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Unfavorable business mix continues to hurt margins

Operating performance below estimates

* SYRMA reported a weak operating performance in 4QFY24, with EBITDA margins declining 200bp YoY due to an unfavorable business mix (higher share of low-margin consumer business – 46% in 4QFY24 vs. 40% in 4QFY23).

* However, revenue growth was strong at 67% YoY in 4QFY24, led by broadbased growth across verticals.

* Factoring in the 4QFY24 performance and an increase in the consumer mix (low-margin vertical), we have lowered our EBITDA estimates for FY25/FY26 by 7%/13%. Accordingly, we have cut our EPS estimates by ~9%/15% in FY25/FY26. We retain our BUY rating on the stock with a TP of INR535 (35x FY26E EPS).

Broad-based growth across vertical drives revenue growth

* Consolidated revenue grew 67% YoY/60% QoQ to INR11.3b (est. INR9.9b) owing to strong growth across verticals (Healthcare/consumer/ automotive/industrial vertical grew 2.5x/93%/49%/42% YoY).

* EBITDA margins contracted 200bp YoY and expanded 100bp QoQ to 6.5%, led by gross margin contraction of 430bp YoY/540bp QoQ to 17.2% due to an unfavorable business mix. EBITDA grew 28% YoY/90% QoQ to INR737m.

* Adjusted PAT declined 17% YoY (up 2.3x QoQ) to INR349m.

* The order book stood at ~INR45b as of Mar’24 vs. ~INR45b/INR38b in Dec’23/Sep’23. The consumer/industrial/automotive/healthcare segments accounted for ~40%/20-25%/20-22%/5-7% of total orders as of Mar’24.

* For FY24, revenue/EBITDA grew 54%/7% YoY to INR31.5b/INR2b, while Adj. PAT declined 9% YoY to INR1.1b.

* Gross debt increased to ~INR5.8b as of Mar’24 vs. ~INR3.5b as of Mar’23. Net debt stood at ~INR4.5b as of Mar’24 (vs. net debt of ~INR2.1b as of Mar’23).

Highlights from the management commentary

* Guidance: The management has guided for revenue growth of ~40-45% in FY24, with EBITDA margins of ~7%. It is confident of maintaining over 40% revenue growth going ahead.

* Exports accounted for ~23%/26% of total sales in 4QFY24/FY24. The US and Europe accounted for ~95% of the exports. SYRMA expects exports to grow by ~30% YoY in FY25.

* Capex: SYRMA has increased its SMT capacity to ~6.3m components from ~3.2m earlier. The company spent ~INR2.5b on capex in FY24. It expects capex of ~INR1.5-1.8b in FY25 mainly for the Pune design center and other ongoing expansions

Valuation and view

* SYRMA should significantly benefit from the rapid growth in the electronic systems design and manufacturing (ESDM) industry, given its: 1) rich experience of over three decades, 2) a strong order book of INR45b, 3) growing exports, and 4) strong executional capabilities.

*  We estimate a CAGR of 38%/48%/58% in revenue/EBITDA/adj. PAT over FY24- 26, driven by a robust revenue growth and a healthy order book.

* Factoring in the 4QFY24 performance and an increase in the consumer mix (lowmargin vertical), we have lowered our EBITDA estimates for FY25/FY26 by 7%/13%. Accordingly, we have cut our EPS estimates by ~9%/15% in FY25/FY2

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