Syrma SGS Technology Limited (SYRMA) Q4 FY23 Earnings Concall Transcript

Syrma SGS Technology Limited (NSE:SYRMA) Q4 FY23 Earnings Concall dated May. 19, 2023.

Corporate Participants:

Nikhil Gupta — Investor Relations

Jasbir Singh Gujral — Managing Director-

Bijay Kumar Agrawal — Chief Financial Officer

Analysts:

Bhoomika Nair — DAM Capital Advisors — Analyst

Aniruddha Joshi — ICICI Securities — Analyst

Rahul Gajare — Haitong Securities — Analyst

Piyush Khandelwal — Bank of India Mutual Fund — Analyst

Saurabh Mehta — East Lane Capital — Analyst

Rahul Hirawat — Multiples Private Equity — Analyst

Umang Parekh — Ashika India Alpha Fund — Analyst

Amar Mourya — AlfAccurate Advisors — Analyst

Vinayak Mohta — Stallion Asset — Analyst

Vinod Chari — BOB Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Syrma SGS Technologies Limited Q4 FY 23 Earnings Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions] Please not that this conference is being recorded.

I now hand the conference over to Ms. Bhoomika Nair from DAM Capital Advisors. Thank you and over to you,Ms. Nair.

Bhoomika Nair — DAM Capital Advisors — Analyst

Yeah. Thanks, Nirav. Good morning, everyone, and a warm welcome to Syrma SGS Technology Q4 FY23 earnings call. I would like to thank the management for giving us this opportunity and would like to welcome them.

I’ll now without any further delay, I’ll now hand over the call to Mr. Nikhil Gupta, Investor Relations, to take this call forward. Over to you, Nikhil.

Nikhil Gupta — Investor Relations

Welcome to Syrma SGS FY23 earnings call. We have with us today Mr. J. S. Gujral, Managing Director; Mr. Jayesh Doshi, Director; and Mr. Bijay Agarwal, our Chief Financial Officer, to discuss the performance of the company during fiscal year 2023 followed by the question-and-answer session.

During this call, certain statements that will be made are forward-looking which involves several risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those in such forward-looking statements. All forward-looking statements made herein are on the information presently available to the management and the company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, pls do review the disclaimer statements in the earnings release and all other factors that can cause a difference.

I’ll now hand over this call to Mr. J.S. Gujral, Managing Director, Syrma SGS.

Jasbir Singh Gujral — Managing Director-

Ladies and gentlemen, a very warm welcome to all of you for the first full-year earning call of Syrma SGS Technologies Limited. I will first share with you the key financial metrics for the year gone by, then delve on the macroeconomic environment, followed by our plan for the year ahead. Bijay Agarwal, our CFO, will run you through the detailed financial and then we go into the Q&A session.

The company has recorded a robust 63% growth in revenues in the year ended March ’23. This is on the back of a 45% growth recorded in the previous financial year. The net PBT and PAT have all grown by about 61% in the current year. Order book as on 31st of March stands at about INR3,000 crores, now this is versus INR2,000 crores as on 31st of December ’22 and INR1,200 crores as on 31st of March 2022. So if I was to compare March ’22 to March ’23, the order book has gone up from INR1,200 crores to INR3,000 crores.

In the Board meeting which we held yesterday where the audited financials were approved, the Board has recommended a 15% dividend or INR1.50 pass up for equity shares to the shareholders, which will be taken up at the AGM.

Now I’ll come down to the macroeconomic level environment in the currency. India is currently witnessing a phenomenal interest from the global companies looking for a manufacturing base outside China. So this interest is further strengthened by the demographic profile of our population since no other country in the world can offer a vast pool of English-speaking technical talent spread across disciplines. We have a growing demand in the country, a thriving democracy, independent judiciary, and a government focused on facilitating manufacturing in general and electronics in particular — and ELECTRONICS.

No the ecosystem for electronics manufacturing in India have never been so good. I’ve been in this industry for almost like close to 36 years now. We have never had sort of a combination of positive global environment, a government focused on encouraging manufacturing and the industry having come of age. Now, the push for e-mobility, smart metering, energy efficiency, 5G, iotization of electronics has led to a significant increase in the electronic content in the product. Everyone keeps working when the economy is growing at 5%, 6%, 7%, how come electronics industry is growing at 30%, 35%.

But just to share with you the context of electronics demand in some of the growing sectors. A combustion two-wheelers, for example, has an electronic content of approximately 2000 per vehicle — two-wheeler. While our EV Two-wheeler it has 15 to 20,000. So there is a 7 to 10 times multiplier effect of migration from a combustion Two-wheelers to a electronic Two-wheeler. Similarly in the four-wheeler, the electronic content goes up from about 5,000 to 6,000 in the engine, I’m not talking about the periphery electronics, infotainment, air-conditioning dashboard, I’m only referring to the content in the engine. It goes up to 60,000 to 70,000 in a electric car. Periphery electronics would remain by and large the same.

Now from almost a zero content in a conventional fan, it goes up by INR350 to INR400 to INR450 in a BLDC fan. Smart RF energy meters have a electronic content of almost three to five times than the normal energy meter, which is INR350 to INR500, INR600 for single three phase, it goes up to INR1,200 in a RF smart energy meter. Now I’ve just picked-up for high-growth areas and that will sort of give you a broad idea of where the demand is coming from.

About the plans of the company, we are very focused on building up a sustainable profitable, socially responsive organization for the long-run. And towards this end, we have taken some significant steps in the quarters gone by. One, we have set-up or exclusive subsidiary for exclusively focusing on design and development. Till now we were doing the design and development as part of or activity and we felt it was getting diffused because manufacturing would take a priority. Hence we have carved-out the design and development center and housed it into a 100% owned subsidiary called Syrma SGS Engineering and Technology Services Limited. Now this is being handled by our CEO from Syrma, he has migrated to the subsidiary company, Dr. Sreeram Srinivasan, who is a veteran in this industry and he would be spearheading this effort. We have also hired a Senior President from the industry who has got about two decades plus of experience in software and engineering services industry to aid Dr. Sreeram in this push. Now this is just done about two-three months ago. Actually, the subsidiary was formed only I think in April.

