Syrma SGS Technology coming up with IPO to raise around Rs 880 crore

Syrma SGS Technology

• Syrma SGS Technology is coming out with a 100% book building; initial public offering (IPO) of 4,00,20,077 shares of Rs 10 each in a price band Rs 209- 220 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on August 12, 2022 and will close on August 18, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 20.90 times of its face value on the lower side and 22 times on the higher side.
  
• Book running lead managers to the issue are DAM Capital Advisors, ICICI Securities and IIFL Securities.
  
• Compliance Officer for the issue is Rahul N Sinnarka.
  

Profile of the company

The company is a technology-focussed engineering and design company engaged in turnkey electronics manufacturing services (EMS), specialising in precision manufacturing for diverse end-use industries, including industrial appliances, automotive, healthcare, consumer products and IT industries. Among the large bouquet of EMS players in India, it is one of the fastest growing Indian-headquartered ESDM companies. The company has a track record of technical innovation which involves working with the engineering teams of its marquee customers, and over the years, it has evolved to provide integrated services and solutions to OEMs, from the initial product concept stage to volume production through concept co-creation and product realization. Its manufacturing infrastructure enables it to undertake a high mix of products with flexible production volume requirements. It is leaders in high mix low volume product management and is present in most industrial verticals. Further, it is one of the leading PCBA manufacturers in India, supplying to various OEMs and assemblers in the market. The company is also amongst the top key global manufacturers of custom RFID tags.

The company leverages its various strengths such as global sourcing capabilities and long-standing relationship with its vendors to consolidate and bring down the cost of raw materials and components, and explore alternative components, vendors, materials and processes to reduce product cost and bring products faster to market. Its concept co-creation initiative enables it to design products for its customers from the ideation / concept phase that they initiate and give them the preliminary prototypes for their testing and trials. This may also involve collaboration with the engineering team of its customers. Once the design and quality are approved, it helps them to seamlessly transition to volume manufacturing at its high-speed fully integrated manufacturing facilities. It has continuously diversified its product portfolio to keep pace with developments in technology. In addition, its continued focus on technology innovation and its design infrastructure have also enabled to undertake services for its customers over time. It currently operates through 11 strategically located manufacturing facilities in north India (i.e. Himachal Pradesh, Haryana and Uttar Pradesh) and south India (i.e. Tamil Nadu and Karnataka). Its presence in these states enables it to efficiently cater to the requirements of its customers in north and south India.

Proceed is being used for:

• Funding capital expenditure requirements for development of a R&D facility and expansion / setting up of manufacturing facilities.
  
• Funding working capital requirements.
  
• General corporate purposes.
  

Industry overview

Electronics is one of the fastest growing industries in the country. The total electronics market (which includes domestic electronics production and imports of electronic products) in India is valued at Rs 6,711 billion ($91 billion) in FY21, which is expected to grow at a CAGR of 25.5% to reach RS 20,873 billion ($282 billion) in FY26. The domestic production of electronics is around 74% of the total electronics market in FY21, which is expected to reach around 96% by FY26, with the help of various government initiatives and development of electronic ecosystem in India. Also, the global landscape of electronic design and manufacturing is changing significantly, and revised cost structures have shifted the attention of multinational companies to India. India is positioned not only as a low-cost alternative, but also as a destination for high-quality design work. Many multinational corporations have established or expanded captive centres in India. Among the large bouquet of EMS players in India, the company is one of the fastest growing Indian-headquartered ESDM companies.

According to the World Bank’s Doing Business Report, India has improved its position in ease of doing business from 142 ranks in 2015 to 63 rank in 2020. In recent years, India’s demand for electronic products has increased substantially, primarily due to India’s development in the EMS segment. At present, India is the second largest mobile phone manufacturer in the world. The Indian start-up ecosystem is still evolving, and the potential that Indian start-ups have shown is a huge opportunity for the country. The company has deep connects with the start-up ecosystem that can help partner with the next generation companies very early. The reliance on imports to meet rising demand for electronic products is projected to increase unless timely measures are taken to improve local electronic production. Electronics consumption market in India is estimated at Rs 5,925 billion ($80 billion) in FY21, and is expected to grow at the rate of 18.4% to reach RS 13,769 billion ($186 billion) by FY26.

