Cyient DLM coming up with IPO to raise upto Rs 353.30 crore

Cyient DLM

• Cyient DLM is coming out with a 100% book building; initial public offering (IPO) of 1,33,32,297 shares of Rs 10 each in a price band Rs 250-265 per equity share.
• Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on June 27, 2023 and will close on June 30, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 25.00 times of its face value on the lower side and 26.50 times on the higher side.
• Book running lead managers to the issue are JM Financial and Axis Capital.
• Compliance Officer for the issue is Parvati K R.

Profile of the company

The company 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 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 it provides to its clients as B2P or B2S services. It was incorporated on June 30, 1993 and has over 22 years of experience in developing high mix, low-to-medium volume highly complex systems. The company is one of the leading integrated Electronic Manufacturing Services (EMS) and solutions providers with capabilities across the value chain and the entire life cycle of a product. It was incorporated on June 30, 1993. It has over 22 years of experience in developing high mix, low-to-medium volume highly complex systems, it is a qualified supplier to global OEMs in the aerospace and defence, medical technology and industrial sectors. ‘Low volume, high mix’ (LVHM) is a type of a contract manufacturing setup which typically has a very high emphasis on quality and customization which changes according to the requirements of the customer. 

The company leverages the design capabilities of its Promoter, Cyient, a leading engineering services provider with over three decades of domain expertise providing engineering and design solutions globally with a focus on multiple industries. Its Electronic Manufacturing Services are provided as Build to Print (B2P) and Build to Specification (B2S) services to its clients. Its B2P solutions involve its client providing the design for the product for which it provides agile and flexible manufacturing services. Its B2S services involve utilising its Promoter’s design capabilities to design the relevant product based on the specifications provided by the client and manufacturing the product. Its solutions primarily comprise: (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.

Proceed is being used for:

• Funding incremental working capital requirements of the Company.
• Funding capital expenditure of the Company.
• Repayment/prepayment, in part or full, of certain of the company’s borrowings.
• Achieving inorganic growth through acquisitions. 
• General corporate purposes. 

Industry overview

Electronics is one of the fastest-growing industries in the country. The total electronics market (domestic electronics production and imports of finished goods) in India was valued at Rs 9,263 billion ($124 billion) in FY22, expected to grow at a CAGR of 18.4% to reach Rs 21,540 billion ($ 289 billion) in FY27. The landscape of the industry is changing significantly, and revised cost structures have shifted the focus of multinational companies in India. At present, the Indian government is striving to strengthen manufacturing capabilities across several electronics industries and fill the gaps to make the Indian electronics sector globally competitive. India is positioned as both a high-quality destination for design and a cost-effective option. Low manufacturing costs, a skilled workforce, and a vast geographical area are some of the driving elements behind the development of India's electronics ecosystem. Also, the manufacturers are slowly shifting their focus on product mix from high-volume, low-mix (HVLM) products to low-volume, high-mix (LVHM) products.

The demand for electronic goods in India has grown significantly in recent years. The domestic electronics consumption market is estimated at Rs 8,117 billion ($ 109 billion) in FY22, expected to grow by 10.6% to reach Rs 13,463 billion ($ 181 billion) in FY27. Increasing electronics penetration in semi-urban and rural markets, a shift in lifestyle among the Gen Y population, and the adoption of smart gadgets are some key drivers supporting domestic consumption. Domestic electronics production accounted for approximately 69% of the total electronics market in FY22, valued at Rs 6,376 billion ($ 86 billion), and is expected to grow to approximately Rs 19,403 billion ($ 260 billion) in FY27, owing to various government initiatives and the development of India's electronic ecosystem. The total import value of finished goods in the electronics industry was valued at Rs 2,887 billion ($ 39 billion) in FY22, compared to Rs 1,736 billion ($ 23 billion) in FY21.

The A&D industry typically encompasses civil aviation, defence aviation and defence equipment. The global A&D industry, which is sized at $ 720 Bn in 2021, is expected to grow at 5.9% CAGR to become $ 960 Bn market by 2026. Leading commercial aerospace companies such as Boeing, Raytheon, Collins, and SpaceX, as well as emerging drone start-ups, will also provide growth in the mid-to-long term. Meanwhile, the defence sector was steady, reporting modest growth in the US and significant growth in Europe, with global military expenditures hitting an all-time high of $2.1 trillion in 2021. Unlike commercial aviation, the defence end markets were unaffected by the pandemic. India’s defence capital expenditure is constantly growing, which is evident from the annual defence budget, which has increased to Rs 5.25 lakh crore for FY23 from Rs 4.78 lakh crore for FY22. Besides, there is increased demand for large aircraft from Indian carriers like Indigo, SpiceJet, Tata etc. There are major initiatives from the government of India promoting a steady flow of foreign investment in this sector. This offers opportunities for start-ups as well as further expansion for the existing players. 

