Syrma SGS Technology Ltd. share price target

Syrma SGS Technology (SYRMA) reported a strong operating performance in 2QFY25, with EBITDA margins expanding 160bp YoY due to operating leverage and a favorable business mix.

Syrma reported revenue/EBITDA growth of 92.9%/20.7% YoY while APAT declined 32.3% YoY. Gross/EBITDA margin contracted 706bps/230bps YoY primarily due to change in revenue mix.

SYRMA reported a weak operating performance in 1QFY25, with EBITDA margins declining 230bp YoY due to an unfavorable business mix.

Strong Q1 topline growth was offset by GM contraction due to higher RM costs; dip in EBITDA margin caused by unfavourable product mix

CPI: Food inflation; still overpowering. FPI Debt Flows: A likely surge in FPI Flow (Debt). ABB: Margins swell; outlook strong. TVSL: Cruising on the right track; maintain BUY. FNXP: Broadly in-line Q4FY24; positive outlook. SYRMA: Strong topline, but margins remain subpar

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).

Noteworthy observations from Syrma SGS Tech’s Q4FY24 result: (1) Strong growth (+66.9% YoY) led by ~INR 1bn revenue shift from Dec’23 to Jan'24 and high demand momentum across all segments.

AIAE: Soft quarter, volume growth uncertain; cut to HOLD. BOB Essential Commodities Index: How prices look in Jan'24. SYRMA: Margin slide continues; retain HOLD. BRIT: Faster volume growth to boost profitability

Q3 topline growth strong at 38% YoY but EBITDA margin shrank 380bps to 5.5% on weak product mix

Q2 topline growth robust at 52% YoY but lower share of ODM business drove gross margin down 690bps

Syrma maintained strong revenue growth of 52.4% YoY led by robust growth in Auto, Consumer and Industrial segments. However, Healthcare segment continued to disappoint with 37.5% YoY revenue decline. While the EBITDA margin contracted 305bps YoY, we note there are margin tailwinds in H2FY24-25 such as (1) acquisition of Johari, (2) simplification of group structure and synergy benefits, (3) operating leverage and (4) revival of Healthcare segment in FY25.

While revenue decline in Healthcare segment has continued to impact EBITDA margins, we like two points from Syrma’s Q1FY24 result: (1) Rest of the product portfolio has continued to report industry leading growth rates, (2) order book stands at INR 35bn at end of Q1FY24 (INR 30bn at end of Q4FY23) which indicates strong order intake for the
company; we are also enthused as there is strong order inflow from existing as well as new customers.

Q1 topline growth robust at 54% YoY but margins falter on lower healthcare business

We hosted Syrma in conference at Singapore and came back enthused about the growth prospects. Key takeaways: (1) there is strong demand for electronics across multiple sectors such as automotive, industrial, infrastructure and consumer, (2) electric vehicles require 9-10x more electronics than current ICE engine vehicles; steady growth in EV will result in higher growth of EMS industry and Syrma.

We remain positive on Syrma as (1) there is strong growth in order book (Rs30bn at end of Mar’23 vs Rs21bn at end of Dec’22) which indicates strong revenue visibility in FY24, (2) margins have likely bottomed out in FY23. The company will likely benefit from lower input prices and operating leverage in FY24 and (3) we also model healthcare segment to report revival in H2FY24.

Q4 topline/PAT up 83%/160% YoY spurred by strong growth in the auto and consumer segments

While the revenue growth remained strong, Syrma’s Q3FY23 EBITDA margins were impacted due to (1) lower exports and 76% decline in healthcare revenues, (2) Steep 3x revenue growth in Consumer business which generates low margins and (3) lower revenues from ODM.

Q3 topline growth robust at 70% YoY led by resilient domestic demand; order book expands further to Rs 21bn

With recovery in auto production and electric vehicles, we expect demand for PCBA to increase resulting in higher domestic sales for Syrma. With correction in input prices, we model its margins to improve and inventory days to reduce.