The initial response from the customers has been very-very encouraging. And going forward, that is in two to three years, this vertical will not only be a significant contributor to our revenues and margins but will also increase the stickiness with the customers. The vintage of the customers in any case is very strong, going back two decades, 15 years, three decades. But with this feat in the business with the customers, we believe the stickiness will even go up further and this will help us in expanding our footprint both in terms of revenues and margins.

We have also beefed up our marketing teams by having representations both in the East and West Coast of USA, strengthening our marketing team in Germany, and sort of beefing up our team in the domestic market in India. Our subsidiary company in Germany is also now — we are putting up a prototype lines going forward so that the new customers we can service them better from there and then the series productions will be migrated back into India.

In the quarter gone by, we have a quarter or two quarters gone by, we have on-boarded eight to 10 major customers, including some very formidable names — global names and these customers are spread across the automotive, which is both combustion and EV, HVSC, which is refrigeration and air-conditioning, industrial park, electric charging infrastructure and infrastructure electronic, which would include energy metering, water metering, smart lighting, both for domestic and global requirement.

Now, with all these things in place, we expect that the revenue in the coming years should grow by about 35% to 40%. That’s in line with the growth in the industry. It is nothing outlined. But conservative estimate that we should be growing at that rate with our long-term objective of sustaining a double-digit EBITDA in the coming years.

Now having taken this, I’ll just hand over to Bijay Agarwal, who will run you through with the detailed financials quarter-on-quarter whatever it is and then we are open for question-and-answers. Thank you very much.

Bijay Kumar Agrawal — Chief Financial Officer

A very good morning to everyone. I’ll now take you through the brief financials for the year FY 2023. I’m delighted to say that the company has registered a strong growth during the FY23. On a consolidated basis, our total income grew by almost 63% to INR2,092 crores. EBITDA also demonstrated a strong performance for the year at INR232 crores with a growth of 61% year-on year. And this is despite the ongoing global challenges and inflation, we are able to control our costs to deliver these margins.

Out of our total other income, which is approximately INR43.7 crores, this includes a treasury income of INR35 crores and the rest is other operating income, which is primarily majorly related to ForEx M2M impact on the raw-material purchases and sales and other miscellaneous items. So if we exclude the treasury income out of the total EBITDA, my operating EBITDA is approximately INR197 crores, which is 9.6% of operating EBITDA margin. Our PBT grew by 61% to INR179 crores and same way our PAT for the year is INR123 crores with a growth of 61% over the FY 22. This quarter our gross margin also — gross material costs also increased by almost 400 bps to 73.6%, as a factor of softening of exports, healthcare business and coupled with the change in other business mix, revenue mix by other industry segments.

If we talk about the quarterly performance, our quarter revenue grew by almost 80% year-on-year to INR700 crores. EBITDA for the quarter demonstrated a strong performance with INR81 crores of total EBITDA. And out of this if we similar way exclude the treasury income of about approximately INR15.5 crores, so my net operating EBITDA is approximately INR65 crores for the quarter, which is 9.5% EBITDA margin for the quarter. Coming to PBT for the quarter is approximately INR68 crores, which is 181% up year-on-year and same way PAT for the quarter is INR43 crore.

Now I’ll come to the treasury numbers as of March end, which is approximately INR884 crores. We have a debt position as of March end of around INR347 crores. So we are maintaining a net cash position of approximately INR537 crores as on 31st March 2023. On CapEx side, we had spent approximately INR170 crores for the full-year. But going forward as we see regarding the new locations whatever we are exploring, we should be able to deploy somewhere around INR200 cores to INR260 crores of CapEx in the year FY 2024.

Coming to our net working capital position, we have a net working cap investment of approximately 74 days when we calculate on average basis, which is probably a market standard. However, when we check ourselves on the year end position basis, we are running a total net working capital position of approximately 89 days, which is slightly three to four days lesser than the position what we were maintaining during FY22. Going forward, we see it’s a clear focus area for all of us. We should be able to save five to 10 days of net working capital position going forward towards the FY24 end, that’s what we are targeting.

So here onwards, I’ll just hand over the call to Bhoomika to take it forward. Yeah, thank you everyone.

Jasbir Singh Gujral — Managing Director-

Bhoomika, this is Gujral. If possible I think we should structure the question-answers into three buckets, one is related to business, one is related to financials and one is the general part. So that will gives us the focus in the stream of thoughts is more sort continuous if we have business in one section, financial with the other and then general.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Aniruddha Joshi from ICICI Securities. Please go-ahead.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah, thanks. Thanks for the opportunity. Sir, in case of consumer business, the margin are relatively lower than the

Operator

Anirudh sorry to interrupt you. Can I request you to speak through the handset, please.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah, is it okay now?

Operator

Yes.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah, so the question is, the consumer business has got a relatively lower-margin than the company average. So what are the steps the company is taking to improve the margins here? And secondly on healthcare business you slightly touched upon it, but when do we see the full recovery in healthcare business? And last question is, any update on the new customers that we would have signed during the quarter or during past, let’s say, six months? And lastly, the current order books. Yeah, thank you so much.

Jasbir Singh Gujral — Managing Director-

Okay. Now the order book which you said, I’ll take the last one because we have a order book of about INR3,000 crores as of 31st of March 2023. And out of this, approximately 70 odd percent, 70% will be executed within the current year, 70%, 72%, rest is for the financial year ’24-’25 and we are just to 45 days of this year. And this order book is spread across verticals with the lead in automotive, both combustion and EV and consumer.

Now coming on to your consumer vertical. Yes, the consumer vertical has comparatively lower-margin than the the rest of the industry, but it is a very growing space and our consumer products are primarily into telecom and other smart, what you call, electronics. And we expect that the low country margins on this product are compensated by the high volumes, the efficiency which we achieve on the line. And going forward based on the programs of the government for encouraging local manufacturing, there will be backward integrations happening. Now once the backward integration happens, then the margins automatically go up because you’ll start getting value on the value additions which you do in the domestic market.

