Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA(CE)/Stable/CRISIL A1+(CE)' ratings on the bank facilities of Cyient DLM Limited (Cyient DLM) that are guaranteed by Cyient Ltd (Cyient, ‘CRISIL AA/Stable/CRISIL A1+’). Further, CRISIL Ratings has also reaffirmed its ‘CRISIL A+/Positive’ rating on the Rs 36 crore proposed un-guaranteed long-term bank facilities of Cyient DLM.

 

CRISIL Rating’s continues to expect overall improvement in the business risk profile of Cyient DLM with improved revenue driven by strong order book execution while maintaining its healthy operating margins and working capital over the medium term; with financial risk profile also strengthening post the equity issuances this year.

 

Operating income during the first six months of fiscal 2024 grew by 50% to Rs 509 crore with strong order execution with EBITDA margin of 8.7% against 10.2% during the same period last fiscal owing to adverse product mix and absence of one-off purchase price variance gains received last year. Steady new orders amounting to USD 41.9 million, healthy order book position of Rs 2,287 crore as of September 30, 2023 and available capacities should drive steady improvement over the medium term. CRISIL Ratings believes revenues to grow by a strong 35-40% in fiscal 2024 driven by strong execution of orders with available capacities at Cyient DLM’s plants which alongwith improved fixed cost absorption should support EBITDA margins at 10-11% levels while maintaining healthy working capital levels. Further, Cyient DLM’s financial risk profile, net worth and liquidity position has substantially improved post the equity issuances totaling Rs 700 crore in June 2023 wherein proceeds were used for debt reduction; same is expected to sustain over the medium term.

 

The ratings also continue to reflect the company’s diversified product profile, strong clientele and strong operational and financial support from its parent which supports its growing scale of operations. These strengths are partially offset by susceptibility to raw material prices, and large working capital needs.

 

For Rs 432 crore of bank facilities that are credit enhanced by Cyient, the ratings continue to reflect the strength of the unconditional and irrevocable corporate guarantee extended. This is in-line with the revised CRISIL Ratings’ approach towards credit enhancement provided by the guarantee.

Analytical Approach

For arriving at the rating on the bank facilities guaranteed by Cyient, CRISIL Ratings has applied its criteria for rating instruments backed by guarantee.

 

For arriving at the rating for facilities not guaranteed by Cyient, CRISIL Ratings has applied its criteria for notching up of ratings for support from its parent, Cyient, given the continued operational and financial support.

Key Rating Drivers & Detailed Description

Strengths:

• Unconditional and irrevocable guarantee from Cyient: The credit enhanced rating is based on the strength of the unconditional and irrevocable guarantee provided by the guarantor, Cyient. The credit quality of the rated facility thus reflects the credit quality of the guarantor. CRISIL Ratings understands that the corporate guarantee includes the invocation terms and is designed to ensure full and timely payment to the lender even in case of non-invocation. Also, CRISIL Ratings understands that Cyient will make payments not later than thirty calendar days of (i) continuous overdrawal of cash credit/overdraft accounts, (ii) non-payment by Cyient DLM of bank guarantee on invocation,  or  (iii) account being overdue on account of devolvement of letter of credit or remaining unpaid in any other case; in case Cyient DLM fails to service its debt obligations, irrespective of the lender invoking the guarantee, without any set off.

 

• Strong credit risk profile of guarantor, Cyient: Cyient is an information technology (IT) services company, offering niche product and process engineering services in diverse domains, such as transportation, connectivity, sustainability as well as new growth areas. Cyient’s revenue grew by 32% in fiscal 2023 to Rs 3,465 crore followed by 31% in the first half of fiscal 2024 driven by healthy growth in the services segment with strong support from the acquisitions done last year. Aided by acquisitions, recovery in product development spending by clients across sectors, stronger deal wins following revival of end-market demand globally and healthy customer additions, the revenue is expected to grow by 14-16% in fiscal 2024. The operating efficiency of Cyient is healthy and comparable to other tier-II IT service providers.

