About the company:

Cyient DLM Limited, a subsidiary of Cyient Limited is one of the leading integrated electronic manufacturing services (EMS) and solutions providers encompassing the complete life cycle of products, ranging from design and building to maintenance. As of March 31, 2023, PCB Assembly and box building contributed 63% & 32% of the total revenue from operations respectively. With a strategic emphasis on quality and innovation, the company specializes in offering comprehensive solutions, including the manufacture of PCB assemblies, cable harnesses, and box builds. Its customer base consists of prominent global Original Equipment Manufacturers (OEMs) in the aerospace and defence, medical technology, and industrial sectors. Cyient DLM’s services are offered in two distinct categories: Build to Print (B2P) and Build to Specification (B2S), with the latter benefitting from the advanced design capabilities of its parent company, Cyient Limited. In addition to its core offerings, the company provides other services to its clientele, including obsolescence management, new product introduction, value engineering, sustenance engineering, and logistics and supply chain management.

The Objective of the Fresh Issue:

The company intends to utilize the net proceeds received from the fresh issue towards:

1. Funding incremental working capital requirements of the company

2. Funding capital expenditure of the company

3. Repayment/prepayment, in part or full, of the company’s borrowings

4. Achieving inorganic growth through acquisitions

5. General corporate purposes

Key Strengths and Opportunities:

1. India’s EMS industry is the fastest growing among all countries, with a remarkable CAGR of 32.3%. By 2026, it is projected to contribute 7% (USD 80 billion) to the global EMS market, highlighting the immense potential for growth and market share.

2. The company enjoys a significant entry barrier to new entrants as one of the few EMS companies in India offering electronics solutions for safety and mission-critical applications in highly regulated industries. Its clients are primarily engaged in industries such as aerospace and defence, medical technology, and industrials, which are typically subject to stringent regulations.

3. The company has a robust and industry-leading order book with marquee customers, with whom they enjoy sustained and long-standing relationships as their preferred partners.

4. The company intends to expand its geographical footprint by way of inorganic expansion in key geographies, particularly North America.

Risks:

1. Top 10 customers contributed 91% of the total revenue from operations for the year ended March 31, 2023. The loss of any of the key customers or any defaults or delays in payment of a significant portion could have a material adverse effect on the business operations, results, and cash flows of the company.

2. All the manufacturing facilities of Cyient DLM are located in southern India. For the year ended March 31, 2023, about 91% of the total revenue from operations is attributable to the Mysuru facility. Any disruption in any of its manufacturing facilities may adversely affect the business operations of the company.

3. The cost of materials consumed constituted about 80% of the total expenses for the year ended March 31, 2023. Since the company’s profitability is highly dependent on its inventory costs, failure to manage them could have an adverse effect on the company’s business operations.

4. As of March 31, 2022, Cyient DLM’s market share in the Indian EMS market was 0.5%. The company faces the risk of failure to compete effectively in the highly competitive EMS industry.

5. The company employs a “Low-volume, high-mix” contract manufacturing setup, prioritizing quality and specialization over a “High-volume, low-mix” approach where the primary focus is on speed and utilization. As a result, the capacity utilization of its facilities is lower compared to other manufacturing companies.

Financial Snapshot:

Conclusion:

Considering the current market dynamics and the Indian government’s active promotion of India as an attractive electronics manufacturing destination, Cyient DLM has the potential to thrive and expand its operations in this sector. However, the company’s PAT declined by 20% YoY in FY23 and it exhibits the lowest PAT margin in comparison to its listed peers. The company’s earnings valuation stands at 34x, considering EPS as of March 31, 2023 and the upper price band. Even though its listed peers are not truly comparable on a one-to-one basis, the PE ratios of Kaynes Technology, Syrma SGS Technology, and DCX Systems as of June 26, 2023 are 78x, 58x, and 30x respectively. The company intends to achieve inorganic growth through acquisitions. Although inorganic growth allows a company to grow faster and immediately increase its market share, steady and slow organic growth is considered superior as it shows the company has the ability to make money regardless of the economic backdrop. The long-term growth potential of the company is contingent upon several factors including stabilization of its financials. Hence, we advise our investors to consider subscribing to this IPO solely for potential listing gains.