What you must know about the Cyient DLM Limited IPO?

Cyient DLM Ltd is a subsidiary of Cyient Ltd, the Hyderabad based industry-centric technology solutions company. Cyient holds 92.84% if the capital of Cyient DLM Ltd while Amansa Investments of Singapore holds the balance 7.16%. The promoters of Cyient DLM hold 18 shares each as nominees of Cyient Ltd. The company was incorporated in the year 1993 to provide electronic manufacturing services (EMS). Cyient DLM undertakes these EMS services as Built to Print (B2P) or as Built to Specifications (B2S) services. The latter is a more comprehensive version of the former.

The B2P business entails the client giving them the design specifications for the product and Cyient DLM only manufacturing as per the specifications. The B2S service is more elaborate and includes designing the product based on specifications and then manufacturing it. The EMS solutions offered by Cyient DLM comprises of PCBA (printed circuit board assembly), cable harness and box build used in safety systems in aircraft cockpits. Some of its prestigious clients include Honeywell, Thales, and BEL; among others. The Book running lead managers to the IPO are JM Financial and Axis Capital Ltd. KFIN Technologies Ltd will be the registrars to the issue.

Highlights of the IPO issue of Cyient DLM Ltd

Let us now look at the details of the of Cyient DLM IPO; the EMS company. The price band for the issue has been fixed at ₹250 to ₹265. There will be no offer for sale (OFS) component in the IPO. The fresh issue component of the IPO entails the issue of 2,23,39,623 shares which at the upper end of the price band of ₹265 has a fresh issue value of ₹592 crore. Therefore, the overall size of the company IPO will also have a total issue size of ₹592 crore, since there is no OFS portion in the IPO.

The company was promoted by five professionals, who have already sold their stakes to Cyient Ltd and are now on the board as nominees of Cyient. The principal promoter now is Cyient Ltd of Hyderabad which holds 92.84% of the company. However, post the IPO, this stake of the promoter will get diluted 66.68%. The funds raised from the fresh portion of the IPO will be used for working capital needs, capex requirements, loan repayment and inorganic growth facilitation.

As per the terms of the offer, 75% of the net offer is reserved for the qualified institutional buyers (QIBs), while only 10% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors . The table below captures the details.

The company has a par value of Rs10 per share and post the IPO, the stock of Cyient DLM Ltd will be listed on the NSE and on the BSE. The minimum lot size for IPO application will be 56 shares and the table below depict the required lots and number of shares for different category of investors.

Key dates for Cyient DLM Ltd IPO and how to apply?

The issue opens for subscription on 27th June 2023 and closes for subscription on 30th June 2023 (both days inclusive). The basis of allotment will be finalized on 05th July 2023 and the refunds will be initiated on 06th July 2023. In addition, the demat credits are expected to happen on 07th July 2023 and the stock will list on 08th July 2023 on the NSE and the BSE. Cyient DLM Ltd will follow another high tech company IPO of Ideaforge Technology Ltd which will open a day before the Cyient DLM IPO opens.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to Rs2 lakh per application) or in the HNI / NII quota (above Rs2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Cyient DLM Ltd

The table below captures the key financials of Cyient DLM Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI

There are few key takeaways from the financials of Cyient DLM Ltd which can be enumerated as under

1. The revenue growth has been extremely robust and has stayed around the 15% mark on an average in the last 3 years, despite the growing base. PAT margins of 3-4% are the upper end of the EMS segment and if the company can maintain that kind of net margins, it would be supportive of valuations. The company has reported attractive return on net worth (RONW) which would be a more reflective data point in this segment. In short, growth and profitability are supportive of the stock.

2. EMS is traditionally a low margin but high volume business and with its pedigree, backing of Cyient Ltd and the institutional participation likely in the IPO, it should see more interest in this space. Its EMS focus is also more niche compared to the more generic EMS offerings in the market. That should justify higher valuations.

3. One area where the company can do better is the rate of sweating assets as is evident from the rather asset turnover ratio being below 1 and also consistently falling. The other area of concern is the high debt levels, with the total debt consistently at 2 times to 3 times the net worth. It remains to be seen how much funds are used to pare debt.

In terms of the weighted average EPS of Cyient DLM Ltd over the last 3 years, it is a little over ₹10 per share. So, the upper price band would peg the P/E ratio at less than 30X the diluted capital post IPO. If you compare with the kind of valuations that EMS companies are getting in India, this would classify on the lower end, so the price does leave something on the table for the investor.

However, like any technology IPO, the risks are high and it is meant for investors with a higher risk appetite as well as a longer holding period. For investors who missed the EMS stories in the past, this is a good opportunity.

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