Parent is discounted less than 30 times its earnings but 93%-subsidiary, whose profit margin is significantly lower, is priced at 60+ multiple!
|
CYIENT DLM OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 592 Cr (2,23,39,623 equity shares) |
| Offer for Sale | NIL |
| Face Value | Rs 10 |
| Price Band | Rs 250 – 265 |
| Mkt/Bid Lot | 56 Nos. |
| Imp Market Cap | Rs 2,100 Cr |
| Imp Equity Cap | Rs79.28 Cr |
| Implied Free Float | 33.32% |
| Lead Manager | Axis Capital and JM Financial |
| Registrar | KFin Technologies |
| Listing At | BSE, NSE |
|
INDICATIVE ISSUE SCHEDULE |
|
| Opening :27-Jun-2023 | Closing :30-Jun-2023 |
| Allotment :05-Jul-2023 | Refunding :06-Jul-2023 |
| Demat Credit :07-Jul-2023 | Trading :10-Jul-2023 |
The Offer
The Hyderabad-registered but Mysuru-headquartered Cyient DLM Ltd (CDLM) is entering the capital market with a public issue of Rs 592 Cr. The IPO is a fresh issue of 223.39 lakh equity shares (at the cap price) from the company. The offer is being made through the book-building route with a price band of Rs 250-265 for Rs 10 paid-up share.
Applicants should bid for a minimum lot of 56 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on Monday, July 10, 2023. Axis Capital and JM Financial are acting as managers to the offer while Karvy’s new avatar, Kfin Technologies, plays the role of registrar to the issue. The bidding opens on Tuesday, June 27 and closes on Friday, June 30, 2023.
Of the net issue proceeds, Rs 291 Cr is proposed to be utilized for working capital requirements, Rs 44 Cr for funding capital expenditure requirements, Rs 161 Cr for repayment of borrowings and Rs 70 Cr for achieving inorganic growth through acquisitions. The balance amount is earmarked for general corporate purposes.
Lineage
The IPO document of CDLM presents the 1991-registered Cyient as promoter. As a matter of fact, Cyient is not the original promoter. CDLM was originally incorporated thirty years ago as Rangsons Electronics Private Ltd at Mysuru by R Vasu and N Narendra. , The Hyderabad-based Cyient acquired 74% equity of Rangsons Electronics from the original promoters in the year 2015 subsequent to which, the company’s name was changed to Cyient DLM Private Ltd.
Cyient acquired the remaining 26% in 2019 and shifted the registered office of CDLM from Mysuru to Hyderabad in 2020 besides establishing a manufacturing facility in Hyderabad in the same year. Last year, CDLM has reportedly entered into a New Product Introduction Contract with Honeywell Inc for the supply of next generation cockpit avionics modules.
As regards the track record of CDLM’s new promoter Cyient, the company was incorporated in 1991 as Infotech Enterprises which went public with a premium issue in March 1997. The name of the company was changed in May 2014. Cyient is a consistently dividend paying company, last dividend being 520%. For its equity base of Rs 55 Cr, the company’s revenue and profits are quite impressive. Cyient’s revenue, which was at less than Rs 4,000 Cr five years ago, has crossed Rs 6,000 Cr in fiscal 2023. Net profit is close to five times its equity capital.
However, until recently, the company’s stock attracted only a modest P/E of less than 20. The reason is not far to fetch. Between fiscal 2019 and 2022, the company’s top line failed to grow. Operating margin had never crossed 18% in last nine years. The company’s debts have surged from Rs 326 Cr in fiscal 2022 to Rs 934 Cr in fiscal 2023. And, the most discouraging aspect of Cyient is the promoters’ stake, which is as low as 23%. Contrary to its past, the stock’s P/E multiple has shot up in recent months as its subsidiary was getting ready for its IPO.
