IPO Analysis: Cyient DLM Limited

IPO Rating: Apply for long term

About the issue:

Incorporated in 1993, Cyient DLM Limited provides Electronic Manufacturing Services (EMS) and solutions. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 250 to Rs 265 per equity share. The issue size is Rs 592 crore at a higher price band.

The IPO opening date is June 27, 2023, and it will be closing on June 30, 2023. The issue is likely to be listed on the exchange on July 10, 2023. The IPO market lot size is 56 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (728 shares or Rs 192,920) at the upper price band.

Objects of the Issue

The company proposes to utilise the net proceeds towards funding the following objects:

1. Funding incremental working capital requirements of the company.
2. Funding capital expenditure of the company.
3. Repayment/prepayment, in part or full, of certain of the borrowings.
4. Achieving inorganic growth through acquisitions, and
5. General corporate purposes.

Promoter holding

The pre-issue shareholding is 92.84 per cent, post the IPO the promoter stake will be 66.65 per cent.

About the company

Cyient DLM Ltd. (CDL) is an integrated EMS and solutions provider focused on the entire product life cycle, including design, build, and maintenance. Its solutions primarily consist of the manufacturing of (i) printed circuit board assembly (PCBA), (ii) cable harnesses, and (iii) box builds used in safety-critical systems such as cockpits, in-flight systems, landing systems, and medical diagnostic equipment, which CDL provides to clients as B2P or B2S services.

CDL is a leading integrated Electronic Manufacturing Services (EMS) and solutions provider with capabilities spanning the value chain and the entire product life cycle.

It makes use of the design capabilities of its Promoter, Cyient Limited, a leading engineering services provider with over three decades of domain expertise that provides engineering and design solutions globally with a focus on multiple industries. It offers clients Build to Print (B2P) and Build to Specification (B2S) Electronic Manufacturing Services.

The EMS market is experiencing significant tailwinds. India's EMS industry is significant, accounting for 2.2 per cent (USD 20 billion) of the global EMS market in 2022. India's EMS industry is the fastest growing among all countries, with a CAGR of 32.3 per cent, and is expected to account for 7.0 per cent (USD 80 billion) of the global EMS market by 2026. The government continues to make a strong push to make India an ideal location for electronics manufacturing in the region. OEMs continue to collaborate with EMSs to develop their products, despite clear benefits in terms of production efficiency, reduced overhead, labour costs, and faster new product introductions. Furthermore, OEMs are increasingly outsourcing product design and development to EMS partners.

Because of its solutions-oriented approach, client-focused service, and track record of dependability, CDL is well-positioned to capitalise on these tailwinds. As a wholly-owned subsidiary of Cyient Limited, it benefits from the Promoter's reputation, customer relationships, global salesforce, network, and technical expertise, making it one of India's leading integrated EMS and solutions providers.

Its clients come from a wide range of high-entry-barrier industries with stringent quality and qualification requirements. CDL has long-term relationships as an integrated partner with several marquee customers, including Honeywell International Inc. (Honeywell), Thales Global Services S.A.S (Thales), ABB Inc, Bharat Electronics Limited, and Molbio Diagnostics Private Limited, with an average relationship of more than 11 years as of March 31, 2023.

The company offers services to clients throughout the product life cycle by acting as an integrated service provider that can support their manufacturing and after-market service needs, as well as their design needs by leveraging the Promoter's design team. It enjoys long-term relationships with high customer stickiness and a high proportion of repeat business as a strategic partner to clients across highly regulated industries, allowing it to have visibility on future revenue and a stable client base.

CDL's manufacturing infrastructure consists of three facilities located in two Indian states: Mysuru, Hyderabad, and Bengaluru, with a total manufacturing area of 229,061 square feet. Its Mysuru facility has a manufacturing area of 65,929 square feet and primarily manufactures PCBA, cable harnesses, and box builds for aerospace and defence clients. Its Hyderabad facility, located in a special economic zone, has a manufacturing area of 150,932 square feet and primarily manufactures PCBA, cable harnesses, and box builds for clients in non-aerospace and non-defense industries such as medical technology and healthcare.

Its Bengaluru facility has a manufacturing area of 12,200 sq ft and is focused on high-precision manufacturing. Some of the items manufactured include body valves, hinges, elbow adaptors, assemblies like bracket assembly, lanyard assembly and hinge arm locking assembly, etc.

Financial

On the financial performance front, for the last three fiscals, CDL has (on a consolidated basis) posted a revenue/net profit of Rs 636.91 crore /Rs 11.81 crore (FY21), Rs 728.48 crore/Rs 39.8 crore (FY22), and Rs 838.34 crore/Rs 31.73 crore (FY23).

Valuation and Outlook

If we attribute FY23 earnings to post-IPO fully diluted paid-up capital, then the asking price is at a P/E of around 63.25x. The issue is priced at a P/BV of 5.48 based on its NAV of Rs. 48.33 as of March 31, 2023, and at a P/BV of 2.34 based on its post-IPO NAV of Rs. 113.25 per share (at the upper band). Thus the issue appears fully priced. The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy, based on its financial performance and future prospects.

The company has established a niche in the EMS and solutions-providing segments. With its preparations in place, it is set to capitalise on the promising prospects. The reduction of debt after the IPO will save financial costs and improve earnings. Hence, we recommend subscribing to the issue for the long term.