On the healthcare, we have a seen rebound — little rebound in the last quarter of this financial year. But the rebound has been slower and we expect that it may be a couple of quarters before the rebound happens. Not once rebound happens, I think we’ll all be very surprised by the steep rebound which will happen because the supply-chain pipelines are obviously getting exhausted and I expect that maybe by 3rd-quarter of this year we should see a strong rebound on the medical healthcare part.

Your last question — one of the questions on the customer order — customer acquisitions. As I shared, we have on-boarded eight to 10 customers and they’re all big domestic and very formidable global giants, both for domestic and exports. And they are spread across verticals, including automotive, industrial, power management and I have now started calling infrastructure electronics, this energy metering, water metering, smart street lighting and all those things. And these customers which we have on-boarded, their initial plans and all those things, I think what really see us maintaining the growth tempo beyond the ’23-’24 because they have just been on-boarded, and this year would be more for prototyping, product approvals and all that. Series production would only come in calendar year ’24 because global giants work on calendar year. So the Series volumes will come in calendar year ’24, so it could be Q4 of ’23-’24 for us, or ’24-’25. But the dialog is very robust and we are very positive with what these new on-boarded customers would sort of contribute to our business.

Aniruddha Joshi — ICICI Securities — Analyst

Okay, thank you. Thanks a lot, sir. Just last question. Sir, overall profitability margins improving in FY’22.

Bijay Kumar Agrawal — Chief Financial Officer

Anirudh, can you speak a little louder, I can’t hear you.

Operator

Anirudh, there is a bit of static from your line. May I request you to rejoin the queue please. Thank you. The next question is from the line of Rahul Gajare from Haitong Securities. Please go-ahead.

Rahul Gajare — Haitong Securities — Analyst

Thanks gentlemen for the opportunity and congratulations on pretty good performance in this particular quarter and for the full. First on the business front, you have a very strong order backlog at almost INR3000 and we’ve seen a significant uptick in order backlog during the last few quarters. You also indicated about new onboarded customer. Is it possible you could give us some sense on the kind of order intake that you could look for in FY24 from these new customers that you’ve on-boarded and the existing business? That’s the first question.

Jasbir Singh Gujral — Managing Director-

Okay, now very rightly you said the order intake has been strong. Now just to set the context, we have a order book of about INR2100 crores as of 31st of December. And if my memory serves me right, I think in the last quarter we had executed or we had a sales revenue of about INR700 crores. So INR2,100 crores minus INR700 crores would take it down to INR1,400 crores. And if we have order book when we say is a INR3,000 crores. So the order intake during the quarter has been INR1,500 cores, INR1,600 crores.

And the new customers which we have on-boarded, they would again, because the base in the current year is almost nil for those customers. The incremental revenues which will come from them in the calendar year ’24 or financial year ’24-’25, I think it will be very-very significant. It will be a significant portion of the revenues, the growth driving for the next year. Apart from this, I’ll share that we have got the RD approval for one of our plants. But that’s for the railways. And going-forward in this year also we see a significant uptick in railways contributing to the revenue, so as a percentage it may still be very small because currently the base is small, but going-forward I expect railways also to be played a significant share in our revenues.

Rahul Gajare — Haitong Securities — Analyst

Okay. Sir, continuing with the same question. Is it possible you could break this order backlog in this how much is the share of exports and how the other industries are in terms of the order backlog breakup, so that will give us some sense on the profitability because like you said you, consumer at this point in time it’s a low-margin business compared to your industrial business. So if you can break-up this order backlog, that be very helpful for us to forecast the profitability and margin profile.

Bijay Kumar Agrawal — Chief Financial Officer

See for approximately 30% of our revenues for the financial year gone by, 31% or whatever, I think it’s 30%, 31%t. I related the orders based on that, but the backlog hand calculation show the orders of INR3,000 crores would have almost the same proportion of the export to the domestic. There will not be a significant difference in that. So if we say its INR3,000 crores is the order, the export orders would be in the range of INR700 crores, INR800 crores or something like that.

Rahul Gajare — Haitong Securities — Analyst

Okay. How would you break this into segments that you highlight in terms of auto, consumer, healthcare, industrial, IT and railways. Can you break this order backlog into deal vertical?.

Jasbir Singh Gujral — Managing Director-

If we do break, IT, the policy — new IT policy has been only announced day before yesterday. So we are still on the drawing board to work out how it will pan-out and whatever it is. So that impact of the new IT policy which is positive is not factored into whatever I’m saying because we are still working on that. But broadly the order breakup, again if we see the industry composition would be 25 — approximately 20%, 25% would be automotive, about 30%, 32% or 35% would be consumer, about 20% would be industrial, 7%, 8% would be IT or whatever currently it is and railways and other businesses. So three-four buckets, 20%, 25% automotive; 25%, 30% industrial; 30%, 32% consumer as rest is other.

Rahul Gajare — Haitong Securities — Analyst

Yeah. Sir my last question is, you know, if you can break-up the revenue also in terms of the segments that you do, in terms of PCB box build. And actually if you can put some of this information in the presentation that you all put up, it will be very easy for us to gauge from the presentation itself, the breakup of order book, the breakup of revenue in terms of PCB box build, RFID, etc., and obviously the share of ODM in the overall revenue..

Bijay Kumar Agrawal — Chief Financial Officer

In the financial year FY23 is approximately 18% for this year. And similar way if we talk about box build also, that is about 18.5%. And if we talk about PCB, that is again approximately 80% there.

Rahul Gajare — Haitong Securities — Analyst

You said ODM and box build are both around 18%.

Bijay Kumar Agrawal — Chief Financial Officer

Yes. ODM is 18% and box build is 18.5%.

Operator

Thank you. Rahul, sorry to interrupt you. I’ll request you to rejoin the queue again for a follow-up question. I request to all the participants, please restrict to one question per person so the management and address all the questions for the participants. The next question is from the line of Piyush Khandelwal from Bank of India Mutual Fund. Please go ahead.