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Cyient Consolidated Financials (in Cr) |
|||||||
| Year Ended |
FY-23 |
FY-22 | FY-21 | FY-20 | FY-19 | FY-18 |
FY-17 |
| Revenue |
6016 |
4534 | 4132 | 4427 | 4618 | 3918 |
3607 |
| Operating Profit |
1003 |
818 | 575 | 549 | 633 | 535 |
477 |
| OPM% |
16.7 |
18.0 | 13.9 | 12.4 | 13.7 | 13.7 |
13.2 |
| Other Income |
81 |
112 | 140 | 158 | 134 | 152 |
93 |
| EBIDTA |
1085 |
930 | 715 | 707 | 767 | 687 |
570 |
| EBIDTA % |
17.8 |
20.0 | 16.7 | 15.4 | 16.1 | 16.9 |
15.4 |
| Interest |
100 |
39 | 43 | 49 | 33 | 20 |
17 |
| Depreciation |
257 |
192 | 195 | 188 | 111 | 105 |
95 |
| Tax |
202 |
169 | 135 | 118 | 151 | 149 |
93 |
| Net Profit |
514 |
522 | 364 | 341 | 477 | 403 |
327 |
| Equity Capital |
55 |
55 | 55 | 55 | 55 | 56 |
56 |
| Reserves |
3411 |
3061 | 2902 | 2506 | 2509 | 2288 |
2061 |
| Borrowing |
934 |
326 | 276 | 374 | 325 | 241 |
165 |
| Fixed Assets |
1233 |
740 | 634 | 643 | 1082 | 494 |
450 |
| Price -High |
1042 |
1292 | 708 | 658 | 887 | 698 |
555 |
| Price- Low |
724 |
652 | 184 | 205 | 571 | 459 |
416 |
| Closing Price |
993 |
929 | 649 | 230 | 648 | 689 |
469 |
| Dividend % |
520 |
480 | 340 | 300 | 300 | 260 | 160 |
Key Management
Krishna Bodanapu (46), Executive Vice-Chairman and Managing Director of Cyient, is the Non-Executive Chairman of CDLM. Rajendra Velagapudi (60) is the Managing Director of CDLM. Prior to joining CDLM, he was associated with Ford Truck Manufacturing Division, Simpsons Co. Ltd. for a period of two years, Bajaj Tempo Ltd and Bharat Earth Movers Ltd for a period of over eight years.
Anthony Montalbano is the Chief Executive Officer and Business Head of the company. Prior to CDLM, he as associated with Flex, USA for a period of 10 years, HCL America Inc and Wipro Ltd. Founder-chairman of Cyient, BVR Mohan Reddy, is on CDLM’s board as a Non-Executive, Non-Independent Director. Shrinivas Appaji Kulkarni is the Chief Financial Officer of CDLM. He was previously associated with Ind- Telesoft, Intel Corporation, Intel India, EMC Software and Service and Sasken Communication.
Stakeholders
Until August 2022, CDLM’s capital was only Rs 1.37 Cr (13.67 lakh shares). In September 2022, the company made a rights issue of 15.70 lakh shares at a price of Rs 566 a piece which was wholly subscribed by the new promoter. Three months later, in December 2022, CDLM came out with a bumper bonus issue in the ratio of 17:1 which brought down Cyient’s cost of holding to only Rs 17.26 per share. Currently, promoter Cyient holds 92.84% of the Rs 56.94 Cr equity capital. The remaining 7.16% is held by investor shareholder, Amansa Investments Ltd who acquired these shares through a private placement only a few days ago at the rate of Rs 265 a share.
Post public offer, of the enlarged equity capital of Rs 79.28 Cr, Cyient will hold about 66.68% (52.86 million shares), while Amansa will hold 5.14%. Post-issue, of the promoters’ holding, 20% is locked-in for a period of eighteen months and the balance 46.68% is locked for six months.
Business Profile
CDLM 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 printed circuit board assembly (PCBA), cable harnesses and box builds which are used in safety critical systems such as cockpits, in-flight systems, landing systems, and medical diagnostic equipment, which the company provides to its clients as B2P or B2S services.
CDLM claims to have leveraged the design capabilities of its parent company Cyient. It also enjoys long-term relationships as an integrated partner to multiple marquee customers such as Honeywell International Inc, Thales Global Services, ABB Inc, Bharat Electronics and Molbio Diagnostics.