Pros and strengths

Ability to provide integrated engineering solutions with capabilities across product value chain: The company is a complete, end-to-end integrated EMS and solutions provider with robust capabilities providing both B2P and B2S services. As an integrated manufacturing partner providing ‘design-led-manufacturing’ solutions to its customers, it provide design through the design team of its Promoter and, manufacturing, testing and certification support to ensure that its customers’ products meet robust standards in reliability, safety and performance. It is well-positioned to deliver solutions to its customers across the entire product lifecycle. Its engineers have significant expertise which helps it build and supply complex products to its customers in a timely manner. Its capabilities allow it to act as a strategic partner to clients helping them through their journey on product introduction. Its role as an integrated solutions provider which is further strengthened by its Promoter’s design capabilities and expertise sets it apart from its competitors, and allows it to work with its clients from the conceptualization and design stage and support their manufacturing needs.

High entry barriers for competitors due to technical expertise: The company’s position as one of the few EMS companies in India offering electronics solutions for safety and mission-critical applications in highly regulated industries acts as a significant entry barrier to new entrants. Its clients are primarily engaged in industries such as aerospace and defence, medical technology and industrials which are typically highly regulated industries. It commenced its operations by manufacturing simple PCBAs for its customers for use in simple systems such as temperature transmitters, switching devices, airport lighting systems and other low complexity aerospace and industrial products, and subsequently evolved its capabilities to manufacturing complex PCBs for safety-critical applications, cable harnesses and box builds to large assemblies. The company has evolved significantly from providing simple PCB services, to having become a provider of high complexity, low to medium volume mission-critical solutions. This has enabled it to deepen its relationships with its customers over the years.

Robust and industry leading order book with marquee customers: The company has built a diverse customer base with marquee clients over 22 years of its presence in the EMS industry. Its strategic partnership model with its customers has accelerated its growth and allowed it to enjoy a position of an industry leader in the EMS sector. It also focus on assisting customers meet their requirements across the spectrum of their engagement with it, including in terms of cost, productivity, product reliability and low time to market. This, together with its high delivery standards and performance excellence, has enabled it to acquires, service and deepen and lengthen its relationship with diverse range of high-level clients ranging from startups to industry leaders. The company has consciously focused on reducing the long tail of customers by focusing on growing its business and relationships with strategic and marquee customers.

Manufacturing infrastructure, stringent quality, diverse in-house capabilities: The company’s operations are currently undertaken through its manufacturing facilities spread across two states and three cities in India, at Mysuru, Hyderabad and Bengaluru, with a total manufacturing area of 229,061 sq. ft. Its Mysuru and Hyderabad facilities are focused on electronics manufacturing processes including PCBA, cable harnesses and box builds, which closely align with its core competence in electronics systems, integration and manufacturing services, and are equipped with surface mount assembly (SMT) lines, printed through hole (PTH) assembly lines, X-ray inspection systems, in-circuit testers, flying probe testers, boundary scan testers, functional testers, environmental stress screening (ESS) chambers, HASS and HALT machines, vibration testers and other advanced equipment. Its Bengaluru facility is focused on producing high-precision, low-volume mechanical manufacturing products and is equipped with milling, drilling, turning and grinding machines.

Risks and concerns

Depends on third party suppliers for raw materials and components: The company is dependent on third party suppliers, including overseas suppliers, for the import and supply of its raw materials and components, including semiconductors, passives (such as capacitors, diodes and resistors), mechanicals (such as sheet metal, plastics and aluminium), cables and connectors and consumables and packing. It relies on such suppliers to perform their conditions and deliver adequate supplies and high-quality raw materials, components and other inputs in a timely manner. Its suppliers are associated with it through purchase orders, and it does not enter into definite-term agreements with them. Accordingly, its suppliers may not perform their obligations in a timely manner or at all, resulting in possible delays to its production schedule and adversely affecting its output. Further, its ability to identify and build relationships with reliable suppliers contributes to its growth as well as other aspects of its operations. There have been instances in the past where it experienced interruptions in the supply of raw materials and components, due to reasons such as the COVID-19 pandemic, conflicts between countries, fire accident at the site of a component manufacturer and disruptions due to extreme weather conditions.