 

Cyient maintains a high benchmark for its core design services business, considering the incremental growth opportunities, specific skills, and domain expertise, which are not easily transferable between sectors. However, Cyient mostly has long-term contracts under this vertical, leading to stable revenue. Over the medium term, Cyient targets to deliver complete engineering solutions to the end customer through Cyient DLM.

 

The EBITDA margin in fiscal 2023 moderated by 59 bps y/y to 16.8% owing to one-off acquisition related expenses but improved to 18.5% during the first six months of fiscal 2024 led by cost optimisation, favourable product mix and healthy margins of the design-led manufacturing (DLM) segment. The operating margin of Cyient is expected to improve with 200-250bps improvement in the consolidated services margins, with sustenance of cost optimisation and volume benefits. Cyient DLM, on increased synergies with Cyient’s core design services, is expected to support the trajectory over the medium term. Return on capital employed (RoCE) is expected to improve gradually, in line with profitability.

 

Sizeable tangible networth coupled with strong cash and equivalent of Rs 1,077 crore as on March 31, 2023, supports the financial risk profile. Debt protection metrics continued to remain robust. Consolidated debt increased to Rs 1,218 crore (including lease liabilities of Rs 284 crore) in fiscal 2023 from Rs 573 crore (including lease liabilities of Rs 247 crore) in the previous year owing to debt-funded acquisitions but has subsequently moderated to Rs 1,039 crore in September-2023. Consolidated debt is expected to reduce post repayment of bank debt at Cyient DLM with continuing healthy cash accruals supporting the strong financial risk profile. Cyient continues to scout for strategic acquisitions to grow its business and employ surplus liquidity efficiently.

 

• Diversified product profile and strong clientele: Cyient DLM is a leading electronics system design and manufacturing player, which provides system design, integration, testing and manufacturing of electronic components and subsystems for original equipment manufacturers (OEMs) in the aerospace and defence sectors and other high-tech engineering segments. It has customers in India, Europe, North America, China and Japan. The company has a diversified clientele, with the top five customers contributing 68% to revenue.

 

Weaknesses:

• Moderate but growing scale of operations: The moderate scale of Cyient DLM is reflected in its revenues being less than Rs 1000 crore, albeit growing consistently at 15% over the last five years to fiscal 2023. In fiscal 2023, revenue grew consecutively by 15% for second year in a row to Rs 833 crore while EBITDA margin remained healthy at 11% (moderating from 12.2% last year) driven by focus on higher-margin export orders, automation, exit from lower margin orders and economies of scale benefit. Medium term revenue growth is supported by doubling of order book to Rs 2,287 crore as of Sept-2023 vis-a-vis last year backed by regular orders from existing clients and new orders from overseas clients. CRISIL Ratings believes revenues to grow by a strong 35-40% driven by strong execution of orders with available capacities at Cyient DLM’s plants which alongwith improved fixed cost absorption should support EBITDA margins at ~11% levels while maintaining healthy working capital levels.

 

• Large working capital requirement: The working capital cycle remained elongated over the past few years owing to the large variety of materials required for the final product, despite large customer advances. Gross current assets (net of cash) increased to 292 days as on March 31, 2023 from 235 days in the previous fiscal; caused by receivables and inventory of 72 and 209 days, respectively. With expected strong execution of new orders, working capital is expected to remain high, albeit partly funded by the IPO proceeds.

 

• Susceptibility to fluctuations in raw material prices: As the cost of procuring raw materials and various components accounts for bulk of the production cost, fluctuation in the prices of raw materials may drastically impact profitability. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin was below 5% in fiscal 2020 but has improved after a series of steps taken by the company, including exiting low-margin orders, customers and geographies and ramp-up of the facility in Hyderabad.

