Low profit margin does not warrant ultra high P/E.
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SYRMA OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 766 Cr (3,48,18,182 shares) |
| Offer for Sale | 33,69,360 shares (Rs 74.13 Cr) |
| Face Value | Rs 10 |
| Price Band | Rs 209 – 220 |
| Market/Bid Lot | 68 Nos. |
| Implied M-Cap | Rs 38.77 Cr |
| Implied Eq-Cap | Rs 176.22 Cr |
| Implied Free Float | 52.58% |
| Lead Manager | Dam Cap, ICICI Sec and IIFL Sec |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 12-Aug-2022 | Closing : 18- Aug-2022 |
| Allotment : 23-Aug-2022 | Refunding : 24-Aug-2022 |
| Demat Credit : 25-Aug-2022 | Trading : 26-Aug-2022 |
The Offer
Mumbai-registered but Chennai-headquartered Syrma SGS Technology Ltd is entering the capital market with an initial public offer of Rs 840.13 Cr which translates into 38,187,542 equity shares at the cap price. The offer consists of a fresh issue of Rs 766 Cr (34,818,182 equity shares) from the company and an `Offer for Sale’ of 3,369,360 shares (Rs 74.13 Cr) from Veena Kumari Tandon, who is one of the promoters of the company. The offer is being made through the book-building route with a price band of Rs 209-220 for Rs 10 paid-up share.
Applicants should bid for a minimum lot of 68 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on August 26, 2022. Dam Capital, ICICI Securities and IIFL Securities have been roped in as book running lead managers to the offer and Link Intime will be the registrar to the issue. The bidding opens on Friday, August 12 and closes on Thursday, August 17, 2022.
The company proposes to utilise the proceeds from the fresh issue towards funding capex requirements for development of a R&D facility and expansion/setting up of manufacturing facilities (Rs 403 Cr), working capital requirements (Rs 132 Cr) and general corporate purposes. In the event the public offer is not completed by April 2023, the company has an obligation to buy-back the shares allotted under the pre-IPO placement in May 2022.
Lineage
Originally incorporated as Syrma Technology in August 2004, the name of the company was changed to Syrma SGS Technology in 2021 following the acquisition of SGS Tekniks Manufacturing. Though the offer document presents Sandeep Tandon, Jasbir Singh Gujral, Veena Kumari Tandon and Tancom Electronics (P) Ltd as promoters, none of them was a signatory to the Memorandum of Association in 2004. Tancom Electronics is the largest shareholder, holding nearly 45%. Though the name sounds like an electronics company, Tancom is reportedly engaged in the business of investment holding and there has been no change in its activities since the date of incorporation.
Syrma SGS is claimed to be a technology-focused engineering and design company engaged in turnkey electronics manufacturing services (EMS) specializing in precision manufacturing for diverse end-use industries, including industrial appliances, automotive, healthcare, consumer products, and IT industries.
Syrma’s products reportedly serve marquee customers across the end-use industries namely TVS Motor Company, A. O. Smith India Water Products, Robert Bosch Engineering, Eureka Forbes, CyanConnode, Atomberg Technologies, Hindustan Unilever and Total Power Europe.
Syrma currently operates through eleven strategically located manufacturing facilities in north India (Himachal Pradesh, Haryana and Uttar Pradesh) and south India (Tamil Nadu and Karnataka) and three dedicated R&D facilities, two of which are located in India (at Chennai and Gurgaon), and one is in Stuttgart, Germany.
Key Management
Promoter-Director Sandeep Tandon (53), who directly does not hold any share in the public company, is designated as the Executive Chairman of the company. Holding a bachelor of science in electrical engineering from the University of Southern California, he has about 18 years of experience in the electronics manufacturing sector. He had previously been associated with Celetronix Inc., USA.
Single largest individual shareholder of the company, Jasbir Singh Gujral (66) has been appointed as Managing Director. A Chartered Accountant by profession, he was earlier a director of SGS Tekniks Manufacturing which was acquired by Syrma in 2021.
Stakeholders
Of the pre-IPO equity capital of Rs 141.41 Cr, the promoter group, which consists of six shareholders, controls 61.47%. Whereas group company Tancom Electronics holds 44.78%, individual promoters Jasbir Singh Gujral and Veena Kumari Tandon hold 8.89% and 3.45% respectively. Post-IPO Tancom, whose average cost of holding is only Rs 1.57 a share, will hold 35.93%, Jasbir Singh Gujral, whose cost of holding would be Rs 52.88 a piece, will have 7.13% and the selling promoter-shareholder Veena Kumari Tandon,, whose cost of holding will be negative post `offer for sale’, will have just 0.86%.
Business Track
Syrma is claimed to be one of the leading Printed Circuit Board Assembly (PCBA) manufactures in India and top global manufacturers of custom RFID tags. Syrma’s PCBAs are reportedly used in products manufactured in the automotive, medical, industrial, IT and consumer products industries. Its radio frequency identification (RFID) products are used in shipping, healthcare, manufacturing, retail and fintech industries.
The company’s electromagnetic and electromechanical parts are used in products manufactured in the automotive, industrial appliances, consumer appliances and healthcare industries, among others. Syrma also manufactures motherboards, DRAM modules, solid state drives, USB drives and other memory products.
