This love of convenience and convenience has sparked a rapidly growing electronic manufacturing services (EMS) industry. India’s domestic electronics industry is projected to hit $300 billion (approx ₹24,500 billion) by FY26, with electronics exports expected to reach $120 billion by then.
These projections depend on India gradually reducing its dependence on electronics imports. Currently, India fulfills majority of its electronics needs through imports. However, the government’s push for indigenous manufacturing, in tandem with the “China +1” strategy, is likely to drive a transition to domestic manufacturing.
A rising middle class, higher disposable incomes and the rapid adoption of digital technologies are just some of the factors fueling the growth of the consumer electronics market.
We are already seeing early signs of change, with an increase in electronics exports. In 2022, electronic exports grew at an annual growth rate of 13%, the highest in the past six years. The sector is at a critical juncture, presenting investors with an excellent opportunity to capitalize on massive growth.
Syrma SGS Technologies, a leading player in the EMS sector, is well poised to benefit from this trend. The company offers a wide range of electronics to a well-diversified set of industries, with the consumer (32% of revenues in the financial year 2023) and automotive (20%) sectors contributing a large part to the top line. The company also serves the industrial (31%), railways, IT sectors (9%) and healthcare (8%) segments.
Within the consumer segment, Syrma SGS Technologies pioneered the production of radio frequency identification (RFID) products in India and holds a leading position.
The domestic business accounts for a larger share of revenue (70% in the financial year 2023) but the international segment has grown rapidly, from ₹4.8 billion in FY21 to ₹6.2 billion in FY23.
Currently, the company works with original equipment manufacturers (OEMs) as a contract manufacturer and is slowly getting into design. It is the design part of its business that sets Syrma SGS apart from its EMS peers.
Getting involved in product design offers the company flexibility in idea generation, product development, raw material selection and even experimentation with technical specifications, all of which usually culminate in higher operating margins.
The business is doing well, with revenue and net profit expanding at 38% and 22% compound annual growth rate (CAGR) over the last three years.
Returns have also been admirable, considering the company is still in the early stages of growth. The return on equity and return on capital employed stand at a three-year average of 13.9% and 16.5%, respectively. The company’s current order book stands at ₹billion, up 50% of ₹20 billion in FY23.
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Syrma SGS also sought to expand its business inorganically. It recently acquired a 51% stake in Johari Digital, an original design manufacturer (ODM) serving the healthcare industry. The acquisition is likely to be a value accretive, given that the business has grown well, with robust operating margins (over 35%). The prospects look good and fit well with Syrma’s growing focus on design.
Syrma SGS also maintained a solid balance sheet, with a favorable debt-to-equity ratio of 0.1x. The well-capitalized balance sheet allows it to jump to the next stage of growth while rewarding shareholders with dividends. In FY23 the company distributed 21% of its total profits to shareholders.
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Conclusion
Syrma SGS is poised for continued growth in the coming years, with its strong expertise and leadership in various industries. The increasing integration of electronic components into cars, especially for advanced driver assistance systems and electric vehicles, will allow Syrma SGS to effectively utilize its expertise.
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The growing global demand for internet of things (IoT) devices and smart consumer electronics presents a significant opportunity for the company. Currently, the stock is trading at a PE of 73.9, in line with the industry PE of 75.
While growth prospects remain strong, we remain concerned whether such high valuations can drive significant returns.
Happy Investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com