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IPO Analysis : Cyient DLM Ltd.
IPO Analysis
Cyient DLM is one of the leading integrated Electronic Manufacturing Services (“EMS”) and solutions providers with strong capabilities across the value chain and the entire life cycle of a product. With over two decades of experience in developing high mix, low-to-medium volume highly complex systems, we are a qualified supplier to global OEMs in the aerospace and defence, medical technology and industrial sectors. We are one of the few EMS companies in India catering to highly regulated industries and the largest supplier of EMS services to the aerospace and defence industry by value in India. 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. Their Electronic Manufacturing Services are provided as Build to Print (“B2P”) and Build to Specification (“B2S”) services to clients. There B2P solutions involve our client providing the design for the product forwhich we provide agile and flexible manufacturing services & B2S services involve utilising our Promoter’s design capabilities to design the relevant product based on the specifications provided by the client and manufacturing the product. Our 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.
The India EMS is a sizeable industry, contributing to 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. We are well positioned to take advantage of these tailwinds on the back of our solutions-oriented approach, client-focused service and track record of reliability. Being a wholly- owned subsidiary of Cyient Limited, our relationship with our Promoter allows us to benefit from its reputation, customer relationships, global salesforce, network and technical expertise, making us one of the industry’s leading integrated EMS andsolutions providers in India.
Cyient DLM customers belong to a diverse range of high-entry-barrier industries that have stringent quality and qualification requirements. We enjoy 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 September 30, 2022 with the aforementioned customers. We provide services across the product life cycle for our 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 our Promoter’s design team. As a strategic partner to clients across highly regulated industries, we enjoy long-term relationships with high customer stickiness and a high proportion of repeat business, which allows us to have strong visibility on future revenue and a stable client base. Cyient DLM 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. 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. & 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, Bengaluru facility has a manufacturing area of 12,200 sq. ft. and is focused on high-precision manufacturing.
Industry Research:
The overall electronics market is inclusive of electronics products, electronics design, electronics components, and electronics manufacturing services. The global electronics industry was valued at USD 2,288 billion in CY2020 and grew to USD 2,494 billion in CY2021. As per Frost & Sullivan’s analysis, the industry is expected to grow at a CAGR of 4.9% to reach USD 3,168 billion by CY2026. Some of the critical factors driving this growth are increasing disposable income, improved acceptability of audio and video broadcasting, higher broadband penetration, the inclination of the youth towards next-gen technologies, emergence of e-commerce, rising demand from rural markets, etc. Globally, per capita, electronic consumption is increasing and is currently USD 324. Per capita consumption is the highest in the West and increasing rapidly in major economies such as the North America and Europe, driven by the growing adoption of wireless connectivity for several electronic devices. Increasing investments in Research and Development (R&D) in consumer electronics and technological advancements, coupled with the growing popularity of wearable electronic devices, are also driving the market. Per capita consumption of electronics in India is only USD 78, 1/4th of the global average, however domestic electronics consumption is increasing rapidly because of urbanization and the adoption of electronic products in Tier 2 and Tier 3 cities.
Electronics manufacturing has been divided into two categories: products that are produced in-house by OEMs and those that are produced by EMS companies. Currently, in-house electronic manufacturers account for approximately 65% of the total electronics market, which is a significant contribution. However, in recent years, the involvement of EMS players has expanded significantly, making the job of OEMs easier to manage.
The global EMS market is traditionally comprised of companies that manufacture electronic products, predominantly assembling components on Printed Circuit Boards (PCBs) and box builds for OEMs. Today OEMs are seeing more value from EMS companies, leading to involvement beyond just manufacturing services to product design and development, testing, and aftersales services (repair, remanufacturing, marketing, and product lifecycle management).
EMS companies are equipped to provide a gamut of services which include design, assembly, manufacturing, and testing of electronic components for OEMs. EMS companies can be contracted at different points in the manufacturing process.
Design services and solutions: Design services include multiple associated actions that occur after determining the customer's specific requirements and before manufacturing or at the beginning of an assembly. The EMS Company based on inputs from the OEMs creates conceptual design and the same is shared with the OEMs for inputs and approvals.
Prototyping: The next step is to create a Proof of Concept (POC) to demonstrate that concept of design, functions. Post that, once design for manufacturability, design for testing and design for servicing are established, prototypes are made to make sure that the product will serve its proposed purpose after it is manufactured as a part of a bigger production run.
