Cyient DLM IPO review (May apply)

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Review By Dilip Davda on June 23, 2023

•    CDL is an integrated EMS and solutions provider for B2P and B2S segments.
•    While its top line marked steady growth, its bottom line posted inconsistency.
•    EMS segment has marked fast growth and will continue to do so. 
•    The company is poised for better prospects with the reduction in debt and expansion plans afoot. 
•    However, based on its FY23 performance, the issue appears fully priced. 
•    Well-informed/cash surplus investors may park funds with a long-term perspective.

PREFACE:
The company originally planned for a fresh equity issue worth Rs. 700 cr. But as it opted for pre-IPO placement worth Rs. 108 cr. (4075471 shares) at a price of Rs. 265 to Amansa Investments Ltd., the IPO size is reduced by an equivalent amount, i.e. the IPO stands reduced to Rs. 592 cr. The market expected some group company shareholders' quota reservations but was disappointed. Group's flagship company Cyient Ltd. is already listed on BSE and NSE and currently quoting at a P/E of around 45.50. This counter marked ATH (All Time High) of Rs. 1525 in the first week of June 23.

ABOUT COMPANY:
Cyient DLM Ltd. (CDL) is an integrated EMS and solutions provider with a focus on the entire life cycle of a product, including design, build and maintain. 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 CDL provides to clients as B2P or B2S services. 

CDL is one of the leading integrated Electronic Manufacturing Services ("EMS") and solutions providers (Source: Frost & Sullivan Report) with capabilities across the value chain and the entire life cycle of a product. 

It leverages the design capabilities of its Promoter, Cyient Limited, a leading engineering services provider with over three decades of domain expertise providing engineering and design solutions globally with a focus on multiple industries (Source: Frost & Sullivan Report). Its Electronic Manufacturing Services are provided as Build to Print ("B2P") and Build to Specification ("B2S") services to clients. 

The EMS market is witnessing strong tailwinds. India EMS is a sizeable industry, contributing 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. 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, OEMs are also increasingly moving product design and development processes, to EMS partners (Source: Frost & Sullivan Report). 

CDL is well positioned to take advantage of these tailwinds on the back of its solutions-oriented approach, client-focused service and track record of reliability. Being a wholly-owned subsidiary of Cyient Limited, its relationship with the Promoter allows it to benefit from its reputation, customer relationships, global salesforce, network and technical expertise, making one of the industry's leading integrated EMS and solutions providers in India (Source: Frost & Sullivan Report).

Its customers belong to a diverse range of high-entry-barrier industries that have stringent quality and qualification requirements. CDL 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, with the aforementioned customers. 

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

CDL's manufacturing infrastructure comprises three facilities spread across two states in India, at Mysuru, Hyderabad and Bengaluru, with a total manufacturing area of 229,061 sq. ft. Its Mysuru facility has a manufacturing area of 65,929 sq. ft. and is primarily engaged in the manufacture of PCBA, cable harnesses and box builds for clients in the aerospace and defence industries. Its Hyderabad facility, which is located in a special economic zone, has a manufacturing area of 150,932 sq. ft. and is primarily engaged in the manufacture of PCBA, cable harnesses and box builds for clients based in non-aerospace and non-defence 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. As of March 31, 2023, it had 656 permanent employees and 361 contract labourers on its roll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book-building route IPO of fresh equity shares issue (approx. 22339678 shares) worth Rs. 592.00 cr. It has announced a price band of Rs. 250 - Rs. 265 per share of Rs. 10 each. The issue opens for subscription on June 27, 2023, and will close on June 30, 2023. The minimum application to be made is for 56 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 28.18% of the post-IPO paid-up capital of the company.

The company has reserved shares worth Rs. 15.00 cr. for its eligible employees and offering them a discount of Rs. 15 per share. From the residual quota, it has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors.

The total gross funds of Rs. 700 cr. mobilized through pre-IPO and IPO route, from the net proceeds after deducting IPO expenses, it will utilize Rs. 291.09 cr. for working capital, Rs.43.57 cr. for capital expenditure of the company, Rs.160.90 cr. for repayment/prepayment of certain borrowings, Rs. 70.00 cr. for inorganic growth through acquisitions, and the rest for general corporate purposes.  

Axis Capital Ltd. and JM Financial Ltd. are the two joint Book Running Lead Managers and KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 125 to Rs. 566 per share between December 2003 and June 2023. It has also issued bonus shares in the ratio of 17 for 1 in December 2022. The average cost of acquisition of shares by the promoters is Rs. 78.76 per share. 

Post-IPO, CDL's current paid-up equity capital of Rs. 56.94 cr. will stand enhanced to Rs. 79.28 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 2101.00 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CDL has posted a turnover/net profit of Rs. 636.91 cr. / Rs. 11.81 cr. (FY21), Rs. 728.48 cr. / Rs. 39.80 cr. (FY22), and Rs. 838.34 cr. / Rs. 31.73 cr. (FY23). Thus while its top line marked steady growth, its bottom line posted inconsistency. In fact, the net profit has declined for FY23. According to the management, this was due to the higher finance cost and lower other income. 

For the last three fiscals, CDL has reported an average EPS of Rs. 10.07 and an average RoNW of 30.45%. 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). 

For the last three fiscals, its PAT margins were 1.88% (FY21), 5.52% (FY22) and 3.81% (FY23) and RoCE margins were 11.48% (FY21), 17.56% (FY22), and 13.48% (FY23). Thus for FY23, it has posted declining trends on both these counts. However, its EBITDA margins remained almost stagnant at 11.66% for FY22 and 10.55% for FY23. Its total number of customers marked a fall as it came down from 50 for fY22 to 35 for FY23. For both these years, its inventory outstanding increased to 186 days for FY23 from 137 days for FY22 and all these parameters raise concern. 

If we attribute FY23 earnings to post-IPO fully diluted paid-up capital, then the asking price is at a P/E of around 66.25. Thus the issue appears fully priced. 

DIVIDEND POLICY:
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. 

COMPARISON WITH LISTED PEERS:
As per the offer document, CDL has shown Syrma SGS, Kaynes Tech, and DCX Systems as their listed peers. They are currently quoting at a P/E of around 138.95, 91.97, and 35.37 (as of June 23, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The two BRLMs associated with the issue have handled 52 public issues in the past three fiscals, out of which 19 issues closed below the IPO price on the listing date. 

Cyient DLM IPO FAQs