Buy Syrma SGS Technology Ltd For Target Rs.540 By Motilal Oswal Financial Services
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High mix of consumer business hurts overall margin
Operating performance below estimates
* SYRMA reported a weak operating performance in 1QFY25, with EBITDA margins declining 230bp YoY due to an unfavorable business mix (higher share of low-margin consumer business at 53% in 1QFY25 vs. 39% in 1QFY24). However, revenue growth was robust at 93% YoY, majorly driven by consumer segment (up 2.7x YoY).
* Factoring in the 1QFY25 performance, we have lowered our EPS estimate for FY25 by 7% while maintaining FY26E EPS. We retain our BUY rating on the stock with a TP of INR540 (35x FY26E EPS). Broad-based growth across verticals
* Consolidated revenue grew 93% YoY to INR11.6b (est. INR10b) owing to strong growth across verticals (Healthcare/consumer/IT & Railways/ automotive/ industrial vertical grew 3.8x/2.7x/2.7x/29%/21% YoY).
* EBITDA margins contracted 230bp YoY to 3.8% (est. 5.5%), led by gross margins contraction by 710bp YoY to 15%, due to an unfavorable business mix. EBITDA grew 21% YoY to INR446m (est. INR554m). Adj. PAT declined 32% YoY to INR193m (est. INR266m), led by increasing depreciation (up 71% YoY) and interest costs (up 73% YoY).
* The order book stood at ~INR45b as of Jun’24 vs. ~INR45b/INR35b in Mar’24/Jun’23. The consumer/industrial/automotive/healthcare segments accounted for ~38-40%/22-25%/23-25%/6-7% of total orders as of Jun’24. 1Q order inflow stood at INR12b, largely from consumer (~INR4b), auto (~INR4b) and industrial (~INR3.6b).
* Gross debt increased to ~INR6.1b as of Jun’24 vs. ~INR5.8b as of Mar’24. Net debt stood at ~INR4.9b as of Jun’24 (vs. net debt of ~INR4b as of Mar’24).
Highlights from the management commentary
* Guidance: The management has maintained its revenue growth target of ~40-45% for FY25, with EBITDA margins of ~7% (including PLI and forex gains/ losses). The increasing mix of industrial and healthcare segments and higher exports may boost margins in the rest of FY25.
* Exports accounted for ~16% of total sales in 1QFY25. SYRMA expects exports of ~INR10-11b in FY25 (~20-25% YoY growth), with an aim to take exports to 1/3rd of sales in the longer run.
* Capex: SYRMA expects to spend ~INR1.35-1.4b on capex in FY25 (INR700- 750m already spent in 1Q). The major portion of capex (INR1b) will be incurred for Pune facility, while the rest will be for Germany facility (prototyping and assembly lines).
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 40%/48%/58% in revenue/EBITDA/adj. PAT over FY24- 26, driven by a robust revenue growth and a healthy order book.
* Factoring in the 1QFY25 performance, we have lowered our EPS estimate for FY25 by 7% while maintaining FY26E EPS. We retain our BUY rating on the stock with a TP of INR540 (35x FY26E EPS).
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SEBI Registration number is INH000000412