Pros and strengths

Leading design and electronic manufacturing services company in terms of revenue: The company is a technology-focussed engineering and design company engaged in turnkey electronics manufacturing services (EMS), specialising in precision manufacturing for diverse end-use industries, including industrial appliances, automotive, healthcare, consumer products and IT industries. Also, the global landscape of electronic design and manufacturing is changing significantly, and revised cost structures have shifted the attention of multinational companies to India. Its leading position in the market is driven by its focus on quality and customer relationships nurtured through prompt responsiveness and ensuring reliability. Specifically, for the purposes of the monitoring and maintenance of quality of its products, it has a team of 121 employees who are dedicated to quality assurance and quality control, as on March 31, 2022. This has helped ensure that there has been no recall of its products by its customers in the last five years. In addition, there have been no instances in the last five years where its customers have initiated any legal proceedings and/or claimed any damages in respect of its products.

Diversified service offering: The company has, over the years, diversified and expanded its product portfolio, and evolved its operations to provide design and engineering services and original design manufacturing services, that cater to various industries, including automotive, healthcare, IT, industrial appliances, energy management, water purification, power supply, and consumer products industries. The diversification and expansion of its product portfolio is primarily driven by the continuously evolving needs of its customers and technological advancements in the industry. Its continuously evolving product portfolio has helped accelerate its growth and in innovating the manner it cater to and thus retain both new and existing customers. In addition, it has also evolved its operations to include design and engineering services and original design manufacturing services as part of its service offerings, which have helped increase its wallet share with its existing customers, in addition to bringing in new customers.

Established relationships with marquee customers across various countries: The company’s product portfolio has helped it forge strong relationships with its major clients. It has established and will continue to focus on strengthening long-standing relationships with well-known customers across the enduse industries that it cater to. The varied applications of its products have helped it build a wide customer base across many end-use industries. It has also helped build on existing relationships by enabling it to provide multiple product-oriented solutions for the varying requirements of its existing customers. Several global brands are its customers both in India and overseas. Certain of its marquee customers across the end-use industries that it cater to, include TVS Motor Company, A. O. Smith India Water Products, Robert Bosch Engineering and Business Solution, Eureka Forbes, CyanConnode, Atomberg Technologies, Hindustan Unilever and Total Power Europe B.V. Its wide customer base across various sectors reduces its dependence on any one end-use industry and provides a natural hedge against market instability in a particular end-use industry.

State-of-the-art manufacturing capabilities: The company currently operate through 11 manufacturing facilities spread across five states namely Tamil Nadu, Karnataka, Himachal Pradesh, Haryana and Uttar Pradesh, that are supported by 849 permanent employees and 3,886 persons employed as contract labour / temporary employees and retainership employees (as on March 31, 2022). Its presence in these states enables it to efficiently cater to the requirements of its customers in north and south India. Its manufacturing facilities in Tamil Nadu are located in a special economic zone and its manufacturing facility in Haryana has been set up under the Electronic Hardware Technology Park scheme, which allow it to avail certain tax and other benefits in respect of the products manufactured out of these facilities. In addition, its manufacturing facilities are strategically located in Tamil Nadu, Karnataka and Haryana, which allow it to cater to its export requirements (in light of the proximity of these facilities to the respective city airports and Chennai port).

Risks and concerns

Depend on third parties for supply of raw materials: The company is dependent on third party suppliers for its raw materials. The raw materials used by it include electronic components, wound components, wiring harness, plastic parts, sheet metal parts and process consumables. Discontinuation of production by its suppliers or a failure of these suppliers to adhere to the delivery schedule or the required quality could hamper its manufacturing schedule and therefore affect its business and results of operations. This dependence may also adversely affect the availability of key materials at reasonable prices thus affecting its margins and may have an adverse effect on its business, results of operations and financial condition. There can be no assurance that strong demand, capacity limitations or other problems experienced by its suppliers will not result in occasional shortages or delays in their supply of raw materials.

