Automotive, Industrial And MedTech Sectors Will Unleash New Opportunities

Key Takeaways

• Syrma SGS expects strong revenue growth through new client acquisitions and strategic exports, which could also boost gross margins.
  
• Expansion into new facilities and industries, along with margin improvement strategies, positions Syrma SGS for enhanced operational efficiencies and profitability.
  
• The reliance on expanding markets and new customer orders, amid slowdowns in key segments, poses risks to revenue and margin stability.

Catalysts

Provides turnkey electronic manufacturing services in India, the United States, Germany, and internationally.

• Syrma SGS Technology is experiencing strong revenue growth and expects a further 30%-35% increase in the upcoming year, driven by onboarding new clients in the automotive and industrial sectors. This should positively impact their future revenue and earnings.
  
• The company has taken significant steps to improve its margin profile, with current strategies already showing a favorable impact on their EBITDA margins. Future improvements in margins are expected, which will likely enhance net margins.
  
• There is potential for a rebound in the MedTech business as delays in customer projects are resolved, which Syrma expects will happen in the next financial year, providing another stream for revenue growth.
  
• Management is targeting exports as a key growth area, with the aim to increase this to 25%-30% of total revenue, thereby improving gross margins, as exports were noted to be higher-margin businesses.
  
• The expansion into the laptop assembly, backed by the PLI scheme, alongside new facility setups (e.g., Pune, Germany), indicates a strategic investment to build capabilities and cater to additional demand, positively affecting future revenue and operational efficiencies.

Syrma SGS Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Syrma SGS Technology's revenue will grow by 28.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 3.9% in 3 years time.
• Analysts expect earnings to reach ₹3.3 billion (and earnings per share of ₹18.35) by about May 2028, up from ₹1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹4.2 billion in earnings, and the most bearish expecting ₹2.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.6x on those 2028 earnings, down from 60.4x today. This future PE is greater than the current PE for the IN Electronic industry at 37.3x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.64%, as per the Simply Wall St company report.

Syrma SGS Technology Future Earnings Per Share Growth

Risks

• The company is facing a slowdown in the MedTech and Consumer segments, which could impact future revenue growth and margins.
  
• The export business has been subdued, particularly due to economic challenges in Germany, which could affect revenue and earnings stability.
  
• The company's high-volume Consumer business is characterized as low margin, which might constrain overall margin expansion despite revenue growth efforts.
  
• Increasing debt due to higher working capital and CapEx requirements could impact net margins and ROCE if not managed efficiently.
  
• The reliance on new customer orders and market expansions, which are subject to execution risks and delays, could affect revenue and margin predictability.

Valuation

• The analysts have a consensus price target of ₹587.1 for Syrma SGS Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹740.0, and the most bearish reporting a price target of just ₹452.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹84.0 billion, earnings will come to ₹3.3 billion, and it would be trading on a PE ratio of 48.6x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹471.95, the analyst price target of ₹587.1 is 19.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.