Liquidity: Strong

Cash and equivalents amounted to Rs 168 crore as of March 31, 2023 of which Rs 77 crore was unencumbered. Cyient DLM’s liquidity improved substantially post the recently concluded equity issuances and is expected to remain strong over the medium term with further ongoing and need-based support provided by Cyient. Albeit, on standalone basis, cash accruals are expected to ramp-up over the medium term to Rs 70-80 crore in fiscal 2024 and higher in later years against an annual repayment of Rs 25 crore toward loan availed from Cyient; which would begin from fiscal 2025. Utilisation of the sanctioned working capital limits of Rs 432 crore has averaged 80-90% over the past few months mainly on account of high non-fund based needs. Fund based utilization has reduced post the IPO.

Outlook on rating on facility guaranteed by Cyient Ltd: Stable

The outlook is based on the ‘Stable’ outlook on the rating of Cyient. The rating on Cyient DLM will remain sensitive to any change in the ratings on Cyient.

 

Outlook on ratings on facility not guaranteed by Cyient Ltd: Positive

CRISIL Rating’s believes Cyient DLM will be able to improve its business risk profile over the medium term driven by strong growth in revenues while maintaining its healthy operating margins and working capital over the medium term. Financial risk profile, net worth and liquidity which has improved post the equity issuances are expected to sustain at healthy levels over the medium term.

Rating Sensitivity factors

Rating sensitivity factors for guaranteed bank facility:

Upward factors

• Improvement in the credit rating of Cyient by 1 notch or more.
• Steady improvement in the business risk profile of Cyient,

 

Downward factors

• Downgrade in the credit rating of Cyient by 1 notch or more.
• Change in term of the guarantee agreement negatively impacting the payment structure.

 

Rating sensitivity factors for unguaranteed bank facility:

Upward factors

• Upward revision in the credit risk profile of Cyient.
• Substantial growth in revenues while maintaining operating margins at 11-12%.
• Sustenance of the improved financial risk profile and liquidity position.

 

Downward factors

• Downward revision in the credit risk profile of Cyient.
• Decline in business performance, owing to delay in ramp-up of new capacity or absence of favourable order book, leading to fall in operating margins to below 5%.
• Substantial deterioration in financial risk profile and liquidity driven by any large debt-funded capex, substantial dividend outflow or by way of ICDs to group company.
• Change in support stance of parent, Cyient.

Adequacy of credit enhancement structure

The rating on the guaranteed bank facility of Cyient DLM reflects the unconditional and irrevocable guarantee from Cyient on the bank loan facilities amounting to Rs 432 crore, which is in-line with the revised CRISIL Ratings’ approach towards credit enhancement provided by the guarantee. The revised approach is based on guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities. CRISIL Ratings understands that the corporate guarantee includes the invocation terms and is designed to ensure full and timely payment to the lender even in case of non-invocation. Also, CRISIL Ratings understand that Cyient will make payments not later than thirty calendar days of (i) continuous overdrawal of cash credit/overdraft accounts, (ii) non-payment by Cyient DLM of bank guarantee on invocation,  or  (iii) account being overdue on account of devolvement of letter of credit or remaining unpaid in any other case; in case Cyient DLM fails to service its debt obligations, irrespective of the lender invoking the guarantee, without any set off. The suffix CE (credit enhancement) reflects the payment structure, which is designed to ensure full and time-bound payment to lenders.

Unsupported ratings CRISIL A+

CRISIL Ratings has introduced the suffix CE for instruments having an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has applied its criteria for notching up rating for parent support. The company has strong financial flexibility since being part of Cyient. The unsupported rating considers the standalone business and financial risk profiles, notched up for the financial and managerial support from the parent Cyient.

About the Company

Cyient DLM, incorporated in 1993 as Rangsons Electronics Pvt Ltd, is a leading player in the electronics system design and manufacturing segment. The company provides system design, integration, testing and manufacturing of electronic components and subsystems for OEMs in the aerospace, defense and other high-tech engineering segments. The company is involved in assembling of printed circuit boards for the telecom and direct-to-home industries.

