Syrma SGS Technology Ltd IPO

Published by Sharekhan Education | August 16, 2022

Syrma SGS Technology Ltd IPO has an issue size: ₹ 836-840 Cr with a price band: ₹209–220.The issue opens on Friday, Aug. 12, 2022 and closes on Thursday, August 18, 2022.

Company Overview:

Syrma is one of the leading electronic system design and manufacturing (ESDM) companies. It has evolved to provide integrated services and solutions to OEMs (original equipment manufacturers), from the initial product concept stage to volume production. The company’s product portfolio caters to various industries, including automotive, healthcare, IT, industrial appliances, energy management, water purification, power supply, and consumer products. Syrma currently operates through 11 manufacturing facilities spread across five states in India.

The portfolio includes printed circuit board assemblies (PCBA), radiofrequency identification (RFID), electromagnetic and electromechanical parts, and other products that include motherboards, DRAM modules, solid-state drives, USB drives, and other memory products.

Objectives of the issue:

The IPO consists of an offer for sale (OFS) and a fresh issue of shares. The proceeds from the fresh issue of shares will aid in funding the capital expenditure requirements of an R&D facility, new manufacturing facilities, and working capital requirements. The minimum application is to be made for 68 shares and in multiples thereon. Post-allotment, shares will be listed on the BSE and NSE. The listing of the equity shares will result in the enhancement of the brand name.

Industry Overview:

The Indian Electronics Manufacturing Services (EMS) sector comprises global and domestic companies like Flextronics, Jabil, Dixon, Syrma, and Foxconn. EMS companies follow one of two unique business models: high volume/low mix or low volume/high mix. EMS companies in India have matured from being mere contract manufacturers to end-to-end support partners.
The addressable market for India’s EMS is estimated to grow at a CAGR of 30%, reaching USD 135 billion by FY26 from USD 36 billion in FY21.India’s EMS market is expanding owing to the China+1 strategy, import substitution, and government incentives like the Production-Linked Incentive Scheme (PLI).

Competitive Strengths: 

Syrma specializes in precision manufacturing. It is a leader in high-mix and low-volume product management. The company’s R&D capabilities have led to the evolution of its product portfolio and service offerings. A focus on quality and customer relationships nurtures its leading position in the market. State-of-the-art manufacturing capabilities, supported by a global supplier network with an emphasis on vertical integration, contribute to its success.

The company has migrated to the Hana S4 platform from its ERP platforms with effect from April 1, 2022, which has resulted in common centralized databases for components, vendors, quality, and supply chain, which will lead to productivity improvements and efficient working capital management.
The company focuses on vertical integration in its manufacturing process, enhancing efficiency in terms of cost and time. It helps eliminate the lead time typically required for the procurement of components.

Key Concerns: 

The company’s customers do not make long-term commitments and may cancel or change the production requirements. Out of the 11 manufacturing facilities currently operated by the company, four collectively contribute to more than 75% of the revenue. It exposes the company to the risk of ‘concentration of manufacturing facilities’. The company is exposed to currency exchange rate risks as a significant percentage of the company’s revenue is denominated in foreign currencies.

Financials:

Syrma’s revenue from operations has seen a 20.8% CAGR over FY20-22 on the back of strong demand traction across the industries. In FY22, it clocked an EBITDA margin of 10%, ROCE at 19%, & ROE at 13.5%. The debt-to-equity ratio has improved from 0.82 in FY20 to 0.24 in FY22. The company did a pre-IPO placement at Rs. 290 a few months back, and now it is coming with an IPO at Rs. 220 (at the upper cap). This augurs well for this IPO. At the upper price band of 220 stock post-issue PE, it works out to be 66.8x its FY22 EPS.

A listed peer like Dixon Technologies is trading at a P/E of 105x. Although the valuation looks reasonable, the growth in earnings was on the back of the acquisition, and the standalone earnings growth remains muted. Hence, we have a neutral educational view of the stock.

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