Piyush Khandelwal — Bank of India Mutual Fund — Analyst

Hi, thanks for the opportunity. Sir, just wanted to understand first on this consumer division because what I see, I mean in FY 22, the material margin on the consumer side was 38%, FY23 was 17%. So is there any benchmark that you look because there must be many kind of order book available under the consumer division as well. So is there any benchmark that you guys said that you be looking under these kind of sectors only under consumer business they’ll be doing business. But there is some threshold on the margin side. But you will be majorly looking for volume under the consumer business.

Jasbir Singh Gujral — Managing Director-

You see that consumer business I think we can classify into two buckets. One is the ODM consumer business, one is the build-to-print consumer business. So if I was to talk of the ODM consumer business, the margins are in-line with other industries. In build-to-print or where [Indecipherable] MSAs is involved, the values are large, the volumes are large and hence the — what to call, margins are low. But what is positive in this is we get a better asset turn because it’s large-volume. the changeovers and the stoppage of lines are not there.

Once we have a better asset turnover and the working capital involvement because the skin of the technology provider is also into it or working capital environment also goes down. So that results a positive cash flows for that particular segment of the business. So you’ll see when we do our business we take a lot of factors into account. Margins obviously is one, stability of the customer volumes, which is giving, what is my working capital involvement, what is my CapEx turnover. So all these factors we consider and then arrive at a decision that on a long-term basis it should be in sync with our objectives.

So we are not hung-up on quarter-on-quarter, we are focused on long-term. And in the consumer business if going-forward based on the plans of the government and the PMPs, the phased manufacturing programs and others, how much more we can do backward integration to increase the value-add. So short-term, it is there, but long-term we’ll see sort of accretion in margins even in consumer business as our volumes grow up or purchasing power goes up and the operating leverage is set.

Piyush Khandelwal — Bank of India Mutual Fund — Analyst

Understood, sir. Just let me put the question a different way. Is there a material difference in the ROCEin the consumer segment versus, let’s say, overall company level or the other segment?

Jasbir Singh Gujral — Managing Director-

ROCE is a function of what? It is the capital employed and if my capital employed is less because of the stake of the technology provider in the inventories that we don’t have to fund the inventories upfront, then obviously the ROCE becomes better.

Operator

Thank you. Piyush, I’ll request to rejoin the queue again for a follow-up question. I request all the participants, please restrict to one question per participant. The next question is from the line of Saurabh Mehta from East Lane Capital, please go-ahead.

Saurabh Mehta — East Lane Capital — Analyst

Yeah, hi sir, thanks for the opportunity. The first question is on working capital. The control in this quarter is quite impressive. So I just wanted to get medium-term outlook on it. Initially, we were guiding for a 10 days saving on this 85, 90 days number. The second thing is on the gross block. We are at INR500 crores, so what is the peak asset turn which we can generate from this. Right now we are about at 4.9 x. Two housekeeping questions on this other income and tax rate. The other income has doubled quarter-on-quarter and the tax rate has gone up to 37% in this quarter. Is there any losses in some subsidiaries or segment because of which the tax rate has gone up. And the last question is, again harping on the consumer a bit, wherein year-on-year our revenue has gone up by 1.6 x, but our gross profit or gross margin from this segment is only up 15%. So we did 38% last year and this year we’ve done 17%. So I know we’ve spoken a lot about it already on the call, but still how should we think about this segment going forward.

Jasbir Singh Gujral — Managing Director-

Yeah, I will take the last question first. As I just explained in the previous question, the consumer business is divided into two buckets, one is the ODM business, one is the vanilla EMS business. Now the ODM business in the year gone by was forming a significant chunk of our consumer business and hence the gross margins or whatever they were high. Now because the EMS business on the consumer segment has grown significantly, the ODM block as a percentage of total consumer business has come down and hence it’s impacted the gross margins in percentage and in absolute terms it would have gone up.

And as I explained, because of involvement of the technology providers and others in the inventories and other, so the working capital involvement in this consumer business or build-to-print or vanilla EMS is significantly lower. And the asset turn is significantly higher. The asset turn from this consumer business could be almost 1.5 to 1.75 times than the average asset turn which we are showing for the consolidated business. Now on that inventory is we had projected that we would try to come down to below 80 days in the inventories. We have come down by about four days. So we are still lagging by about 60% in the reduction. Now I think we should be very mindful of the fact that the inventories are built for future revenues, whereas the number of days are calculated on historical sales. So if my run rate of the last quarter is 200 plus 225, I calculate for the average which will be less than 200. And hence we saw some of the industry peers calculating number of days based on average inventory. Average inventory will be my opening inventory n first April ’22, my closing inventory on 31st March ’23 and averaging it out.

Now if we were to adopt that yardstick, we do both. One is for the comparative with the peers and one is for all internal thing, and internal thing to us is more important and the inventories things has come down to about 74 days. And compared to previous year — if I were to do the previous year comparison also on the same basis, just a minute — so 82 days. So on an average basis we have come down by about eight days. On a year end basis we have come down by about four days. This is an area which needs — we are mindful of it and just because when you’re growing at 60 odd percent, at times you sort of give this efficiency part of the inventory you are holding little backseat because the trust on us to acquire customers and the market-share.

The third question was that on asset turnover of 500, what is the thing is 4.9. You see, if I was to classify assets, there would be two parts of assets. One is the infrastructure asset, one is about income-generating asset, which is the plant and equipment. Now once I invest a infrastructure upfront, it takes about two to three years for that facility to be optimally utilized. So the infrastructure spread is not optimally utilized and hence the asset turn goes down. If I was to only calculate based on the revenue-generating machineries, then I think we would be better-off. Going forward, I think we should — we are targeting asset turn of about six plus once the whole thing stabilizes.

On the tax part, I think I’ll leave it to Bijay because we are on separate tax regimes and different legal entities and hence, there could be a….

Bijay Kumar Agrawal — Chief Financial Officer

Also in the nine-month number, there was approximately INR2.5 crores of short provisioning which has come to n this quarter four, and that’s where you can see there is a higher tax rate for the quarter, but for the full-year it is evenly distributed. Also, one more point on the asset turn, the asset which we are right now calculating that is based on the revenue which we achieved during the year. So few of the new plants which — the CapEx for which we have been incurred during the full-year, but the revenue for those new plants have impacted only for or maybe benefited for the year only for four months to six months. So, that’s where going forward in the next year once we get the full revenue from those plants, asset turn will automatically improve from current f5 times to 6 times in the upcoming year.

