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  • Nov 26, 2023 - The EMS Megatrend is Here and this Multibagger Stock is Leading the Race

The EMS Megatrend is Here and this Multibagger Stock is Leading the Race

Nov 26, 2023

The EMS Megatrend is Here and This Multibagger Stock is Leading the Race

Electronics have transformed from mere gadgets into indispensable tools in our daily lives.

It's now common to see people drive their cars (including electric vehicles) with their phones connected.

Whether it's enjoying music, navigating using maps, utilising 5G towers for internet access, or staying connected with loved ones, the dependence on electronics is pervasive.

This love for comfort and luxury has led to an expanding electronics manufacturing services (EMS) industry, which is still building some legs to grow on.

India's domestic electronics industry is poised to reach US$ 300 billion (approximately Rs 24,694 billion), with electronics exports expected to reach US$ 120 bn by financial year 2026.

These projections come on the back of the fact that India will increasingly reduce its dependence on electronics imports.

At present, India fulfils a majority of its electronic needs via imports. However, the government's push towards indigenous manufacturing, in tandem with the 'China +1' strategy, is likely to drive this transition to domestic manufacturing.

Additionally, the rising middle class, higher disposable incomes and the rapid adoption of digital technologies are just some factors fueling the growth of the consumer electronics market.

We're already seeing early signs of a shift, with an increase in electronic exports. In 2022, electronics exports grew at an annual growth rate of 13%, the highest in the past six years.

The sector is at a critical juncture of transformation, presenting investors with an excellent opportunity to capitalize on this massive growth.

Syrma SGS Technologies, a leading player in the EMS sector, is well-poised to benefit from this theme.

The company offers a wide range of electronics to a well-diversified set of industries, with the consumer (32% of revenues in financial year 2023) and automotive (20%) sectors contributing a large chunk to the top-line.

Additionally, the company caters to the industrial (31%), railways, IT sectors (9%) and healthcare (8%) segments.

Within the consumer segment, the company pioneered the manufacturing of RFID products in India and holds a leadership position.

The domestic business forms a larger share of the revenue pie (70% in financial year 2023). However, the international segment (30% of revenues) has been growing at a rapid pace, from Rs 4.8 bn in fiscal 2021 to Rs 6.2 bn in financial year 2023 (30%).

Presently, the company works with other OEMs as a contract manufacturer, slowly making inroads into designing.

The designing part of the business is what sets Syrma SGS apart from its peers in the EMS segment.

Getting involved in designing a product offers the company flexibility in idea generation, product development, raw material selection and even experimentation with technical specifications.

All of which usually culminate into higher operating margins.

The business has been doing well, with the revenue and net profit registering a 38% and 22% CAGR over the last 3 years.

The returns have been admirable, considering the company's value addition is still in the early stages of growth.

The return on equity and return on capital employed stand at a 3-year average of 13.9% and 16.5%, respectively.

Syrma SGS Technologies Financial Snapshot (2019-23)

  2020-2021 2021-2022 2022-2023
Revenue Growth (%) 9.78% 132.21% 102.77%
Operating Profit Margin (%) 12.41% 10.68% 11.50%
Net Profit Margin (%) 6.53% 5.31% 6.01%
Return on Capital Employed(%) 17.52% 16.82% 15.41%
Return on Equity (%) 16.67% 13.37% 11.71%
Data Source: Ace Equity

The company's current orderbook stands at Rs 30 bn, up 50% from the orderbook of Rs 20 bn in financial year 2023.

Syrma SGS has been looking to expand its business inorganically.

It recently acquired a 51% stake in Johari Digital, an original design manufacturer (ODM) catering to the healthcare industry.

The Johari acquisition is likely to be value accretive, considering the business has been growing well, with robust operating margins (upwards of 35%) in tow. The prospects look good and align well with Syrma's increasing focus on design.

Syrma SGS has maintained a solid balance sheet, with a favourable debt-to-equity of 0.1x.

The well-capitalised balance sheet enables it to hop onto the next leg of growth while rewarding shareholders with dividends.

In financial year 2023, the company distributed 21% of its total profits to shareholders.

Conclusion

Syrma SGS is poised for continued growth in the coming years, with its strong expertise and leadership status in various industries.

The increasing integration of electronic components into automobiles, particularly for advanced driver-assistance systems and electric vehicle features, positions Syrma SGS to leverage its expertise effectively.

The growing global demand for Internet of Things (IoT) devices and smart consumer electronics presents significant opportunities for the company.

All of this, in tandem with a strong financial footing and policy reforms supporting domestic manufacturing in India, places Syrma SGS on the fast track to growth.

At present, the stock is trading at a PE of 73.9 times, in line with its industry PE of 75 times.

While the growth prospects remain strong, we remain concerned whether such high valuations can drive investor returns.

Comparative Analysis

Company Syrma SGS Avalon Centrum Electronics Kaynes DCX Systems
ROE (%) 11.7 34.4 3.2 16.4 20.9
ROCE (%) 15.4 17.5 8.3 22.2 13.1
Latest EPS (Rs) 7.5 8.1 10.1 20.8 9.1
TTM PE (x) 75.1 59.7 142.8 117.6 40.7
TTM Price to book (x) 6.3 5.9 9.1 14.1 6.1
Dividend yield (%) 0.3 0 0.3 0 0
Industry PE 90.9
Industry PB 6.3
Data Source: Ace Equity

Shares of the company have gained over 100% in 2023 so far.

chart

To know more, check out Syrma's financial factsheet and its latest quarterly results.

Happy Investing!

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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