This small cap company leads the trend in electronics manufacturing services

This love for comfort and convenience has sparked a rapidly growing electronics manufacturing services (EMS) industry. India’s domestic electronics industry is projected to hit $300 billion (about ₹24,500 billion) by FY26, with electronics exports expected to hit $120 billion by then.

These projections depend on India gradually reducing its dependence on electronics imports. At present, India fulfills a majority of its electronic 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’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, presenting investors with an excellent opportunity to capitalise 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 financial year 2023) and automotive (20%) sectors contributing a large chunk to the topline. The company also caters to the industrial (31%), railways, IT sectors (9%) and healthcare (8%) segments.

Within the consumer segment, Syrma SGS Technologies pioneered the manufacturing of radio-frequency identification (RFID) products in India and holds a leadership position.

The domestic business accounts for a larger share of revenue (70% in financial year 2023) but the international segment has been growing at a rapid pace, from ₹4.8 billion in FY21 to ₹6.2 billion in FY23.

Presently, the company works with original equipment manufacturers (OEMs) as a contract manufacturer and is slowly making inroads into design. It is the design portion of itsbusiness that sets Syrma SGS apart from its EMS peers.

Getting involved in designing products 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 has been doing well, with revenue and net profit expanding at 38% and 22% compound annual growth rate (CAGR) over the past three years.

Returns have been admirable, too, 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 orderbook stands at ₹billion, up 50% from ₹20 billion in FY23.

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

Syrma SGS has also maintained a solid balance sheet, with a favourable debt-to-equity of 0.1x. The well-capitalised balance sheet allows it to hop on to the next leg 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 automobiles, particularly for advanced driver-assistance systems and electric-vehicle features, will allow Syrma SGS to leverage its expertise effectively.

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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. At present, 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 information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com