Jasbir Singh Gujral — Managing Director-

I hope that answers all your questions.

Saurabh Mehta — East Lane Capital — Analyst

Yes, sir, thanks a lot. It’s very useful. Thank you.

Jasbir Singh Gujral — Managing Director-

Thank you.

Operator

Thank you. Next question is from the line of Rahul Hirawat from Multiples Private Equity. Please go-ahead.

Rahul Hirawat — Multiples Private Equity — Analyst

Hi sir. Firstly, congratulations on the results that you’ve achieved. I think this is a phenomenal growth. My questions, while we have discussed a lot on the margin profile of the consumer business, if you could also elaborate a little more in terms of the type of clients we are signing because a lot of, say, the consumer variables — clients are at a much lower-margin as compared to certain other consumers. So if you could just give a little more granular flavor in terms of that will help us understand that.

And the second question was around IT part of it. The margins — the material margins of that business has been very fluctuating. So going-forward, what’s like a stable material margin we expect from that business? And do we see a significant uptick in that business given a lot of business coming from government as well? So these two are my questions.

Jasbir Singh Gujral — Managing Director-

Okay, on the IT part, the IT business last year constituted approximately, I think its about 7% of our revenue — 7% odd of our revenues. And the IT policy which was in the works for two years has just been announced by the government day before yesterday. And we have to submit our interest or application within 45 days. Our teams has already started working on it. So whatever numbers or the guidance which I shared with you of the growth and all that, does not factor in the impact of the IT policy which is very favorable. There is nothing negative in the new policy which has come in. So we will share our guidance once we get the IT policy sort of registration and everything.

The margins in IT, the value — unit value is being very-high. The percentage margins are comparatively lower, in line with what they are for other products in the consumer space, in IT they would be almost at the same level, but the offset is that; A, the unit value being very high, absolute figures go up.

Your second question was on the composition of the consumer business. Our consumer business consists of fiber to home products, WiFi, wireless, ONT, GPON. It consist of water purification systems. It consists of, what you call, water heating systems — domestic water heating system and the smart electronics. The smart electronics, the variables and all that, the government has come up with the phased manufacturing program where some of the products have started attracting custom duty as 1st March — 1st of April 2023. So going-forward, we are evaluating that if we were to backward integrate and make a PCB out of that, the value addition, while the sale price will limit the sale, the value addition goes up significantly because we are manufacturing the PCB, currently the PCBs are being imported.

Similarly, there would be other components. The government has come out with a very detailed manufacturing program with periods, that effective ex date the duty will be liable on this effective Y date duty will be liable on this component. So we believe that going-forward there will be accretion to the margin on this segment because of the backward integration when we start manufacturing — assembling the boards also in India.

Rahul Hirawat — Multiples Private Equity — Analyst

Understood. And are we looking to increase our capabilities in the PCB manufacturing part?

Jasbir Singh Gujral — Managing Director-

See the PCB, I think we have the best of the capabilities and we are capable of manufacturing any type of PCBs, any layers flexible or whatever. It’s only the capacity has to be increased and capacity sort of in sync with the requirement, because wearable electronics would have a different configuration of line, they are fungible though. But to get the best efficiencies, we are configuring lines that what will be the best line configuration for that. But in terms of capability, I don’t think it requires anything additional capability because we are doing telecom, we are doing railways, we are doing defense, we are doing automotive. And in terms of our technical capabilities, I think it doesn’t require anything additional.

Rahul Hirawat — Multiples Private Equity — Analyst

Understood. Thank you.

Operator

Thank you. Next question is from the line of Umang Parekh from Ashika India Alpha Fund. Please go-ahead.

Umang Parekh — Ashika India Alpha Fund — Analyst

Thank you for the opportunity. My question is on the gross margins. So the gross margins have come down significantly for this quarter and on a yearly basis. So I just wanted to understand that what would be a sustainable gross margin going forward?

Jasbir Singh Gujral — Managing Director-

As I said in my opening statement, we are focused on delivering double-digit EBITDA on a long-term sustainable basis, couple of percentage points here and there, that’s one issue. We don’t see any significant downside in the margins with the composition of the business plans in the sales which we have envisaged for the coming years, we don’t see that quarter-on-quarter, as I said, I’m not really hung-up on quarter-on-quarter because on quarter-on-quarter the [Indecipherable] business we may have a higher proportion of business which is on a lower-margin, but on a year-on year basis and sustained basis it gets evened out. And even on quarter-on-quarter, the margins — the gross margins at time may be lower, but they are offset by the savings in the OpEx, which we make. So if you see here on quarter four, for example, we have a operating EBITDA of about 9.5% versus a full-year of 9.6%, excluding the treasury income. So it’s only a 10 basis point, 1%, 10 basis-points is only reduction. So this is a game that we can’t see gross margins, operating margins, we have to see everything in totality. So everything in totality, my EBITDA has been 9.5 versus 9.6 operating EBITA, the gross EBITDA with treasury income is 10 point something, whatever. So it is not desirable, but we’re not hung-up about it because we are focused on the long-term and long-term we are very sure that was the design and development thing coming in with beefing up of our export setups and marketing setup in Europe and America and venturing out into railways and other things, would have the accretion to the EBITDA. And when I say accretion to the EBITDA, it will be operating leverages and margins.

Umang Parekh — Ashika India Alpha Fund — Analyst

Perfect. Got it. And sir lastly, what would be the timeline for the execution of our current order book of INR3,000 crores?

Jasbir Singh Gujral — Managing Director-

As I said, out of this INR3,000 crores, I think approximately 70%, 75% percent will be executed within the financial year and rest will be a spillover to ’24-’25, and then we just 45 days into this year, the new orders will keep coming in. So I don’t foresee a scarcity of inbound business.

Umang Parekh — Ashika India Alpha Fund — Analyst

Okay. Understood. That was it from my side.