Depends on sale of products to certain key customers: The company enjoys long-term relationships as an integrated partner to multiple marquee customers such as Honeywell International Inc., Thales Global Services S.A.S (“Thales”), ABB Inc, Bharat Electronics and Molbio Diagnostics, having had an average relationship of over 11 years as on March 31, 2023 with the aforementioned customers. There is no guarantee that it will retain the business of its existing key customers or maintain the current level of business with each of these customers and it cannot assure that it will be able to significantly reduce customer concentration in the future. Reliance on certain key customers for significant revenue may generally involve several risks and it may have difficulty in securing comparable levels of business from other customers to offset any loss of revenue from the loss of any such key customers. Risks involved with reliance on key customers for significant revenue may include, but are not limited to, reduction, delay or cancellation of orders from its significant customers, failure to renew contracts with one or more of its significant customers, failure to renegotiate favourable terms with its key customers or the loss of these customers entirely, all of which would have a material adverse effect on the business, results of operations, financial condition, cash flows and future prospects of the company.

Depends on third parties for transportation: The company relies on third parties for the transportation services for the timely delivery of its products to customers located in India and other countries. Its domestic operations use a number of different modes of transportation, including road, air and rail. Where a shipment is outbound overseas, it uses a number of different modes of transportation, including road, air and sea. It also utilise third-party freight forwarders who contract with the relevant ocean carriers and airlines on its behalf and engage third-party logistics service providers to provide support on its transportation requirements. Therefore, it faces a risk that there could be deficiency or interruption in these third-party services. Disruptions of transportation services because of weather related problems, strikes, lockouts, inadequacy of road infrastructure, lack of containers or other events may affect its delivery schedules and impair its supply to customers. To the extent that its losses are not covered by insurance, this may have a material adverse effect on its business, results of operations, financial condition and cash flows.

Highly dependent on Mysuru facility for significant portion of revenue: The company currently operates through three manufacturing facilities in the states of Karnataka and Telangana, namely at Mysuru, Bengaluru and Hyderabad. All its manufacturing facilities are located in southern India. It derives a significant portion of its revenue from operations from Mysuru facility. Any disruptions in any of its manufacturing facilities could result in the damage or destruction of a significant portion of its manufacturing abilities, significant delays in the transport of its products and raw materials and/or otherwise adversely affect its business, results of operations, financial condition and cash flows. There are no instances in the past linked to the location of the company’s manufacturing facilities in these states, that have materially and adversely affected business and operations of the Company. However, its operations are susceptible to local and regional factors, such as accidents, political factors, system failures, economic and weather conditions, natural disasters, and demographic and population changes, the outbreak of infectious diseases such as COVID-19 and other unforeseen events and circumstances. 

Outlook

Incorporated in 1993, Cyient DLM provides Electronic Manufacturing Services (EMS) and solutions. The company provides Electronic Manufacturing Services as Build to Print (B2P) and Build to Specification (B2S) services. B2P solutions involve clients providing the design for the product for which the company provides agile and flexible manufacturing services. And, B2S services involve designing the relevant product based on the specifications provided by the client and manufacturing the product. The company ensures that products meet very robust standards of reliability, safety, and performance through a methodological approach to improving processes, streamlining supply chain and designing value added solutions there by helping minimize total cost of ownership. As an integrated manufacturing partner that provides Design Led Manufacturing (DLM) solutions to customers, it takes ownership of design, manufacturing, testing, and certification support to ensure that customers' products meet robust standards in reliability, safety, and performance. It has expertise in safety-critical electronics in highly regulated industries. Its engineers have significant design and manufacturing expertise that helps its customers build complex products and achieve faster time-to-market. On the concern side, the markets in which the company and its customers operate are characterized by rapidly changing technology, evolving industry standards and demands for features, and continual product innovation. These conditions may also result in significant competition and short product life cycles. Besides, its products are sold to customers in India and overseas, including North America and Europe. As a result, it is subject to several and complex legal and regulatory requirements in the jurisdictions it operate in.

The company is coming out with an IPO of 1,33,32,297 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 250-265 per equity share. The aggregate size of the offer is around Rs 333.30 crore to Rs 353.30 crore based on lower and upper price band respectively. On the financial front, the company’s total income increased by 15.08% from Rs 7,284.84 million in fiscal 2022 to Rs 8,383.44 million in fiscal 2023. This increase was primarily due to an increase in revenue from operations. The company’s profit for the year was Rs 317.27 million in fiscal 2023 as compared to the profit for the year of Rs 397.95 million in fiscal 2022. Meanwhile, the company is intending to continue to strengthen its capabilities across the focus industries by continuing to strengthen and expand its existing relationships with its current clients and by acquiring more strategic clients across its focus industries. It also seeks to continue to strengthen its presence across the aerospace and defence, medical technology and industrials verticals, including by strengthening existing relationships with key clients and targeting major OEMs globally to build scale across its businesses.