Testing services: Testing is an essential element across the entire EMS value chain. EMS companies which can design test solutions for both at PCBA level and at the end of line product testing, including functional testers and fixtures are preferred by the OEMs.
PCB Assembly: At the heart of the electronics industry is Printed Circuit Board or PCB. A PCB with components mounted on is called an assembled PCB and the manufacturing process is called PCB assembly or PCBA for short. PCB assembly is a major activity and normally outsourced to EMS companies.
Box Build: In this, an OEM outsources complete product manufacturing to an EMS company, which manufactures the final product, adds the OEM’s logo, and dispatches it to the OEM’s warehouse for selling. This model is largely used in high volume low mix (HVLM) type of products such as mobiles, computer hardware and industrial segments.
Aftersales Service (Repair and Rework): The demand for repair and remanufacture is not high, because majority of electronic products do not necessitate repair or remanufacturing and are focused more on replacement. Niche verticals like aerospace and defence, railways and high-end electronics segment is opening to accept third-party repairs due to high cost of equipment and re-design which provides immense potential for this segment.
High volume, low mix (HVLM): This is typically a contract manufacturing setup where only a few types of assemblies are produced in large quantities. This technique generally allows changes to be kept at a minimum and the equipment utilization rate significantly high. Contract manufacturers are proven to be more efficient when running at high volumes and require minimal engineering intervention.Most global MNC firms work in the HVLM space catering to the needs of mobiles, computer peripherals, consumer devices and storage devices. This also means that this business requires large-scale deployment of resources and supply chain arrangements.
Low Volume, High Mix (LVHM): This type of contract manufacturing typically has a very high emphasis on quality and customization which changes according to the requirements of the customer. Considering that their products have high margins, even major changes in market dynamics do not heavily impact the production process. OEMs that prefer such solutions prefer to pay higher prices without compromising on quality.
Investment Rationale:
Ability to provide integrated engineering solutions with strong capabilities across the product value chain: Cyient DLM 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 our customers, we provide design through the design team of our Promoter and, manufacturing, testing and certification support to ensure that our customers’ products meet robust standards in reliability, safety and performance. We believe we are well-positioned to deliver solutions to our customers across the entire product lifecycle.
High entry barriers for our competitors due to our technical expertise, capabilities in safety-critical electronics in highly regulated industries and customer engagement:
Their 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. Their clients are primarily engaged in industries such as aerospace and defence, medical technology and industrials which are typically highly regulated industries. Their engagement with the client commences at the early stages of the product life cycle right from the design stage, which also leads to higher customer stickiness. They commenced their operations by manufacturing simple PCBAs for 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 our capabilities to manufacturing complex PCBs for safety-critical applications, cable harnesses and box builds to large assemblies. We have 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 them to deepen relationships with their customers over the years. For instance, their engagement with Honeywell International Inc., one of the key customers, commenced with manufacturing PCBAs for special temperature transmitters in 2009. However, subsequently, they manufactured box builds for airport lighting systems, and have since manufactured more advanced systems for Honeywell such as an entire module of cockpit avionics. Company believe in the deepening engagement with customers over time due to flexibility, agility and the quality they provide will prevent them from switching to other EMS partners, acting as a high entry barrier to our competitors.
Robust and industry leading order book with marquee customers, with whom Company enjoy sustained and long-standing relationships as their preferred partner:
Company has built a diverse customer base with marquee clients over two decades of presence in the EMS industry. Their strategic partnership model with customers has accelerated growth and allowed to enjoy a position of an industry leader in the EMS sector. They also focus on assisting customers meet their requirements across the spectrum of their engagement with them, including in terms of cost, productivity, product reliability and low time to market. This, together with their high delivery standards and performance excellence, has enabled them to acquire, service and deepen and lengthen their relationship with diverse range of high-level clients ranging from startups to industry leaders.
World class manufacturing infrastructure, stringent quality, diverse in-house capabilities and robust supply chain, enabling us to provide high quality end-to end integrated solutions to our customers:
Their operations are currently undertaken through the 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. Mysuru and Hyderabad facilities are focused on electronics manufacturing processes including PCBA, cable harnesses and box builds, which closely align with 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. Bengaluru facility is focused on producing high-precision, low-volume mechanical manufacturing products and is equipped with milling, drilling, turning and grinding machines.