Jasbir Singh Gujral — Managing Director-

Very, very positive on it.

Operator

Thank you. Next question is from the line of Amar Mourya from AlfAccurate Advisors. Please go-ahead.

Amar Mourya — AlfAccurate Advisors — Analyst

Sir, thanks a lot for the opportunity. Firstly, sir, as you indicated that healthcare is going to remain muted in the first-half. So on a year-over-Year basis, what kind of growth we see in healthcare and industrial. If you can help us.

Jasbir Singh Gujral — Managing Director-

Industry growth rate is robust. I don’t foresee any sort of issue on the industry growth rate, just for a minute.

Amar Mourya — AlfAccurate Advisors — Analyst

Healthcare and Industrial segment sir. I’m talking about healthcare and industrial segment. As you indicated, I believe healthcare is largely over export driven, right?

Jasbir Singh Gujral — Managing Director-

See healthcare. so this year, healthcare, the industrial has grown by about 46%. So it is not muted, its an industrial. Healthcare has sort of grown by early teens, it’s not gone up by 20%, but its gone up 12%, 15%, so we don’t — in the coming quarters also. We expect to be stabilized and then we see a uptick in the Q3 of this financial year. So this year we expect that it will be again normal, what you call growth rate in healthcare or at worst — at worst it could be stagnation at what we are doing, but we are confident that we’ll grow at 10%, 12% in healthcare also in the coming year. We expect to grow significantly in industrial.

Amar Mourya — AlfAccurate Advisors — Analyst

Okay, so industrial would be — would be what, like 25%, 30%.

Jasbir Singh Gujral — Managing Director-

We are planning a growth of about 35%, 45% whatever. So industrial would be definitely growing at, I have not taken the order book of Industrial, but I think it should be growing at a good trade-of 20% plus, but this all the figure I have got in mind. But the order book for industrial for whatever clients we have sort of onboarded, it looks good.

Amar Mourya — AlfAccurate Advisors — Analyst

Okay sir.

Jasbir Singh Gujral — Managing Director-

And it will continue to be a significant part of our revenues going forward on a long-term basis.

Amar Mourya — AlfAccurate Advisors — Analyst

Okay, okay, okay. So sir, basically do we see because of the competition changing from, let’s say, industrial growing at the higher-rate now again, and obviously the consumer will grow at a faster rate. But do we see some inch up in the gross margin because of the mix changing in FY’24?

Jasbir Singh Gujral — Managing Director-

See the dynamics of margins because of change in composition of the product mix, we can’t avoid and we can’t wish away. It is part and parcel of the game. What we are focused on is that how do we sort of if it’s a positive change how do we maximize it. And if it’s sort of a little bit of adverse composition, how do we improve upon it. And that is where our operating leverage is and our purchasing part. See, at INR2,000 crore turnover with the material content of approximately 75%, it is INR1,500 crore spent. I am just secularly saying at a INR3,000 crore, it is INR2,200 crores and at a INR4,000 crore it is a 3,000 crore spend.

The gaming par and heft have muscle which we get when we go into that league of purchasing would offset some of these activities or the change in the product mix which may have, and we have now created a specialized sort of dealing procurement from sourcing strategic purchase with focus on value engineering, the deal design thing kicking in to ensure that any adverse impact because of a product mix change is compensated by better sourcing and cost efficiencies in operations. And hence the EBITDA sustained is of double-digit continuous.

Amar Mourya — AlfAccurate Advisors — Analyst

Okay, okay. But then sir is there a scope for you now to improve your gross margin and reach to 30% level because this year our gross margin is around 24%, 25%. I think it has corrected. So do we see that now again we can inch, let’s say in 24% to 30% GP margin again?

Jasbir Singh Gujral — Managing Director-

Very tough to say that. But again, I’m focused more on the bottom-line and the EBITDA. So I would say gross margin is one major and operating efficiencies the second major. Both of these put together, they may complement each other or they may help each other. We are confident of attaining double-digit EBITDA.

Operator

Thank you. Amar, I’ll request you to join the queue again for a follow-up question. The next question is from the line of Vinayak Mohta From Stallion Asset. Please go-ahead.

Vinayak Mohta — Stallion Asset — Analyst

Yes, hi, good morning, sir. Congrats on a great set of numbers. I just had two broad questions. So just wanted to understand give your way forward, the kind of customers you are acquiring, will be moving [Technical Issues] kind of business.

Operator

Vinayak, Your voice is not coming clearly. Your voice is coming little muffled.

Vinayak Mohta — Stallion Asset — Analyst

Is this better?

Operator

If you can talk.

Vinayak Mohta — Stallion Asset — Analyst

Iis this better?

Operator

Yes, go ahead.

Vinayak Mohta — Stallion Asset — Analyst

Yeah. I was just trying to understand the difference between the ODM and the contract manufacturing, what kind of the change in percentage of revenue can we expect going-forward and what kind of margin differential remains between the two segments, because I presume that ODM has a higher share of the margin.

And second question was basically, how are we placed with the capacities. As of today you’ve given, like, the way forward that you acquired eight to 10 new customers and adding to that, railways is going to add a decent chunk to your revenues. So how are the capacities placed with regards to that? And what kind of operating leverage do you presume will be driving the margins, what the operating segments? Because I would presume that the next one to two years might have a decent amount of cost that would add up given the kind of expansion you’ve done. So apart from that, where do you see the operating leverage benefits coming from because post FY’25 I can see the levers, but at least until then. That would be the three questions. Thank you.

Jasbir Singh Gujral — Managing Director-

Okay, now on the composition of the sales going-forward, the fact that we have put up a separate — we have housed in development and engineering efforts into a separate subsidiary is the only a demonstration of the focus of the management in value creation. So this has just been done a couple of months back. The subsidiary has been only created in April. So now with that exclusive focus on design and engineering across verticals, I believe ’23-’24 we may get some benefits of it. But going-forward on a long-term basis the design and engineering would from a significant portion of our revenues and it will also help us in enhancing the margins, because we go into a ODM product. This coupled with the industrial growth and box build, all sort of project of sort of point to the fact that even growing at 35%, 40%, 50% on two-three, four-year basis consistently if we see the back record from 800 to 1,200 to 2,000 and going-forward, they would be accretion in the margin and not dilution.

