On Wednesday, Investec adjusted the price target for Syrma SGS Technology (SYRMA:IN), increasing it to INR460.00 from the previous INR395.00. Despite this change, the firm continues to recommend selling the stock.
The analyst pointed out that Syrma's consolidated revenues saw a significant quarterly decline of 28% in Q2, which is more than the estimated 12-15% drop. This was attributed to reduced sales from the high-volume, low-margin Telecom business, a part of the Consumer segment.
The change in sales mix, combined with the receipt of Production Linked Incentive (PLI) schemes, resulted in an optical improvement in EBITDA margins for the quarter. Adjusted for the PLI incentives, the segment's EBITDA margin appeared better, at 8.5%, which matched the reported basis.
However, the improvement in working capital as a percentage of trailing twelve months revenues was due to an increase in payables and a quarter-over-quarter fall in revenues.
Management's revenue guidance for FY25 indicates an expected increase in Consumer revenues starting in Q3. This suggests that the margins seen in Q2 may not be sustainable in the second half of the year. Furthermore, the post-tax Return on Invested Capital (RoIC) is projected to remain modest, at approximately 12% through to FY27E.
The valuation of Syrma SGS Technology, at 41 times FY26E PE, does not appear inexpensive, especially when considering it is still at a discount compared to its peers. The firm's analysis concludes with a reiterated sell rating on the stock.
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