Cyient DLM

Well poised

A strong order book, focus on safety-critical electronics in highly regulated industries and a strong customer base

Cyient DLM, a subsidiary of Cyient, is one of the leading integrated Electronic Manufacturing Services (EMS) and solutions providers with capabilities across the value chain and the entire life cycle of a product.

Cyient DLM hase over 22 years of experience in developing high mix, low-to-medium volume highly complex systems and it is a qualified supplier to global OEMs in the aerospace and defence, medical technology and industrial sectors. Contracts with customers who are located outside India contributed 59.71% of revenue in FY2023.

Solutions offered by the company primarily comprise: (i) printed circuit board (PCB) assembly (PCBA), (ii) cable harnesses, and (iii) box builds which are used in safety critical systems such as cockpits, inflight systems, landing systems, and medical diagnostic equipment. In FY2023 about 62.6% of revenue come from PCBA, 1.4% from cable harnesses, 32.4% from box builds and balance 3.6% from others.

It provides EMS as Build-to-Print (B2P) and Build-to-Specification (B2S) services to its clients. B2P solutions of it involve its client providing the design for the product for which it provides agile and flexible manufacturing services. B2S services involve utilizingthe Promoter’s design capabilities to design the relevant product based on the specifications provided by the client and manufacturing the product. In FY2023 about 99.8% of revenue comes from B2P. The company proposes to strengthen its B2S value proposition by investing in design capabilities to enhance its value addition and increase ownership in its engagements.

‘Low volume, high mix’ (LVHM) is a type of contract manufacturing setup, which typically has a very high emphasis on quality and customization, which changes according to the requirements of the customer. Typically, it enters into master service agreements (MSA) with its customers, which are generally for a term of three years to five years.

It leverages the design capabilities of itspromoter, Cyient, a leading engineering services provider with over three decades of domain expertise providing engineering and design solutions globally, with a focus on multiple industries.

Its manufacturing infrastructure comprises three facilities spread across two states in India, at Mysuru, Hyderabad and Bengaluru, with a total manufacturing area of 229,061 square feet (sft). The Mysuru and Hyderabad facility are primarily engaged in manufacture of PCBA, cable harnesses and box-builds. While the Mysuru facility is catering for clients in the aerospace and defence industries, its Hyderabad facility is catering to clients in non-aerospace and non-defence industries, such as medical technology and healthcare. Its Bengaluru facility is focused on high precision manufacturing with production of products such as body valves, hinges, elbow adaptors, assemblies like bracket assembly, lanyard assembly, and hinge arm locking assembly.

The company, pursuant to a share purchase agreement dated September 14, 2022, purchased 2,342,869 equity shares of Innovation Communication Systems (ICS, and such equity shares, the ICS Shares) a company primarily engaged in the business of designing and manufacturing of telecommunication equipment, from its Promoter, aggregating to 15.00% of the paid-up equity share capital of ICS, at a price of Rs 380.73 per ICS Share and for a total consideration of Rs 89.20 crore , based on fair value as certified by an independent valuer.

The issue and object of the offer

The issue comprises fresh issue of equity shares aggregating RS 592 crore. Of the net proceeds from the issue about Rs 291.09 crore will be utilized for funding incremental working capital, Rs 43.572 crore for capex, Rs 160.911 crore for repayment of borrowings, Rs 70 crore for achieving inorganic growth through acquisitions and balance for general corporate purposes.

As of March 31, 2023, its total borrowings amounted to Rs 314.474 crore which also included unsecured loans aggregating to Rs 153.563 crore from its Promoter.

Strength

Ability to provide integrated engineering solutions with capabilities across the product value chain.

It is a qualified supplier to global OEMs in aerospace, defence, medical technology and industrials. In FY2023 about 20%, 37.6%, 16.3%, 25.1% and 1% of revenue from operation come from aerospace, defence, medical technology and industrial verticals.

Catering to multiple marquee customers globally such as ABB, Honeywell International, Thales Global, Molbio Diagnostics with whom it enjoy sustained and long-standing relationships as their preferred partner. These marquee clients together contribute more than 50% of the revenue of the company.

The order book as of end of March 2023 stood strong at Rs 2432.547 crore. The order book, which is industry leading, is to be executed over the next 24-30 months.

Strong parentage from Cyient,with over 3 decades of experience in providing engineering and design solutions globally.

Weaknesses

Delay, shortage, interruption, reduction in the supply of or volatility in the prices of raw materials including electronics components such as semi conductors may affect the operations of the company.

Slowdown and reduced spending in the industries in which customers of the company operate.

The capacity utilization of the Mysuru and Hyderabad facility in FY2023 for PCBA was 38.43% and 7.61%, respectively, which is lower in comparison to other manufacturing companies.

In FY2023 about 90.75% of its total revenue from operations was contributed by its Mysuru facility.

Do not own the Cyient trademark, which is registered in favour of its Promoter but has entered a Trade-Name License Agreement, dated December 13, 2022, with its Promoter.

Some of corporate records, including those relating to allotments of Equity Shares in the past, are not traceable.

Change in import and export regulations of both India and key export and import markets.

Trade receivables as end of March 31, 2023, stood at Rs 161.78 crore, which is about 19.4% of FY2023 revenue.

Valuation

Consolidated sales for the fiscal ended March 2023 were higher by 15% to Rs 832.03 crore. With the operating profit margin contracting by 110 bps 10.6%, the growth at operating profit moderated to stand at 4% to Rs 87.78 crore. After accounting for lower other income, higher interest and depreciation as well as taxation, the PAT was down by 20% to Rs 31.73 crore.

The consolidated EPS (on expanded post issue equity based on the upper price) for FY2023 is Rs 4 and the PE works out to 66.3 times.

In comparison, the EMS players of similar size in revenue such as Syrma SGS Technology, Kaynes Technology, DCX Systems and Avalon Technology are quoting at a PE of 66.2 times 95.2 times, 34.9 times and 65.9 times of their consolidated EPS for FY2023. Similarly, larger players such as Dixon Technologies and Amber Enterprises quotes at PE of 103.64 times and 50.42 times their consolidated FY2023 EPS.