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 organic revenue growth driven by strong order book execution and support from acquisition of Altek Electronics Inc (Altek) while maintaining its healthy operating margins and working capital over the medium term.

 

On October 03, 2024, Cyient DLM announced acquisition of 100% stake in the US Electronic Manufacturing and Services (EMS) company, Altek for $29.2 million (including $5.8 million earnouts), to be funded through a mix of low-cost foreign currency debt and available liquid surplus (including IPO proceeds earmarked for acquisitions). Altek reported $37.2 million in revenue in 2023 with margins similar to Cyient DLM and will augment Cyient DLM’s products, customers and market profile in the EMS market while driving growth in Aerospace and Defense apart from medical and industrial segments.

 

Operating income during fiscal 2024 grew by 44% to Rs 1,196 crore led by strong order execution in the Aerospace and Defence segments while EBITDA margin moderated to 9.3%. Revenue during the first quarter of fiscal 2025 continued to grow at 19% on-year to Rs 258 crore while EBITDA margin stood at 7.8%. The moderation in EBITDA margin in fiscal 2024 and first quarter of fiscal 2025 as compared to 11-12% level seen in fiscals 2023 and 2022 is mainly due to substantial increase in employee headcount, ESOP expenses, and delivery of a large low-margin order. Enhanced hiring in fiscal 2024 has been done to cater to continued strong demand expected over the medium term. While aggregate revenue growth is expected to be strong over the medium term led by organic growth of +20% led by execution of healthy orderbooks (of Rs 2127 crore as of June-24) and support from Altek acquisition, Company is expected to maintain double digit EBITDA margins despite the large employee additions and one-off expenses in Altek with improved fixed cost absorption; and remains the key monitorable. Working capital days remained high but improved during fiscal 2024 with gross current asset days (net of cash) of 234 day as compared to 292 days last year and should remain at 240-250 days over the medium term.

 

Cyient DLM’s financial risk profile has seen a robust improvement in fiscal 2024 post the equity issuance and IPO with networth of Rs 904 crore, nil external debt (loan from parent, Cyient of Rs 134 crore as of March 31, 2024) and liquid surplus of Rs 537 crore. The company has part-utilized the IPO proceeds upto Rs 272 crore for debt repayment, fund working capital needs and for general corporate purposes. Financials risk profile and liquidity is expected to remain strong over the medium term even after the debt-funded acquisition of Altek given healthy liquid surplus and cash accruals being sufficient to fund capex and meet increased working capital needs.

 

The equity issuances and bulk deal sale of stake has reduced Cyient’s equity stake in the company to 67% by July-2023 from 100% previously, and further to 52.16% in August-2024, however, it will continue to hold the majority ownership and has provided corporate guarantees to the debt facilities of the company. Cyient will also continue to provide its support to Cyient DLM through intercompany loans which stood at Rs 134 crore as of March-2024.

 

For Rs 432 crore of bank facilities that are credit enhanced by Cyient, the ratings continue to reflect the strength of the unconditional, irrevocable and corporate guarantee extended. This 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 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.

Analytical Approach

• For arriving at the rating on the long-term 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.
• For arriving at the ratings, CRISIL Ratings has also consolidated Cyient DLM's newly incorporated wholly owned subsidiary, Cyient DLM Inc, which has acquired Altek Electronics, Inc. in October-2024; given its under a common management and in related business.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Unconditional, irrevocable and continuing guarantee from Cyient: The credit enhanced rating is based on the strength of the continuing, 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 19% in fiscal 2024 driven by healthy growth in both services and DLM segments. Aided by healthy demand from end-user industries, healthy deal wins and customer additions, revenue growth is expected to remain healthy over the medium-to-long term, albeit growth in fiscal 2025 is expected to remain muted owing to some deferrals/extensions seen. Operating efficiency of Cyient is healthy and comparable to other tier-II IT service providers.

 

Cyient maintains 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.

