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Review By Dilip Davda on August 8, 2022

•    SSTL is one of the fastest-growing companies in India in the EMS segment.
•    It is also one of the leading players in customized RFID tags.
•    For FY22 it marked growth in the top line, but the bottom line witnessed pressure.
•    The company is focusing on a high-margin product portfolio for marquee customers.
•    Though the issue appears fully priced, investment for the medium to long term can be considered.

PREFACE:
Amidst reforms proposed by SEBI and RBI for a primary market that impacted Anchor Investors, HNIs and also the modified process of IPO subscription data, we witnessed an almost over two and half months gap for mainboard IPOs. Finally, we are having IPO from Syrma SGS Technology Ltd. 

This company is surprisingly coming with IPO at a lower price than the pre-IPO price. The management attributed this as an investor's friendly gesture as global market moods have changed and prevailing uncertainty. Due to the pandemic, it suffered pressure on its margins but is not gearing for a high-margin product portfolio for its marquee customer base. 

ABOUT COMPANY:
Syrma SGS Technology Ltd. (SSTL) is 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. 

According to the F&S Report, among the large bouquet of EMS players in India, SSTL is one of the fastest-growing Indian-headquartered ESDM companies. The Company is also among the top key global manufacturers of custom RFID tags (Source: F&S Report). Its current product portfolio may be categorized as follows:

- Printed circuit board assemblies ("PCBA"): Our PCBAs are used in products manufactured in the automotive, medical, industrial, IT and consumer products industries, and shall include box-build products;

- Radiofrequency identification ("RFID") products: Our RFID products are used in products manufactured in the shipping, healthcare, manufacturing, retail and fintech industries;

- Electromagnetic and electromechanical parts, which include magnetic products like chokes, inductors, magnetic filters, transformers as well as high volume manufacturing assemblies: Our electromagnetic and electromechanical parts are used in products manufactured in the automotive, industrial appliances, consumer appliances and healthcare industries, among others; and

- Other products, include motherboards, DRAM modules, solid state drives, USB drives and other memory products.

SSTL currently operate 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 customers in north and south India. SSTL's manufacturing facilities in Tamil Nadu are located in a special economic zone and our manufacturing facility in Haryana has been set up under the Electronic Hardware Technology Park scheme, which allows it to avail of certain tax and other benefits in respect of the products manufactured out of these facilities. 

As of March 31, 2022, SSTL has 849 permanent employees and 3,886 persons employed as contract labour / temporary employees and retainer ship employees. 

Out of the 11 manufacturing facilities currently operated by SSTL, two facilities collectively contribute to more than 80% of its total revenue from operations and this raises a concern. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for funding of R & D facility development/ expansion and setting up of a new manufacturing facility (Rs. 403.00 cr.), working capital (Rs. 131.58 cr.) and general corporate purposes, SSTL is coming out with a maiden combo IPO of fresh equity issue worth Rs. 766 cr. of Rs. 10 each (approx. 34818176 shares) and an offer for sale of 3369360 shares (worth Rs. 74.13 cr. at the upper cap) making an overall IPO size of Rs. 840.13 cr. The company has announced a price band of Rs. 209 to Rs. 220 per share of Rs. 10 each. The issue opens for subscription on August 12, 2022, and will close on August 18, 2022. The minimum application to be made is for 68 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 21.67% of the post-issue paid-up equity capital of the company.

The company did a pre-IPO placement of 3793103 shares at a price of Rs. 290 per share and has already garnered Rs. 110 cr. from the market. 

Joint Book Running Lead Managers (BRLMs) to this issue are DAM Capital Advisors Ltd., ICICI Securities Ltd. and IIFL Securities Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. The company has allocated an IPO quota of 50% for QIBs, 15% for HNIs and 35% for Retail investors. 

Having issued initial equity at par, SSTL issued/converted further equity in the price range of Rs. 100 to Rs. 7204.50 between March 2008 and May 2022. It has also issued bonus shares in the ratio of 100 for 1 in October 2021. The average cost of acquisition of shares by the promoters/selling stakeholder is Rs. 1.57, Rs. 52.88 and Rs. 59.97 cr.

Post-IPO, SSTL's current paid-up equity capital of Rs. 141.41 cr. will stand enhanced to Rs. 176.23 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 3877.04 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SSTL has (on a consolidated proforma condensed financial performance basis) posted turnover/net profits of Rs. 879.95 cr. / Rs. 91.50 cr. (FY20), Rs. 904.29 cr. / Rs. 65.54 cr. (FY21) and Rs. 1284.37 cr. / Rs. 76.46 cr. (FY22).

For the last three fiscals, it has posted (based on a proforma condensed combined financial performance) an average EPS of Rs. 5.18 and an average RoNW of 14.85%. The issue is priced at a P/BV of 5.19 based on its NAV of Rs. 42.36 as of March 31, 2022, and at a P/BV of 2.66 based on its post-IPO NAV of Rs. 82.78 per share (at the upper cap). 

If we attribute FY22 earnings to post IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 50.69.  Thus the issue appears fully priced even at a lower price compared to the pre-IPO placement price. 

COMPARISON WITH LISTED PEERS:
As per offer documents, SSTL has shown Dixon and Amber Enterprise as its listed peers. They are currently trading at a P/E of 131.17 and 157.52 (as of August 08, 2022). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY: 
The company has not declared any dividends for the reported periods of the offer documents. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with the offer have handled 63 public issues in the past three years, out of which 24 issues closed below the issue price on the listing date.

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