The IPO of EMS player Cyient DLM opened on Tuesday morning for subscription and was already subscribed 2.65 times at the end of day one. The issue closes June 30. The company intends to raise ₹700 crore in total through fresh issue of equity. The price band of the issue has been set at ₹250-265. The market capitalisation of the company post issue at the upper band will be ₹2,100 crore. The company is raising funds to prepay some debt, fund its capital expenditure and working capital requirements. The promoter group - Cyient Ltd will retain the majority stake in the company post issue with 67 per cent equity.
The company has more than two decades of experience in developing high mix, low-to-medium volume highly complex systems. The company is a qualified supplier to global OEMs in the aerospace and defence, medical technology, and industrial sectors.
At the upper end of the IPO price band, the company is valued at pre-issue PE of around 45 times. On a post-issue basis, the company is valued at a PE of around 66 times. Peer Syrma SGS trades at 68 times, Kaynes Technology at 76 times, Avalon Technologies at 55 times and DCX Systems at 30 times. On a EV/EBITDA basis, it is valued at 19 times.
Based on the above, while valuation is not out of peer range and thus reasonable on a relative basis, it is not cheap on an absolute basis. While prospects for the company appear good, given low PAT margins, potential risks from global economic slowdown and client concentration, we prefer a wait-and-watch approach for now.
Business and prospects
Cyient DLM offers comprehensive solutions throughout the product life cycle. The company leverages the design capabilities of its parent company, Cyient, and provides build to print (B2P) and build to specification (B2S) services to its clients. Its solutions include PCB assembly, cable harnesses, and box builds used in critical systems such as cockpits, inflight systems, and medical diagnostic equipment.
B2P solutions involve the client providing the design for the product and the company provides manufacturing services. B2S services, however, involve utilising the company’s capabilities to design products based on client specifications and manufacturing the product. In FY23, the company had 70 per cent of its revenue from exports and the rest from the domestic market, which the management expected to be in the range of 30-35 per cent in FY24.
Within the EMS sector, Cyient DLM is a high-mix and flexible volume player which means it produces high variety of products in defined quantities — it follows make-to-order operations. The company’s notable clients are Honeywell International Inc., Thales Global Services S.A.S, ABB, Bharat Electronics Ltd and Molbio Diagnostics Private Ltd. The company’s manufacturing infrastructure includes facilities in Mysuru, Hyderabad, and Bengaluru, with specialised areas for different manufacturing needs.
Prospects
The EMS market is witnessing strong tailwinds. The India EMS currently accounts for 2.2 per cent ($20 billion) of the global EMS market in 2022. The sector is growing fast and is expected to contribute 7 per cent of the global EMS market in 2026.
There continues to be a strong push from the government to make India an ideal location for electronics manufacturing in the region. With clear benefits in terms of production efficiency, reduced overhead, labour costs, and faster new product introductions, OEMs today continue to collaborate with EMSs to develop their products. In addition to it, as per Frost & Sullivan Report, OEMs are also increasingly moving product design and development processes, to EMS partners.
According to the company, benefits from the sectoral expertise and brand reputation of its promoter, Cyient and its design capabilities enhance its value proposition.
The order-book stands at ₹2,546.8 crore (as on September 30, 2022) and based on FY22 revenue, the book to bill ratio turns out to be good at around 3.5 times as of September.
However, it must be noted that Cyient DLM gets 67 per cent of revenue from top 5 clients and 93 per cent from top 10 clients. This customer concentration is not favourable and could pose some risk.
Financials
Cyient DLM has reported a decent set of numbers over the past few years although higher costs resulted in decline in profits in FY23. Its revenues grew at a CAGR of 15 per cent from FY21-23, whereas EBITDA grew at a CAGR of 31 per cent for the same period and PAT grew at a CAGR of 64 per cent in this period. The higher PAT growth is also due to the base effect. Its EBITDA margin for FY23 was 11.2 per cent, lower than FY22’s 12.6 per cent. In FY23, its PAT margin was at 3.8 per cent, lower versus FY22.