creating greater export opportunities for EMS players in India.
Higher electronic content to expand addressable market –There is a marked rise in electronic content across end-user categories such as automobiles, consumer durables, industrial, and telecom, among others. In automobile, electronic content per vehicle is likely to treble due to transition towards electric vehicles. In consumer durables, growth of inverter air conditioners, BLDC fans, etc. is driving the demand for PCB/PCBA. In industrials, the shift from analog to smart meters and the adoption of digital displays in capital goods equipment are contributing to growth of electronic components.

Company has doubled it’s revenue in FY23 and is expected to grow exponentially going forward

EMS market is expected to grow with a CAGR of 32% (FY22-FY27) and management is confident of growing more than industry

Key Risks involved:
Promoter is engaged in another sizeable business – an insurance company by the name Infinx
Shortage of semi-conductor supply from global market in future
Entry barrier to this industry is not too high. Future competition might come in
Slowdown in demand in few verticals
Delay in onboarding new customers/challenges in increasing market share from existing customers

Valuations are currently heated but the growth is also huge, so valuations may remain elevated for long
But any bad quarter may trigger a huge selloff

Looking forward for inputs from the industry experts or those who have more idea about the company

*This is not a buy sell recommendation, invested tracking quantity

[manish962]

Detailed risk analysis & disclosure of your holding is missing. Till you comply, the thread remains locked.

[joinjp2003]

Syrma SGS Q3 FY24 concall notes (rough cut)

1. Flattish Q3, push out of delivery/revenue of 100-110 crores during Q3 resulted in flattish revenue.
2. Management has guided for 3000 crores revenue in FY24, which means Q4 shall be ~980 crores (January 2024 company did revenue/shipment of 362 crores so sounds on track). Margin for full year is guided in 7 to 7.5%. So Q4 might have EBITDA of 85 cores to 115 crores or 8 to 12% margin range.
3. Margins in Q3 were also impacted by unused capacity which was ramped up recently. Company hired talent to address the upcoming growth hence sequential increase in operational cost.
4. FY25 revenue guidance is of 40-45% growth so this might put revenue in 4200 crore to 4350 crores range. While EBITDA margin guidance is 7-8%.
5. Exports grew YoY 50%.
6. Commissioned new facility at Gurgaon, Noida and few others. Cumulatively April – to December- smt capacity increased from 3.2 m tonne per hour to 6.3m tonne per hour
7. Net debt low at 65-80 crores.
8. Capex in 9m was 240 crores capex. 40-50 crores capex planned in next quarter.
9. Gross block is 720 crores including 150 crores of CWIP. Asset turnover should be in 6x to 7x range once fully utilised (current asset turnover is in 4x to 5x range).
10. 4500 crore order backlog (OB). Exports book about 20% of OB. Exports to grow further in coming year on the back of healthcare. Order book break-up – consumer – 40%, industrial – 30%, auto-18-20%, healthcare-8-10%.
11. Focussed on maintaining or increasing margin of each vertical however commenting on overall margin is difficult due to mix changes. IT business (I think laptops) will have entirely different margins (I believe 1-2% based on earlier calls).
12. Strategy is to grow at industry+ rate for next several years.
13. Railway business has just started. Base of railway expands then it will not fluctuate much. Railways is long gestation business. Next year 70-75 crores contribution from railways possible.
14. Healthcare should be about – 335 to 400 crore next year.
15. 9M CFO – negative. Likely to be positive on year end basis in FY24. Next year net working capital days should come down, currently just over 70 days and target to bring it to 60 days.
16. Large accounts and volume-based business will help in reducing working capital days so company is targeting ROCE of 25% in one to two years. Capital employed is around 1500.
17. Johari digital did a revenue of 30 crores with 30% EBITDA margin, revenue was flat YoY. Next year target is to grow it by 25-40%
18. Onboarded few high-volume clients in IOT, Energy, Automative, etc. In consumer no change in clients. New clients will contribute from FY25 to FY26.
19. Hired consultant - McKinsey for operating efficiency, and to understand where to double down.

Below is my own work on how FY24 and next year will look based on lower and upper range guidance by management:

	FY23	FY24E	FY25E - lower range	FY25E - higher range
Revenue	2048	3000	4320	5040
EBITDA/operating margin	9%	7%	7%	8%
EBITDA	192	210	302	403
PAT % of EBITDA	64%
PAT		135	194	258
Mcap to PAT (PE ratio)		68	48	36

Disclosure: Bought today in fall so biased.

Disclaimer: I am not a financial advisor and nor a SEBI registered Analyst. The content shared here is only for learning purpose. All the names mentioned here are for example purpose. I may buy more, exit or partly sell the stock/bonds without any prior intimation.

[Amrit_Sharma]

Management keep on fooling the investors by guiding for 7-8% EBITDA margin targets every quarter and every quarter in reality margin keeps on deteriorating. But hopefully we have reached the bottom of margin drawdown cycle.

[meekinvestor]

Does the company supply RFID cards or any RFID related items for Automatic Train Protection (ATP) system or Train Collision Avoidance System (TCAS)?

[meekinvestor]

ICICI recommends Syrma.
20240808054545_ICICI_Syrma-SGS-Technology.pdf (368.4 KB)

[Aarti]

Wonder how a low margin (6% EBIDTA), low ROCE business, declining growth (high growth only last year), low exports command PE of 68 !!

