Cyient Ltd IPO: Invest for medium-term returns

Cyient DLM Ltd is tapping the capital markets with its fresh issue of Rs700 crore in a price band of Rs250-265. The issue opens on Tuesday the June 27 and closes on Friday, June 30. The company had done a pre-IPO of Rs108 crore at Rs265, which is the top end of the price band. Further the company allotted 97,98,113 shares at Rs265 to 20 investors. The highest allocation was made to Amansa Holdings Private Limited of 26,41,520 shares or 26.96 per cent of the anchor book. Incidentally, Amansa was the institution to whom the pre-IPO was made. Effectively, Amansa has been allotted Rs178 crore out of the Rs700 crore issue (108+70), making it 25.4 per cent of the original issue of Rs700 crore.

As an important piece of information, it would be appropriate to place on record that Amansa holds 8.71 per cent of the equity in Cyient Limited and is the largest shareholder after the promoter group. This clearly demonstrates his confidence in the company and testifies his large investment in the subsidiary now going public.

The company is a leading integrated electronics manufacturing service provider, serving the entire value chain and product life cycle. It is present in highly regulated industries which makes it one of the few players in this segment in the country. It has facilities at Mysore, Bengaluru and its latest plant at Hyderabad.

The company has a built to specifications and a build to print model. It delivers its services through PCBs, cable harnesses and Box build products. It serves Aerospace, Defence, Medical and Industrial customers. It has a list of marquee clients with relationships of 8 to 14 years. The names include the likes of Honeywell, Thales, Bharat Electronics, Molbio and ABB. The parent company has a very strong designing team and Cyient DLM is able to leverage the same to get critical designing done from the parent or anyone else it chooses. This also provides an end-to-end solution for customers. The modern plant which came up at Hyderabad in 2020, is suited to handle complex requirements of customers across verticals of aerospace, defence, industrials and medicals. All the plants have complex world class certifications which make the company a preferred vendor. With long lead time and critical parts required across verticals, clients look to choose suppliers with abundant caution. Cyient DLM gains here over its competitors.

It has an impressive order book of Rs2,432 crore which is about three times its last reported revenues of Rs832 crore. Capacity utilisation is poor at the new plant in Hyderabad which was commissioned just before Covid-19 set in. This plant caters to the defence and aerospace segments which were the worst affected during the pandemic. With the order book and new programs that are coming into production, one would see the revenues rise as well as margins at EBITDA improve with better utilisation.

The company reported an EPS of Rs7.75 for the year ended March 2023. At this EPS the PE multiple for the company is 32.26-34.19. This compares favourably with its peers like Syrma SGS, Kaynes Technology and DCX Systems from the listed space.

The opportunity for the company is the capacity which has been built and is available for ramping up. It can easily scale up without any significant capex, revenues of about three times with the capacities and infrastructure available. Conversely, the same can become a liability if the company in the next 12-18 months is not able to see that the capacity utilisation starts ramping up as the higher costs of keeping idle capacity would become a drag on the company’s margins. Looking at the growth potential in the sector and considering the efforts of Make in India and Atmanirbhar Bharat, investments in capacity already made and a decent healthy order visibility, investment in the company may be made in the IPO for the medium term.

There could be some listing gains possible but investment should be for the medium to long term.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)