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Syrma SGS Technology (Syrma) has established strong competitive advantages in EMS industry. Its competitive advantages include (1) strong wallet share across companies in multiple industries, (2) large customers such as HUL and TVS which speaks about the quality of Syrma’s products and services, (3) ability to offer ODM services and (4) multiple differentiated products to cater to various requirements of customers. Syrma will gain from the strong growth opportunity (40%+ CAGR over FY22-26E) in EMS industry in India. We model it to gain market shares as well as wallet shares in the PCBA and RFID segments. We also model EBITDA margin expansion over FY22-FY25E due to operating leverage, benefits of PLI schemes and correction in input prices. We forecast revenue and PAT CAGRs of 33.3% and 47.9%, respectively, over FY22-FY25E. Initiate coverage on the stock with a BUY rating and DCF-based target price of Rs350 (implying 25x FY25E EPS).

* Strong competitive advantages: Syrma has developed multiple competitive advantages over the past decade, such as: (1) association with large brands; (2) presence across multiple industries; and (3) strong and credible R&D capabilities, which help it bag orders in original design manufacturing (ODM). With the advent of PLI schemes, it stands on a level playing field vis-à-vis international EMS players.

* Scope to expand margins: Syrma has improved its EBITDA margin from 6.1% in FY17 to 9.9% in FY22. While profitability was impacted in FY22 due to steep commodity price inflation, we believe correction in input material prices will boost the gross margins. Further we model EBITDA margin improvement to 12.3% in FY25E due to operating leverage, benefits of PLI schemes and growth in the ODM business.

* Well positioned to grab the EMS growth opportunity: EMS industry in India is expected to witness 41.1% CAGR over FY22-FY26E (Source: Frost and Sullivan). While domestic consumption of electronics is expected to grow at 18.4% over the said timeframe, we believe import substitution by Indian players, China+1 sourcing strategy of OEMs globally, and GoI’s support through various policy initiatives (PLI scheme, Make in India, etc.) will likely fuel growth for Indian EMS companies.

* Initiate coverage with BUY: We model revenue and PAT CAGRs of 33.3% and 47.9% respectively over FY22-FY25E, with RoE higher than cost of capital. Initiate coverage on the stock with a BUY rating and DCF-based target price of Rs350 (25x of FY25E EPS).

* Key risks: Failure of some of the new products, sharp increase in commodity costs, and higher competitive intensity.

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