[firefueled]

Handsome set of Q2 numbers. Sales rose by 17% while profits went up 27% YoY. The biggest takeaway is the bump in the profit margins which doubled from 4% to 8% since last quarter. Patience will be rewarded, not sarcasm!

[firefueled]

Confident Of Achieving 40-45% Revenue Growth & 7% EBITDA Margin For FY25: Syrma SGS | CNBC TV18

Positive commentary from the company:
Confident Of Achieving 40-45% Revenue Growth & 7% EBITDA Margin For FY25

[dpk1994]

As per the management the company will grow by 40-45% this fy and 35%+ for the next years to come.

Considering the management commentary, the company should do a revenue of around 8500cr by FY27.

Assuming EBITDA margin of 7% and PAT margin of 4% (base case), the PAT should be 350cr and EPS as 19INR.

Now, depends on the valuation given by the market, the share price can be anywhere from 1300 to 1500INR.

19 x 70 = 1300 (2.6x)
19 x 80 = 1520 (3x)

Considering the government push for the EMS sector and the large addressable global market, the market leaders are expected to grow at a very healthy rate for years to come. Now-a-days electronics components are the part for everything that we use, from automobile to consumer appliances, digital devices, etc. So, the TAM will only grow from here on.

There are many Chinese EMS companies such as Shenzhen kaifa technology, DBG Technology, etc. with Mcap over 30Billions USD. The biggest one in India is Dixon with Mcap close to 10Billion.

In India, the market leaders are Dixon, Kaynes and Syrma (cheapest valuation out of them). So, they all should grow for years to come.

Disc. This is a back of the envelope calculation, not a stock recommendation. Invested and biased

[DeepVal]

@dpk1994

In India, the market leaders are Dixon, Kaynes and Syrma (cheapest valuation out of them). So, they all should grow for years to come.

• Agee with your thought that Syrma looks like the cheapest among all electronics manufacturing companies.

@dpk1994

Assuming EBITDA margin of 7% and PAT margin of 4% (base case), the PAT should be 350cr and EPS as 19INR.

Now, depends on the valuation given by the market, the share price can be anywhere from 1300 to 1500INR.

• If we were to invert this, At CMP of 590 and Marketcap of 10,500 crores, the company is trading at 30x PE multiple on FY27

Margin Turnaround

In Q2 company reported the highest EBITDA margin of ~9% in the past two years, marking a potential turnaround, and removing the key overhang of weak/deteriorating margins due to high mix of low margin telecom business.

Management is confident of strong H2

If they achieve the 310-320 cr guidance of EBITDA, it implies a 60%+ EBITDA growth in H2, based on backward calculation.

PLI Approval in MedTech

• Other key development has been PLI approval in cancer care, radiotherapy devices and anesthetics and cardiorespiratory devices
• Medical devices manufacturing tends to be the highest margin business in manufacturing usually
  
  

Working Capital Cycle Improvement

• Co had 90-100 days of WC days over past 3 years
• In Q2, they have brought it down to 56 days with goal to keep it below 60 days
• This is a solid improvement and should help expand RoCE
  
  
  
  
  

Conservatism in Guidance

• Mgmt noted that 7% EBITDA margin is conservative; actuals could be higher. Once bitten, twice shy kind of situation probably …
  
  

[dpk1994]

This was an unexpected very positive news:

MSI selects Syrma SGS to Manufacture ‘Make in India’ laptops for Indian
consumers:
https://nsearchives.nseindia.com/corporate/SYRMASGS_10012025124850_STXintimationforPR10012025Signed.pdf

With this Syrma forays into the IT hardware contract manufacturing process.

Disc: Invested and biased

[Niki14]

I see that MSI-Syrma tie up will be making assembly of laptops as of now , what would be the profit margins on laptop assembly?

[dpk1994]

Difficult to say without management commentary. My guess is MSI laptops are specialized devices and not common consumer durable products, hence, the PAT Margin should be around 3-4%.

PAT margin for Dixon is 2%, not to mention they are manufacturing mass consumption consumer durable products such as Phone and washing machines, hence the margin is less.

Disc: Invested and biased

[rajput_delhi]

MSI laptops are for masses…are pretty good and cheap…and quite common…esp with student community…you may check amazon etc…thx

[dpk1994]

I was informed by peers they are mostly known for their high end gaming and content creator laptops. Ofc they also make low end laptops but unsure if they are know for that. There is a lot of competition in the low end segment.

[VaibhavBhardwaj]

Yes, MSI’s market share in India isn’t that big mostly because the laptops are costly and better alternatives (apple’s MacBook) are available for a similar price which provides much better bang for the buck. However its a step in the right direction. Major laptop players in India like HP, Lenovo, Dell, Acer have set up their own plants under PLI scheme so it would be interesting to see how this space evolves.

I’m more interested in their export led medtech business

[HighCAGR]

As far as I remember HP, Lenovo, Asus & Acer are getting it done through Dixon. All these EMS companies have a huge runway in front which is why they have been given a higher pe for growth visibility. If India moves its export share from services to manufacturing some of these names have the potential to have 4-5x market cap from here. All we have to do is track execution and change our bets accordingly.