Cyient DLM Ltd – IPO Note – Equity Research Desk

Company Overview:

Incorporated on June 30, 1993, Cyient DLM Limited is an integrated Electronic Manufacturing Services (EMS) and solutions provider that focuses on a product’s whole life cycle, including design, manufacture, and maintenance. Its solutions primarily comprise the manufacture of (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, which Cyient DLM provides to clients as B2P (Build to Print) or B2S (Build to Specification) services. The company is a subsidiary of Cyient Ltd, the Hyderabad based technology solutions company. Cyient DLM has three manufacturing facilities located in Mysuru, Hyderabad and Bengaluru with a total manufacturing area of 229,061 sq. ft. It has a diverse Board of Directors with an average of more than seven years of expertise in the EMS business, which is reinforced by its experienced management team with an average of more than 20 years of industry experience.

Objects of the Offer:

• Repayment/prepayment of certain borrowings of the Company.
• To fund working capital requirements of the Company.
• To fund the capital expenditure of the Company.
• Achieving inorganic growth through acquisitions.
• Achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Investment Rationale:

• Fast Growing Industry: The EMS market is witnessing strong tailwinds. In India, EMS is a sizeable industry, contributing to 2.2% (USD 20 billion) of the global EMS market in 2022. India’s EMS industry is the fastest growing among all countries at a CAGR of 32.3% and is expected to contribute 7.0% (USD 80 billion) of the global EMS market in 2026. The strong push from the Government to become Atmanirbharat through PLI schemes makes India an ideal location for electronics manufacturing. With clear benefits in terms of production efficiency, reduced overhead, labour costs, and faster new product introductions, OEMs today continue to collaborate with EMS companies to develop their products.

• Strong Clientele: Cyient DLM’s customers belong to a diverse range of high-entry-barrier industries such as aerospace and defence, medical technology and industrials which have stringent quality and qualification requirements. It enjoys long-term relationships as an integrated partner to multiple marquee customers such as Honeywell International Inc. (“Honeywell”), Thales Global Services S.A.S (“Thales”), ABB Inc, Bharat Electronics Limited and Molbio Diagnostics Private Limited, having had an average relationship of over 11 years as on March 31, 2023. As on FY23, the company has a total number of 35 customers and the top 5 customers accounts for 68% of the overall revenue.

• Financial Track Record: The company’s revenue from operations grew at a CAGR of 22% between FY20-23 from Rs.457 crs in FY20 to Rs.832 crs in FY23. The EBITDA grew at a CAGR of robust 85% between FY20-23 from Rs.14 crs in FY20 to Rs.88 crs in FY23. Simultaneously, EBITDA Margin has improved from 3% in FY20 to 11% in FY23. The company has improved by reporting a loss of Rs.7 crs in FY20 to positive PAT of Rs.32 crs in FY23. The order book of the company as on FY23 stands at Rs.2433 crs which is nearly 3 times of FY23 revenue. 97% of the pending orders are sourced from top 10 customers.

Key Risks:

• Client Concentration Risk – The companyis dependent on the sale of their products to certain key customers. The top 10 customers constituted 91.08% of their total revenue from operations for the year ended March 31, 2023. The loss of any key customers can impact the company’s revenue significantly.

• Raw Material Risk – The company is highly dependent on third party suppliers, global vendors for the supply of components and raw materials, including semiconductors, capacitors, sheet metals, etc. Hence, if any difficulties arise in the supply of raw materials, it would lead to delays in manufacturing and the subsequent processes.

Outlook:

The IPO is a complete fresh issue (100%) which is key positive for the company. The adjusted EPS (including the fresh issue) is at Rs.1.5 for FY21, Rs.5.04 for FY22 and Rs.4.03 for FY23. According to RHP, the listed peer group of the company are DCX Systems, Syrma SGS Technology, Kaynes Technology, Avalon technologies, etc. At the higher price band, the listing market cap will be around ~Rs.2100 crs and the company is demanding a P/E multiple of 66x based on FY23 EPS. The peers such as Syrma SGS Technology, DCX Systems and Kaynes Technology are currently trading at a P/E of 64x, 35x and 92x on a TTM basis. When compared to its peers, Cyient DLM can be placed under fairly priced category. Based on the above views, we provide a ‘Subscribe’ rating for this IPO.

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