CDLM has three manufacturing facilities at Mysuru, Hyderabad and Bengaluru, with a total manufacturing area of 229,061 sq. ft. The Mysuru facility is primarily engaged in the manufacture of PCBA, cable harnesses and box builds for clients in the aerospace and defence industries. The Hyderabad facility, which is located in a special economic zone, is 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.
The Bengaluru facility focuses 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 Track
CDLM’s top line has steadily grown during the last three years, from Rs 457 Cr to Rs 832 Cr. Nevertheless, profit for the fiscal 2023 declined more than 20% (from Rs 39.80 Cr to Rs 31.73 Cr). The decrease in profit was largely attributed to increase in finance costs and employee benefits. Interest costs shot up over 43%, from Rs 22 Cr to Rs 31 Cr. The company’s capital base which was at only Rs 1.37 Cr in March 2022 has already vaulted to Rs 57 Cr due to bonus and private placement. Post-IPO, this will increase to over Rs 79 Cr against its current bottom line of Rs 32 Cr.
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Cyient DLM Financials (in Cr) |
|||||
| Year Ended |
Mar-23 |
Mar-22 | Mar-21 | Mar-20 |
Mar-19 |
| Revenue |
832.03 |
720.53 | 628.03 | 457.09 |
482.07 |
| Operating Profit |
87.78 |
84.04 | 52.12 | 16.23 |
20.15 |
| OPM% |
10.6 |
11.7 | 8.3 | 3.6 |
4.2 |
| Other Income |
6.31 |
7.95 | 8.88 | 7.83 |
1.81 |
| EBIDTA |
94.09 |
91.99 | 61.00 | 24.05 |
21.96 |
| EBIDTA % |
11.2 |
12.6 | 9.6 | 5.2 |
4.6 |
| Interest |
31.52 |
21.98 | 20.77 | 18.19 |
14.06 |
| Depreciation |
19.42 |
19.29 | 18.46 | 10.58 |
8.32 |
| Tax |
12.97 |
9.64 | 0.5 | -0.1 |
0.34 |
| Net Profit |
31.73 |
39.80 | 11.81 | -6.7 |
-0.93 |
| Equity (Implied) |
79.28 |
1.37 | 1.37 | 1.37 |
1.37 |
| Reserves (Implied) |
818.59 |
75.75 | 36.29 | 24.34 |
33.56 |
| Borrowing |
314.47 |
293.19 | 233.77 | 261.37 |
156.56 |
| Fixed Assets |
159.30 |
172.60 | 184.90 | 180.60 |
46.30 |
Valuation
CDLM’s current profitability yields an EPS of only Rs 4 on the proposed equity. The IPO cap price of Rs 265 discounts the EPS more than 66 times which may perhaps compare well with the current discounting listed peers like Kaynes Tech and Syrma SGS. How long will such high discounting hold for an industry whose operating margin low and competition is getting intense? It’s worth noting here that many electronic component manufacturers who tapped the capital markets during the 90’s boom subsequently vanished.