Strong parentage of Promoter, Cyient Limited, and a long history of industry expertise, an experienced Board and senior management team:
Company has derived significant advantages and a strong competitive edge from the sectoral expertise of Promoter, which was named as a Rising Star in Managed Services by the Information Services Group and was named in the ‘Leadership zone’ across aerospace, telecommunication, semiconductors, industrial, and medical devices verticals. Cyient has also been rated as an Expansive-Established player in Digital Engineering and ER&D Services – USA region by Zinnov Zones. ‘Cyient’ is a brand associated with strong global engineering capabilities, quality of service and reliability. Their association with the ‘Cyient’ brand and the domain experience of Promoter gives them an advantage in attracting talent, corporate governance practices, and together with Promoter’s design team, allows to offer a larger value proposition on the ‘design, build and maintain’ value chain. Their end-to-end capabilities, backed by the design capabilities as well as the heritage of Promoter of over three decades provides us with an edge over their competitors, and has enhanced their B2S capabilities, differentiating them from competition.
Business Growth Strategy:
1. Strengthening of core capabilities across focus industries and building scale:
Company intend to continue to strengthen capabilities across the focus industries by continuing to strengthen and expand their existing relationships with their current clients and by acquiring more strategic clients across focus industries. High domestic volumes and consumption, and higher outsourcing volumes will influence domestic electronics manufacturers to bring in the component ecosystem locally and enhance local capabilities of component sourcing, thus making the ecosystem stronger and closer. Tier-2 companies (companies supplying products to Tier-1 companies/ OEMs) are increasingly focusing on product localization, innovative product design, and R&D. However, the extensive financial costs involved in setting up manufacturing, capacity additions/expansions, R&D, manpower, etc. influence them to leverage EMS services. Company believe that they are well-positioned to further augment their core capabilities and build scale by taking advantage of potential moves from global players looking to localise and leverage cost advantages by setting up manufacturing facilities in India under various government schemes, as well as of the growing complexity in product design and development such as miniaturisation of products.
2. Strengthening of B2S value proposititon by investing in design capabilities to enhance our value addition and increase ownership in our engagements:
Company intend to invest in design and enhance engineering capabilities by strengthening their engineering team, establishing independent design capabilities and building up competence to further bolster B2S capabilities and bringing in more domain knowledge and expertise in relation to the industries they cater to. Only very few players are involved in B2S process contributing to around 25% of the total EMS market in India. Company also seek to further leverage the design team of Cyient Limited to provide a more diverse range of solutions to customers, as well as target additional customers through a broader array of solutions. Their plans to set up their own design competency and continue to build upon engineering competency will enable us to increase their current mix of B2S services, and retain their position as one of the leading Indian EMS companies with the breadth of capabilities operating in the contract manufacturing space for high mix safety-critical electronics. Company believe that this will not only improve the quality of products, but also allow them to further meet their customers’ needs and reduce their time to market. Cyient DLM also expect such strengthening of our capabilities to further differentiate us from our competitors in the EMS industry.
3. Expanding inorganically to increase geographic footprint and proximity with clients, further strengthening their capabilities and gain access to target customers:
They intend to expand their geographical footprint, including by way of inorganic expansion in key geographies, particularly North America. By creating a presence in the North American region, Company aim to build greater geographical proximity with some of key clients. This will allow them to build on their existing relationships with them and also allow them to work on more strategic projects with clients in the key industry sectors they cater to, which require closer geographical proximity. They also seek to benefit from the local ecosystem in the North American region. They will also aim to acquire new strategic clients in the industries they focus on and strengthen their capabilities in specific areas.
4. Strengthening supply chain ecosystem and building on operational efficiency:
They intend to further enhance the efficiency of manufacturing operations. To this end, they seek to leverage the increasing automation in the industry, strengthen their operations and program management teams to focus on better client management and creating stronger client touch points, better understand client requirements and build relationships. They also aim to increase focus on digitalization and automation, by way of (i) process automation across the line to strengthen manufacturing, (ii) reduce lead time through value stream mapping and (iii) digitizing their facilities by implementing Industry 4.0 tools across all functions to generate enhanced visibility of our production processes, which they believe will result in increased operational efficiency and allow them to provide more agility and flexibility to their customers.