 

In February 2015, Cyient Ltd purchased 74% stake in Cyient DLM from the erstwhile promoters, Mr Pavan Ranga and his family, for a consideration of Rs 283 crore. In January 2019, Cyient Ltd purchased the remaining 26% stake in Cyient for Rs 42.5 crore. In June-2023, Cyient DLM has completed fresh equity issuance resulting in dilution of Cyient’s stake to 67%.

 

Cyient DLM reported profit after tax (PAT) of Rs 20 crore on operating income of Rs 509 crore during the first six months of fiscal 2024, against Rs 13 crore and Rs 340 crore, respectively, in the corresponding period of the previous fiscal.

About the parent, Cyient

Cyient (formerly Infotech Enterprises Ltd) was founded as a private limited company in 1991 by Mr B V R Mohan Reddy, the executive chairman. The company commenced operations in September 1992. Cyient was reconstituted as a public limited company in April 1995 and made its initial public offering in March 1997.

 

Cyient started operations by providing GIS services. In May 2000, the company diversified into engineering services. It operates through eight strategic business units: aerospace and defence; transportation; industrial, energy and natural resources; semiconductor, internet of things and analytics; medical and healthcare; utilities and geospatial; communications; and design-led manufacturing (Cyient DLM). Cyient DLM provides design integration and production facilities to designs created in the engineering stage, enabling Cyient to provide design-to-production solutions to its clients. 

 

Cyient reported profit after tax (PAT) of Rs 353 crore on operating income of Rs 3,465 crore during the first six months of fiscal 2024, against Rs 195 crore and Rs 2,646 crore, respectively, in the corresponding period of the previous fiscal.

List of covenants

The material covenants of the instruments are as follows:

1. The corporate guarantee shall be unconditional, continuing, irrevocable and enforceable against the Guarantor not withstanding any dispute between Bank and the Borrower.

2. With respect to credit facilities, which does not stipulate any specific payment/repayment schedule, Guarantor will make payments not later than thirty calendar days of (i) continuous overdrawal of cash credit/overdraft accounts, (ii) non-payment by Cyient DLM of bank guarantee on invocation,  or  (iii) account being overdue on account of devolvement of letter of credit or remaining unpaid in any other case; in case Cyient DLM fails to service its debt obligations, irrespective of the lender invoking the guarantee, without any set off.

3. Guarantor shall make all the payments under the said guarantee free and clear of and without any set-off, counter-claim, or any other withholding or deduction whatsoever.

4. The Guarantor will agree to make payments under the guarantee even in case of initiation of insolvency resolution process, including but not limited to enforcement of any moratorium and appointment of resolution professional, against the company under the insolvency and Bankruptcy Code 2016, or, liquidation, winding up, bankruptcy or dissolution (or proceedings analogous thereto) of the company, or, the appointment of a receiver or administrative receiver or administrator or trustee or similar officer of any of the assets of the company

Status of non cooperation with previous CRA:

Cyient DLM had not cooperated with India Ratings And Research Private Limited, which classified it as non-cooperative vide release dated Mar 15, 2018. The reason provided by India Ratings is non-furnishing of information by Cyient DLM for monitoring of ratings

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  level	Rating assigned with outlook
NA	Cash Credit#	NA	NA	NA	97.0	NA	CRISIL AA (CE) /Stable
NA	Cash Credit^	NA	NA	NA	80.0	NA	CRISIL AA (CE) /Stable
NA	Cash Credit*	NA	NA	NA	60.0	NA	CRISIL AA (CE) /Stable
NA	Cash Credit%	NA	NA	NA	30.0	NA	CRISIL AA (CE) /Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	165.0	NA	CRISIL A1+ (CE)
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	36.00	NA	CRISIL A+/Positive

 

^Interchangeable with non-fund based facility upto Rs 40 crore

*Interchangeable with non-fund based facility upto Rs 30 crore

#Fully interchangeable with non-fund based facility

% including Rs 30 crore WCDL having sub-limit of EPC/PCFC/EBRD/FBP/FBD