Now on the capacities, whatever we have installed capacity is today plus maybe a couple of lines would be sufficient for us to achieve this year’s growth projections. The CapEx cycle which is being done in financial year ’23- 24 is essentially for the growth which we are expecting in ’24-’25. So as I said, we’ll be growing at about 35%, 40% this year. The next year if we grow at the same rate which we are confident to operate, it would require the CapEx. So the CapEx cycle by and large which is now being done would specially be for ’24-’25, very little. for ’23-’24. For ’23-’24, we broadly in sync with the capacity, is in sync with the requirement, though the peak requirements at times as high so we are putting in some buffer over there.

Now the operating leverage is, I think even if you see the FY23 numbers, the decrease in the gross margin of about 4% has been offset by about 3.2% by operating. So, going-forward, once the asset start optimum utilization — reach the optimum utilization stage, I think the operating leverages will further set in. And we believe that with, again as I shared, with the scale which we are now envisaging, we would be in a better position to negotiate better prices, better terms with global vendors also. So there is a 2% to 3.3% operating leverage we’ve already got this year, and when the operating cycle has still not been reached the optimum utilization. So, going forward I think this will play a very significant role in sustaining sort of margins.

Vinayak Mohta — Stallion Asset — Analyst

Understood. Just to follow-up on the ODM side, what kind of margin differential do you think can be there between an ODM and a contract manufacturing business as an average, not specific, but over a period of time what kind of margin differentiate have you…

Jasbir Singh Gujral — Managing Director-

I think 2% to 5% is difference which you get kind of in a long-term sustainable basis.

Vinayak Mohta — Stallion Asset — Analyst

On the EBITDA front, right?

Jasbir Singh Gujral — Managing Director-

See, end-of-the day, the effort involved is the same. Once I get a better material margin, then that results into a better EBITDA. Operating expenses don’t change too much.

Vinayak Mohta — Stallion Asset — Analyst

Understood, perfect. Thank you so much and all the best.

Operator

Thank you. Next question is from the line of Vinod Chari from BOB Capital. Please go-ahead.

Vinod Chari — BOB Capital — Analyst

Yeah, good morning, sir. Thank you for the opportunity. I had a couple of industry-related questions. One is, recently I read that Fuji — Fuji is one of our machine suppliers and uji is also sitting up PCB capacity in India. So, and apart from that even otherwise in the industry I think we’re hearing a lot of Chinese companies willing to set-up capacity out of India now. So what would that mean for a industry player like us?

Jasbir Singh Gujral — Managing Director-

I don’t think Fuji is setting up a PCB capacity. I don’t know. In fact I was with the Indian MD the other day, there was no such thing. They are especially into the the equipment and they will continue to be in the equipment. But you have pointed out, I’ll check it up. I’m not aware of it as of date and I don’t think they are into the PCB thing globally also.

So as far as the Chinese companies setting up pace in India, I don’t see it as a threat, I see it as an opportunity. It also opens up doors for me to tie-up with some company for some specialized products and start manufacturing in India. Whatever we have been discussing is all organic growth now. So I don’t think Chinese companies coming into India and setting up a shop as a threat. In fact, I see it as positive thing that it gives us the opportunity to see how we can participate in that thing and garner in some business from some verticals where we are not present.

Vinod Chari — BOB Capital — Analyst

Okay. Sir, on exports, EU is now talking of retaliatory tariffs for India. So would that impact us in a big way and so what are your thoughts on that? Do you think will happen?

Jasbir Singh Gujral — Managing Director-

One, I don’t think think. But again, if it were to happen, we have to — see, we are into the business. We are not here for candies. So we have to work for it In the electronics. Should the things come, we’ll cross the bridge when it comes, but I don’t see a adverse impact on EU or America, if in fact see a very strong, what you call, interest coming all vested Europe at America for sourcing from India. In fact, my colleague is going out to America to have a chat with one of the major multinationals at the end of this month. It will take 15 months for the business to take, but there is a pro-active positive interest in India. And this is coming from the mouth of the giants. And with Apple coming in, I think its sort of the perception about India changes significantly if a company like Apple. You just imagine when Suzuki came in India in ‘8os, the automotive industry was nowhere in India. But one company has put India on the global map for automotive components.

So one Apple or one Samsung or one Intel or one X, Y, Z. I think it changes the dynamics and global perception. While we may not be able to get business from the Apples and the Intel’s, I’m just saying. The positive impact of the Tier two and Tier three companies when they come to India is where the majority of the business will be. And that business distribution will be democratized over a large number of vendors. Apple will bring in its own vendor. Maybe down the line the component industry would benefit. But EMS, of if you ask me have they benefited from Apple coming in., No. In fact, I lost my manpower.

But the moment the Tier two, Tier three companies come in, that is where the growth is, as I view this was democratized and there’ll be a lot of companies will benefit from it. And we believe we are the first among equals in this industry, so we should be there to capitalize on the emerging opportunities.

Vinod Chari — BOB Capital — Analyst

And again, that was the follow-up question. If you look at Apple, I think they have shifted their entire ecosystem to India. So their suppliers and vendors have also relocated. But are these measures really percolating down to the Indian EMS industry? That was my next question actually.

Jasbir Singh Gujral — Managing Director-

So, Apple, the EMS part. I’m into EMS. EMS part, they will again go with Foxconn or Wistron r whatever. They may not take a EMS partner for their things. But for the periphery component, like the Apple chargers, they may come to people like us. But once, again, a Tier 2 vendor comes into the country because of the perception — positive perception which has been created by entry of Apple or Intel or X, Y, Z, with the new IT policy. Well, the Tier two companies come and these Tier two companies are not companies which are doing INR100 crores, INR200 crores, a billion-dollar companies — multi-billion dollar companies. When they come into the country and they want to tie-up with Indian companies, I think companies like us and/or peers are there to harvest the business which will be coming.

