IPO Size: Rs. 592 cr  

• 100% Fresh Issue: working capital (Rs. 291 cr), repay Rs. 161 cr of Rs. 314 cr debt, acquisitions (Rs. 70 cr), capex (Rs. 44 cr)  
• Rs. 108 cr pre-IPO placement undertaken at Rs. 265 per share on 6^th June 2023

Price band: Rs. 250-265 per share

• Retail allocation of 10% with 75% for the institutional investors

M cap: Rs. 2,101 cr, implying 28% dilution

IPO Date: Tue 27^th Jun to Fri 30^th Jun 2023, Listing Mon 10^th Jul 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Integrated Electronics Manufacturing Services (EMS) Company

100% subsidiary of listed Cyient Limited, Cyient DLM supplies products comprising printed circuit board assembly (PCBA), cable harnesses, box builds such as cockpits, inflight systems, landing systems to global OEMs in the defence (38% of FY23 revenue), industrial (25%), aerospace (20%) and medical equipment (16%) sectors. No opportunity to play on shares of Cyient Limited, as IPO is entirely fresh issue, no funds will flow to parent Cyient.

Strong Order Book

Order book doubled to Rs. 2,432 cr as of 31.3.23, from Rs. 1,203 cr YoY, representing 2.9x FY23 revenue of Rs. 832 cr. Company guides to execute this order book over the next 2-2.5 years, implying 18-20% annual revenue growth. However, this growth will need higher working capital, with inventory days as high as 6 months in FY23 (average 4.5 months) with debtor days of 2.5 months. Peers like Avalon, Kaynes and Syrma have inventory + debtor days of 5-6 months.

Low Single Digit Net Margin  

In line with the industry uptrend, Cyient DLM’s FY23 revenue grew 15% YoY to Rs. 832 cr, but operating profit rise was contained at just 4% YoY to Rs. 88 cr, contracting operating margin by 110 bps to 10.5%. Company operates in the high mix, low-to-medium volume complex systems, but 10.5% margin is not reflective of the high value-add, and also trails closest comparable peer Avalon’s 11.9% margin, which caters to the similar end-user industry. Cyient DLM’s FY23 net profit stood at Rs. 32 cr, translating into a net margin of 3.8%, with FY23 EPS of Rs. 7.8, down from FY22’s Rs. 16.2.

RoE Contraction  

Company is undertaking a heavy dilution of 28%, via IPO, in addition to 5% already diluted via pre-IPO. This dilution is also unnecessary, as it will become net debt free post listing, and also does not need all the funds. One object - Rs. 70 cr for unidentified acquisitions - seems dispensable, as Cyient DLM has no past record of any acquisition in its 22 year history.

Post listing, equity will expand from Rs. 53 cr (as of 31.3.23) to Rs. 79 cr, resulting in FY23 RoE of 16% to halve over the next couple of years. Single digit RoE may not justify the high valuation multiples for the company.

Fully Valued IPO

Even if 50% YoY growth is penciled on FY23 net profit of Rs. 32 cr, for revenue jump and lower interest expense on partial debt repayment, share is being priced at a current year PE multiple of 43x. Recently listed peer Avalon, with ~6% net margin and 48% RoE is ruling at a PE multiple of 48x. Other EMS players like Kaynes and Syrma are growing much faster at 35-40% with Kaynes’ net margin of 8% being industry-highest, while Syrma’s also at 6%. This justifies some of the high PE multiple for peers. But Cyient DLM’s margin is not the strongest with fear of RoE contraction, calling for lower valuation multiple. Thus, the small pricing discount is not attractive and rather fully values the company.