Financial Track
On the performance front, on a standalone basis, the company’s top line has steadily grown in last three years, from Rs 354 Cr to Rs 646 Cr. Nevertheless, the company’s operating margin has come under severe strain for the past couple of years. The OPM has crashed from 17% in fiscal 2020 to 8.7% in 2022.
The acquisition of SGS Tekniks in 2021 boosted the company’s consolidated revenue beyond Rs 1000 Cr and pushed the margin to 9.3% as against the standalone 8.7%. In line with the top line, the company’s consolidated EBIDTA more than doubled. However, the disproportionate hike in equity capital, from just Rs 0.7 Cr to Rs 176.23 Cr, has diluted all the attraction.
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SYRMA SGS TECH FINANCIALS |
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| (Amount in Cr) |
CONSOLIDATED |
STANDALONE |
||||
| Year Ended |
Mar-22 |
Mar-21 | Mar-22 | Mar-21 | Mar-20 |
Mar-19 |
| Revenue |
1019.72 |
438.30 | 646.26 | 438.30 | 397.08 |
354.00 |
| Operating Profit |
94.43 |
46.76 | 56.52 | 46.76 | 67.69 |
39.68 |
| OPM% |
9.3 |
10.7 | 8.7 | 10.7 | 17.0 |
11.2 |
| Other Income |
12.69 |
6.18 | 8.25 | 6.18 | 7.81 |
3.40 |
| EBIDTA |
107.12 |
52.93 | 64.77 | 52.93 | 75.50 |
43.08 |
| EBIDTA % |
10.4 |
11.9 | 9.9 | 11.9 | 18.6 |
12.1 |
| Interest |
6.78 |
4.52 | 3.78 | 4.52 | 7.97 |
6.03 |
| Depreciation |
19.43 |
12.07 | 13.09 | 12.07 | 9.70 |
9.75 |
| Exceptional Item |
2.53 |
3.40 | – | – | -5.60 |
– |
| Tax |
26.98 |
9.63 | 17.89 | 9.63 | 9.65 |
6.08 |
| Net Profit |
56.67 |
32.40 | 30.61 | 28.99 | 44.04 |
21.12 |
| Equity Cap (Implied) |
176.23 |
0.75 | 176.23 | 0.75 | 0.70 |
0.70 |
| Reserves (Implied) |
1271.83 |
240.83 | 1243.66 | 237.42 | 101.00 |
56.49 |
| Borrowing |
194.24 |
56.12 | 132.59 | 56.12 | 83.80 |
94.35 |
| Fixed Assets |
300.10 |
81.40 | 153.90 | 81.40 | 86.90 |
86.00 |
Valuation
Even though the Electronic Manufacturing Services players are currently operating at wafer thin margins, they are discounted at a relatively high Price-Earnings Multiple. Industry peer Dixon Technologies commands a P/E of 118x while Amber Enterprises enjoys 70x. Considering the industry peers’ current discounting, Syrma’s pricing may look reasonable. But, how long will the ultra high discounting sustain in the face of falling operating margin which is already in single digits?
In Syrma’s case, post offer for sale, the average cost of residual holding will be negligible as compared to the offer price. More over prospective investors face the risk of betting on a stock, which has a disproportionately large equity capital, whose promoters are inexperienced in running a public company and have penchant for promoting too many closely held companies for related line of business.
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HOW SYRMA COMPARES WITH PEERS |
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Financials |
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| (Amount in Cr) |
SYRMA SGS |
Dixon Techno |
Amber Enter |
| Market Cap |
3877 |
22560 |
7648 |
| Borrowing |
194 |
458 |
1032 |
| Fixed Assets |
300 |
995 |
1488 |
| Revenue |
1020 |
10697 |
4206 |
| Other Income |
13 |
4 |
33 |
| EBIDTA |
107 |
383 |
309 |
| Interest |
7 |
44 |
46 |
| Net Profit |
57 |
191 |
111 |
| Equity Cap |
176 |
12 |
34 |
| Reserves |
1272 |
985 |
1701 |
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Stock Features |
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| Current Price (Rs) |
220 |
3801 |
2270 |
| Face Value (Rs) |
10 |
2 |
10 |
| Book Value |
82 |
168 |
515 |
| Promoter Stake % |
47.4 |
34.3 |
40.3 |
| Debt/Equity |
0.13 |
0.46 |
0.59 |
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Profitability |
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| OPM % |
9.3 |
3.5 |
6.6 |
| Net Margin % |
5.2 |
1.8 |
2.6 |
| Cash EPS |
4.11 |
46.20 |
64.42 |
| Earnings Per Share |
3.01 |
32.05 |
32.39 |
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Return |
|||
| RONW % |
9.5 |
19.1 |
6.4 |
| ROCE % |
11.8 |
20.5 |
7.3 |
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Discounting |
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| Price/Earnings |
73.1 |
118.6 |
70.1 |
| Price/Cash EPS |
53.5 |
82.3 |
35.2 |
| Price/Book Value |
2.7 |
22.6 |
4.4 |
| Price/EBIDTA |
36.2 |
58.9 |
24.8 |
| Price/Revenue |
3.8 |
2.1 |
1.8 |
| Price/Fixed Assets |
12.9 |
22.7 |
5.1 |
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Distribution |
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| Dividend % |
0 |
100 |
0 |
| Yield % |
0 |
0.1 |
0 |
| Pay-out % |
0 |
6.2 |
0 |