Operates in highly competitive industry: The company competes against many providers of electronics manufacturing services. Some of its competitors have substantially greater financial, manufacturing or marketing resources than it does and have more geographically diversified international operations than it does. In addition, it may in the future encounter competition from other large electronic manufacturers that are selling, or may begin to sell, electronics manufacturing services. The company also faces competition from the manufacturing operations of its current and future customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing to EMS providers. In addition, in recent years, ODMs that provide design and manufacturing services to OEMs, have significantly increased their share of outsourced manufacturing services provided to OEMs in several markets. Competition from other ODMs may increase if its business in these markets grows or if ODMs expand further into or beyond these markets.

Geographical concentration: The company is currently operate through eleven manufacturing facilities spread across Tamil Nadu, Karnataka, Himachal Pradesh, Uttar Pradesh and Haryana. There are no instances in the past linked to the location of the company’s manufacturing facilities in these states, that have materially and adversely affected business and operations of the company. However, due to the geographic concentration of its manufacturing operations, its operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, natural disasters, and demographic and population changes, the outbreak of infectious diseases such as COVID19 and other unforeseen events and circumstances. Such disruptions could result in the damage or destruction of a significant portion of its manufacturing abilities, significant delays in the transport of its products and raw materials and/or otherwise adversely affect its business, financial condition and results of operations.

Working capital requirements: The company requires working capital to finance the purchase of raw materials and for the manufacture and other related work before payment is received from customers. The actual amount and timing of its future working capital requirements may differ from estimates as a result of, among other factors, unforeseen delays or cost overruns, unanticipated expenses, regulatory changes, economic conditions, engineering design changes, weather related delays, technological changes and additional market developments and new opportunities in the EMS sector. Its sources of additional financing, required to meet its working capital requirements and capital expenditure plans, may include the incurrence of debt or the issue of equity or debt securities or a combination of both. If the company decides to raise additional funds through the incurrence of debt, its interest and debt repayment obligations will increase, and could have a significant effect on its profitability and cash flows and it may be subject to additional covenants, which could limit its ability to access cash flows from operations.

Outlook

Syrma SGS Technology has been the preferred value creator for its customers over the last 40 years through innovative and efficient Electronic System Design and Manufacturing. It provides high-mix, flexible volume, precision OEM manufacturing. Its one-stop-solution electronics manufacturing services (EMS) includes product design, quick prototyping, PCB assembly, Box build, repair & rework and automatic tester development services. It also offers OEM solutions for RFID tags & inlays and high-frequency magnetic components. It serves global OEMs in over 20 countries and has supplied several hundreds of million units. The company is focused on technological innovation through its R&D capabilities. It has three dedicated R&D facilities, two of which are located in India at Chennai, Tamil Nadu and Gurgaon, Haryana respectively, and one is located in Stuttgart, Germany. It has a wide product portfolio with applications across diverse end-use industries. On the concern side, the company generally does not obtain firm, long-term purchase commitments from its customers, and frequently do not have visibility as to their future demand for its services. The company may face risks relating to the commissioning of any new manufacturing facilities in newer territories or failure to expand its manufacturing capacity to meet future demand for its products on account of reasons including but not limited to changes in the general economic and financial conditions in India.

The issue has been offered in a price band of Rs 209-220 per equity share. The aggregate size of the offer is around Rs 836.42 crore to Rs 880.44 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 47.25%, from Rs 444.48 crore in Fiscal 2021 to Rs 654.50 crore in Fiscal 2022. The company’s restated profit for the year increased by 6.96%, from Rs 28.61 crore in Fiscal 2021 to Rs 30.60 crore in Fiscal 2022. Meanwhile, the company intends to continue to invest in technology infrastructure to enable further technical innovation, improve its operational efficiencies, increase customer satisfaction and improve its sales and profitability. It intends to further develop its technological infrastructure and technical know-how, to improve on its existing design and engineering service and original design manufacturing capabilities. It also intends to continue focussing on increasing its contributions per customer and to work closely with them to develop a broader portfolio of products, which meet their requirements.