IPO Analysis: SYRMA SGS TECHOLOGY

The IPO opening date is August 12, 2022, and it will be closing on August 18, 2022.

IPO Rating: Invest for long-term

About the issue:

Syrma SGS Technology (“Syrma”), which is engaged into manufacturing of electronics system design and manufacturing (“ESDM”), is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 209 to Rs 220 per equity share. The issue size is Rs 840 crore at higher price band.

The IPO opening date is August 12, 2022, and it will be closing on August 18, 2022. The issue is likely to be listed on the exchange on August 26, 2022. The IPO market lot size is 68 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (884 shares or Rs 194,480) at upper price band.

IPO Particular

The company proposes to utilize the net proceeds from the fresh issue towards funding the capital expenditure requirements for the development of an R&D facility and expansion of manufacturing facilities. Besides it will also be used for funding long-term working capital requirements.

About the company:

Syrma is as a technology-focused engineering and design company engaged in turnkey electronics manufacturing services (“EMS”), specialising in precision manufacturing for diverse end-use industries, including industrial appliances, automotive, healthcare, consumer products and IT industries. The company provides integrated services and solutions to original equipment manufacturers (OEMs), from the initial product concept stage to volume production through concept co-creation and product realization. They undertake a high mix of products with flexible production volume requirements. Syrma is also engaged into PCBA manufacturing in India, supplying to various OEMs and assemblers in the market. Syrma is also amongst the top key global manufacturers of custom RFID tags.

Their current product portfolio may be categorized as follows:

• Printed circuit board assemblies (“PCBA”): The PCBAs are used in products manufactured in the automotive, medical, industrial, IT and consumer products industries, and include box-build products;

• Radio frequency identification (“RFID”) products: The RFID products are used in products manufactured in the shipping, healthcare, manufacturing, retail and fintech industries

• Electromagnetic and electromechanical parts:  This include magnetic products like chokes, inductors, magnetic filters, transformer as well as high volume manufacturing assemblies: Their electromagnetic and electromechanical parts are used in products manufactured in the automotive, industrial appliances, consumer appliances and healthcare industries, among others; and

•Motherboards, DRAM modules, solid state drives, USB drives and other memory products.

Syrma currently operates through 11 manufacturing facilities in north India (i.e. Himachal Pradesh, Haryana and Uttar Pradesh) and south India (i.e. Tamil Nadu and Karnataka). Their manufacturing facilities in Tamil Nadu are located in a special economic zone and the manufacturing facility in Haryana has been set up under the Electronic Hardware Technology Park scheme, which allow them to avail certain tax and other benefits in respect of the products manufactured out of these facilities.

Syrma has three dedicated R&D facilities, two of which are in India at Chennai, Tamil Nadu and Gurgaon, Haryana respectively, and one is located in Stuttgart, Germany.

During the Fiscal 2022, company catered to over 200 customers of which 16 customers have been associated with them for over a period of 10 years, contributing Rs 262.8 crore of proforma revenue in FY22, which is little more than 20 per cent of company’s FY22 revenue.

Further, company acquired 48, 42 and 158 new customers in Fiscal 2020, 2021 and 2022 respectively. In addition, 93 of their customers have been their customer for over 3 years, as on March 31, 2022. A strong client relation is essential for such business for repeat orders.

Inorganic Growth Path

Company is quite active into inorganic growth path and acquisitions include the acquisition of Tovya Automation in December 2014, the merger of 3G Communication Pvt Ltd effective from April 2016, and most recently, their acquisition of SGS Tekniks in September 2021 and Perfect ID in October 2021. After their acquisition of SGS Tekniks, Syrma expanded both their manufacturing facilities footprint across India and their in-house R&D capabilities in Germany. It also helped consolidate their component purchases and improve their procurement costs as well. This acquisition has also opened opportunities for cross selling their RFID and magnetic products to existing customers of SGS Tekniks. Such acquisitions has led to expanding of company’s equity base.

Financial

For the financial year 2020, 2021 and 2022, company recorded total income of Rs 404.88 crore, Rs 444.48 crore and Rs 654.50 crore, respectively. EBITDA for the company has grown to Rs 64.765 crore for FY22 from Rs 52.934 crore for FY21. Company’s restated profit for the year in FY22 was Rs 30.60 crore. For the fiscals ended 2020, 2021 and 2022, company’s ROCE was 31.80%, 19.48%, and 18.39%, respectively. Further, in the fiscals ended 2020, 2021 and 2022, company’s ROE was 55.23%, 16.84%, and 7.83%, respectively. In the fiscals ended 2020, 2021 and 2022, gross margins of the company were 42.76%, 35.64% and 32.11% respectively.

One of the reasons for such decline in operating profit margins and profit compared to FY20 is higher raw material cost. Cost of raw materials constitute the most significant portion of company’s expenditures, representing 70.43%, 67.39% and 64.01% of company’s revenue from operations for Fiscals 2022, 2021 and 2020, respectively. Going ahead, as and when the inflation comes down and supply side constraint eases, we may see margins improving.

Company’s products are sold in over 24 countries (apart from India), including the USA, Germany, Austria, and UK. During the Fiscals 2020, 2021, and 2022, Rs 332.09 crore, Rs 306.97 crore, Rs 353.94 crore, which accounted for 83.63%, 70.04%, and 54.77%, respectively of the revenue from operations, was attributable to exports.

*Standalone Basis

Valuation and Outlook

The offer discounts consolidated FY22 earnings of company by 68 times at higher price band. This looks cheaper compared to other two listed peers that are available at PE of more than 75 times. In terms of market cap to sales the offer is available at three times, which is on higher side compared to two times that the currently listed players are available. Looking product portfolio and service offerings along with EMS large addressable market and inorganic growth path adopted by them, focus on R&D and expected change in product mix that will improve the margin profile, we believe that investors with long term horizon can invest in the IPO.