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How Cyient DLM compares with listed peers |
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Financials |
||||
| (Amount in Cr) |
Cyient DLM |
Kaynes Tech | SYRMA SGS |
DCX System |
| Market Cap |
2101 |
8716 | 7639 |
2532 |
| Borrowing |
315 |
136 | 347 |
510 |
| Fixed Assets |
159 |
159 | 440 |
21 |
| Revenue |
832 |
1126 | 2048 |
1254 |
| Other Income |
6 |
11 | 44 |
30 |
| EBIDTA |
94 |
180 | 232 |
113 |
| Interest |
32 |
35 | 22 |
26 |
| Net Profit |
32 |
95 | 123 |
72 |
| Equity Cap |
79 |
58 | 177 |
19 |
| Reserves |
819 |
901 | 1364 |
547 |
|
Stock Features |
||||
| Current Price (Rs) |
265 |
1499 | 432 |
261 |
| Face Value (Rs) |
10 |
10 | 10 |
2 |
| Book Value |
113 |
165 | 87 |
59 |
| Promoter Stake % |
66.7 |
63.6 | 47.3 |
71.7 |
| Debt/Equity |
0.4 |
0.1 | 0.2 |
0.9 |
|
Profitability |
||||
| OPM % |
10.6 |
15.0 | 9.2 |
6.7 |
| Net Margin % |
3.8 |
8.4 | 5.9 |
5.6 |
| Cash EPS |
6.45 |
19.60 | 8.52 |
7.60 |
| Earnings Per Share |
4.00 |
16.37 | 6.76 |
7.41 |
|
Growth |
||||
| CAGR 3Yr Sales % |
20.1 |
45.4 | 72.8 |
40.8 |
| CAGR 3Yr EBIDTA % |
57.6 |
58.8 | 45.3 |
72.2 |
|
Return |
||||
| RONW % |
15.7 |
9.9 | 8.0 |
12.6 |
| ROCE % |
14.5 |
14.7 | 10.6 |
10.4 |
|
Discounting |
||||
| Price/Earnings |
66.2 |
91.6 | 63.9 |
35.3 |
| Price/Cash EPS |
41.1 |
76.5 | 50.7 |
34.5 |
| Price/Book Value |
2.3 |
9.1 | 5.0 |
4.5 |
| Price/EBIDTA |
22.3 |
48.5 | 33.0 |
22.4 |
| Price/Revenue |
2.5 |
7.7 | 3.7 |
2.0 |
| Price/Fixed Assets |
13.2 |
54.9 | 17.4 |
123.7 |
|
Distribution |
||||
| Dividend % |
0 |
0 | 15 |
0 |
| Yield % |
0 |
0 | 0.4 |
0.0 |
| Pay-out % |
0 |
0 | 21.5 |
0 |
From another view point, Cyient, which consolidates about 93% of CDLM’s profit, is currently priced around 29 times of the earnings. When the parent company stock is priced at a much lower multiple of Price/Earnings, Price/Cash Earnings and Price/EBIDTA, how will one rate the subsidiary’s stock better than the parent’s?
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HOW CYIENT DLM COMPARES WITH PARENT |
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|
Financials |
||
| (Amount in Cr) |
Cyient DLM |
Cyient |
| Market Cap |
2101 |
16149 |
| Borrowing |
315 |
934 |
| Fixed Assets |
159 |
1233 |
| Revenue |
832 |
6016 |
| Other Income |
6 |
81 |
| EBIDTA |
94 |
1085 |
| Interest |
32 |
100 |
| Net Profit |
32 |
561 |
| Equity Cap |
79 |
55 |
| Reserves |
819 |
3411 |
|
Stock Features |
||
| Current Price (Rs) |
265 |
1460 |
| Face Value (Rs) |
10 |
5 |
| Book Value |
113 |
313 |
| Promoter Stake % |
67 |
23 |
| Debt/Equity |
0.4 |
0.3 |
|
Profitability |
||
| OPM % |
10.6 |
16.7 |
| Net Margin % |
3.8 |
9.2 |
| Cash EPS |
6.45 |
73.93 |
| Earnings Per Share |
4.00 |
50.73 |
|
Growth |
||
| CAGR 3Yr Sales % |
20.1 |
10.6 |
| CAGR 3Yr EBIDTA % |
57.6 |
15.3 |
|
Return |
||
| RONW % |
15.7 |
16.2 |
| ROCE % |
14.5 |
18.8 |
|
Discounting |
||
| Price/Earnings |
66.2 |
28.8 |
| Price/Cash EPS |
41.1 |
19.8 |
| Price/Book Value |
2.3 |
4.7 |
| Price/EBIDTA |
22.3 |
14.9 |
| Price/Revenue |
2.5 |
2.7 |
| Price/Fixed Assets |
13.2 |
13.1 |
|
Distribution |
||
| Dividend % |
0 |
520 |
| Yield % |
0 |
1.8 |
| Pay-out % |
0 |
51.2 |
Concern
CDLM’s corporate governance record is far from convincing. Some of the records, including those relating to past allotments, are not traceable. Corporate and secretarial records, including Roc filings too are reportedly not traceable.