Vinod Chari — BOB Capital — Analyst

Again, lastly I think the kind of growth this industry is looking at, do you think there’ll be a steady and adequate supply of manpower for the industry? Or do you think that will hit a ceiling at some point in time?

Jasbir Singh Gujral — Managing Director-

That’s one of the challenges we are there for. If there were no challenges, I think there would be — everyone would be a business man. The fact that there are challenges, some people take that challenge head-on and manpower availability is not a issue. Changing of manpower is a part and parcel of our culture. Attrition is a issue, but we have to see how do we best address it, better sort of attraction engagement with the people and everything. But yes, that is one of the key factors about going-forward. But if you continue, I think if the industry — electronics industry grow at 30%, 35%, manpower becomes a one of the issues which we have to resolve on a day-to-day basis.

Vinod Chari — BOB Capital — Analyst

Okay. Thanks a lot, sir.

Operator

Thank you. Next question is from the line of Piyush Khandelwal from Bank of India Mutual Fund. Please go-ahead.

Piyush Khandelwal — Bank of India Mutual Fund — Analyst

Yeah, thanks. Sir, just one question on this thought process behind the capital location because I see that you guys have recommended a dividend this year. I mean, it just came to the — capital markets have raised money expecting across industry sectors to grow 35% or 40%. ROIC in this business in my sense will be in the range of 18% to 20%. You wont still be hitting the free-cash flow over next two to three years time. So just trying to understand the thought process behind this capital allocation policy.

Jasbir Singh Gujral — Managing Director-

End-of-the day, we have been a profit-making company before listing and we had a profit-making company going-forward. So why shouldn’t the shareholders participate. I think it’s a progressive thinking. If I was only think about myself, I think it’s a progressive thinking that yes, the shareholders who have reposed faith in us and we have made profits. So overall we have made profit. It’s not that we’ll be borrowing money to pay the dividends. We have made profits. We have adequate cash reserves, not not even considering the IPO money, I’m not even talking of that operational thing, so I think it is a positive management thought process of taking along all the shareholders in our growth journey and sort of the rewarding them as partners in progress.

Bijay Kumar Agrawal — Chief Financial Officer

And also for all the next two years, three years CapEx, that’s why we raised the IPO money, we want to clearly distinguish that out of the profits made from the business we will repatriate some as dividend as a policy.

Jasbir Singh Gujral — Managing Director-

So I think we’re not even using the capital available, we are using it from the operating profit which we have made and it’s a highly deleveraged company. So we’re not sacrificing long-term or short-term growth or investment cycle or growth of the company by making this dividend, shareholders are integral part of our ecosystem. That’s what we believe in Syrma SGS. And it is our bounded duty to reward the shareholders who have invested in the company without compromising on the long-term objectives of the company. Why should I be sort be only flowing back everything and not rewarding the shareholders. This is a progressive thought process of the Board.

Piyush Khandelwal — Bank of India Mutual Fund — Analyst

All right. Alright. So the question was more on the free-cash flow generation, not on the progressive because if the industry is growing, let’s say, 35%, 40%, why not retain the money and then deploying the capital itself, it will create more value for the shareholders.

Bijay Kumar Agrawal — Chief Financial Officer

So I think for the CapEx thing we have adequately funded for that thing. So that’s what the plans are very clear for us going-forward what capital allocations we are doing. We have already said that will be spending around INR200 crores to INR250 crores of CapEx in the upcoming year and that much of fund is already there with us. So it’s a it’s a pure-play complete casual planning that way.

Operator

Thank you very much. Sorry sir, go-ahead.

Bijay Kumar Agrawal — Chief Financial Officer

Yeah, please go-ahead.

Operator

Ladies and gentlemen, we’ll take that as the last question. I now hand the conference over to the management for closing comments.

Jasbir Singh Gujral — Managing Director-

Clearly, its been wonderful interacting with you. I would close the Q&A session by reaffirming the management’s vision of creating organization which is growing at a rate superior to the industry average, maintaining double-digit EBITDA and being a responsive, responsible corporate citizen for the country. We are very mindful of the fact of where we want to be. We want to be a design-led engineering, electronics manufacturing company and towards the end we have already refocused over sort of expertise and essential on design and development, which will help our to maintain the growth momentum with the margins in the coming year. The macroeconomic conditions are favorable, so it is favorable for all the industry peers. But we believe that we are there to take benefit of that emerging opportunities and whatever we have discussed, it’s all organic growth which we have discussed.

The other opportunities with one of the gentlemen said about the Chinese companies coming in and all those things, those on additional fruits to be picked if available at logical terms. And we are very mindful of not having a concentrated customer base. Top-five customers contribute 35%, top 10, 51% and top 20 67%. And no customer accounted for as we said last year, more than 10%, 12% of our revenues and we maintain this will continue in the coming year also, minor to 1%, to 2% attrition set apart.

We will not be dependent on any one industry vertical. We’ll be spread across industry verticals and that will enable us to continue to grow at this scorching pace,. 45%, 50% last year, a 62%, 63% this year, a projected 30%, 35%, 40% in the coming year and the future years. I think we are in for a very exciting journey.

And when we are doing all this, the senior management teams attention and time has also taken-up in building the organization. I think the only pitfall which any one of four companies peers can sort of face with this scorching or the accelerated growth which we are having is not having organization structure in place to cater to the growth. We are upfronting expenditure in our HR systems, HR initiative, IT infrastructure, everything. And we have got the PLI for telecom, which has already gone sort of its positive. We have started manufacturing the air-conditioning PLI which we had, we’ll have fruits of it in this year. The IT PLI which has been announced two days back, I think will have a very-very positive impact on the business in general and I don’t see any reason why we should not be able to take benefit of that.

Having said that, I think I will conclude that we are in for a exciting next three-four years of growth with profitability and with all the challenges which are attendant to any growth. And thank you very much for being part of this call. And if you have any other questions offline, I think you can get in touch with the concerned people and Nikhil Gupta is always there to sort of sort out any queries which you may have. Thank you very much and a very good day to you ladies and gentlemen.

Operator

[Operator Closing Remarks]