Products & Services:
1. PCB Assembly:
PCB assembly is the process of connecting electronic components onto PCBs. Components are placed onto the foot prints or inserted into the via holes and soldered to complete the electronic circuitry.
There are two main categories of assembly:
(i) Surface Mount Device assembly; and
(ii) Plated Through Hole assembly.
2. Cable Harness:
Cable harnesses solutions involve the process of assembly of electrical cables or wires. Our cable harnesses solutions are also accredited by NADCAP.
The following are the steps involved in the manufacture of cable harnesses:
cutting;
stripping;
crimping / tinning / soldering / splicing;
connector installation / labelling / braiding;
inspection; and
testing – continuity / insulation resistance / hipot / pull test / retention.
3. Box Build:
It is also known as systems integration, box builds can be anything from a simple PCBA housed in a small enclosure, to a cabinet housing a complex electromechanical system. The box build process involves enclosure fabrication, assembling the various PCBAs and cables harness assemblies, installation of sub-assemblies and components and routing of cabling or wire harnesses.
Key Management Personnel:
Rajendra Velagapudi is the Managing Director of our Company. He holds a bachelor’s degree in technology (Mechanical) from Faculty of Engineering, Nagarjuna University, a master’s degree of engineering in automobile engineering from Anna University, Madras and degree of master of science in design of rotating mechanics from School of Mechanical Engineering, Cranfield University. Prior to joining our Company, he worked with Ford Truck Manufacturing Division, Simpsons Co. Ltd. for a period of two years, Bajaj Tempo Limited and Bharat Earth Movers Limited for a period of over eight years. He was appointed to our Board of Directors with effect from April 25, 2017.
Ganesh Venkat Krishna Bodanapu is a Chairman, Non-Executive & Non-Independent Director of our Company. He holds a bachelor's degree of science in electrical engineering from Purdue University and a master's degree in business administration from the J.L Kellogg School of Management, Northwestern University. He has been associated with our Promoter since 2003 and currently is the managing director and chief executive officer of our Promoter. He was appointed to our Board of Directors with effect from February 4, 2015.
Venkat Rama Mohan Reddy Bodanapu is a Non-Executive, Non-Independent Director of our Company. He holds a bachelor’s degree in engineering from Faculty of Engineering, Andhra University and degree of master of technology from Indian Institute of Technology, Kanpur. He also holds a master’s degree of science from University of Mirhigan and a degree of doctor of philosophy from Jawaharlal Nehru Technological University. Previously, he has been associated with HCL Limited and Electronic Industries Association of Andhra Pradesh. He was appointed to our Board of Directors with effect from December 27, 2022.
Vanitha Datla is an Independent Director of our Company. She holds a bachelor’s degree of arts from Faculty of Arts, Osmania University and post graduate diploma in business administration from ICFAI Business School. She has also completed the CFA program of the Institute of Chartered Financial Analysts of India. She is currently working with Elico Limited, Elico Healthcare Services Limited. Eliscription Private Limited and Elico Mechoptronix Private Limited. She is also an Independent Director in Visaka Industries Limited. She was appointed to our Board of Directors with effect from December 13, 2022.
Jehangir Ardeshir is an Independent Director of our Company. He holds a bachelor’s degree of technology in agricultural engineering from Indian Institute of Technology, Kharagpur and post graduate diploma in management in agricultural and rural management from Indian Institute of Management, Bangalore. He has in the past been associated with Tata Iron & Steel Co. Limited, Tata Sons Limited, Tata Teleservices Limited, Terex India Private Limited and Forbes Marshall Private Limited. He was appointed to our Board of Directors with effect from December 13, 2022.
Pillutla Madan Mohan is an Independent Director of our Company. He holds a bachelor’s degree of engineering (honours) from The Birla Institute of Technology & Science and a master’s degree of science from University of Illionois and diploma honours in personnel management and industrial relations from XLRI, Jamshedpur. He also holds a doctorate of philosophy from the University of British Columbia, Vancouver Canada. He is currently the dean of Indian School of Business. He was appointed to our Board of Directors with effect from December 27, 2022.
Financials:
Balancesheet:
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I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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