 

Given Cyient’s robust market position in the Engineering Research and Development (ER&D) services,  medium-to-long term demand remains healthy given demand from end-user industries including aerospace, transportation, and sustainability segments as well as impetus of the company on the growing semi-conductor business. However, revenue in fiscal 2025 is expected to remain sluggish given extensions/delays in order execution and grow at 1-4% with EBITDA margin continuing to be healthy in 16-18% range.

 

Sizeable networth of Rs 4,091 crore, cash and equivalents of Rs 1,061 crore as on March 31, 2024, and healthy healthy cash accruals drive the strong financial risk profile. Net cash accruals of Rs 664 crore coupled with gross proceeds of ~Rs 700 crore received from stake sale and IPO in the 100% subsidiary, Cyient DLM Ltd, was used to pre-pay debt and part-fund working capital needs, and small capex pin fiscal 2024. Consequently, consolidated debt (including finance lease liabilities of Rs 335 crore) reduced to Rs 799 crore as on March 31, 2024 from Rs 1,218 crore (including finance lease liabilities of Rs 284 crore)

 

Further, Cyient has sold 14.5% stake in August-2024 and received gross proceeds of ~Rs 879 crore which is expected to be utilised for debt pre-payments and investments into semi-conductor business. Healthy cash accruals of Rs 700+ crore should remain sufficient to fund any small to medium sized acquisitions in absence of any term debt repayments post the pre-payments leading to maintenance of strong consolidated cash surplus position which stood at Rs 1,061 crore as of March 31, 2024 (March 31, 2023: Rs 1,077 crore) over the medium term.

 

• Payment structure designed to ensure full and timely payment to investors: Cyient has provided a corporate guarantee for bank facilities of Cyient DLM to State Bank of India, HDFC Bank Axis Bank and Federal Bank. The guarantee covers the entire principal and interest payment obligations on the guaranteed bank facility. It also includes the invocation terms and is designed to ensure full and timely payment to the lender even in case of non-invocation. It ensures 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.

 

• 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 scale of operations: The moderate scale of Cyient DLM is reflected in revenues of less than Rs 1500 crore, albeit growing at a strong rate of the last few fiscals. In fiscal 2024, revenue grew by a strong 44% to Rs 1,196 crore, on the back of 15% growth each in last two fiscals while maintaining a healthy operating efficiency with EBITDA margin of 9.3%, return on capital employed of 15.2% and improved working capital position. Medium term revenue growth is supported by healthy order book of Rs 2,127 crore as of June-2024 backed by regular orders from existing clients, new client additions and Altek acquisition. CRISIL Ratings believes, revenue growth to continue at 30-40% in fiscal 2025 driven by execution of orders with available capacities at Cyient DLM’s plants and inclusion of Altek business which alongwith improved fixed cost absorption should support double-digits EBITDA margins 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) reduced in fiscal 2024, albeit remained high at 234 days as on March 31, 2024 from 292 days in the previous fiscal; caused by reduction in inventory days to 156 from 209 days last year, while receivable days remained at 71-72 days on average. With expected strong execution of order books, working capital is expected to remain high, albeit continue to partly funded by the planned usage of 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, equivalents and investments amounted to Rs 537 crore as of March 31, 2024 of which Rs 464 crore was unencumbered. Cyient DLM’s liquidity is expected to remain strong over the medium term despite funding of Altek acquisition, given strong cash accruals of Rs 130+ crore in fiscal 2025 which is expected to ramp-up further over the medium term. It currently has nil external debt repayments with annual repayment of Rs 25 crore toward loan availed from Cyient apart from obligations under the new acquisition financing which is expected to be foreign currency denominated. Utilisation of the sanctioned working capital limits of Rs 482 crore has averaged 79% over the past 12 months ended August-2024 mainly on account of high non-fund based needs.

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; while continuing to maintain a healthy financial risk profile and liquidity.

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:

• Substantial growth in revenues while maintaining double-digit operating margins.
• Sustenance of the improved financial risk profile and liquidity position.
• Improvement in the credit rating of Cyient by 1 notch or more.

 

Downward factors:

• 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 or downgrade in its credit rating by 1 notch or more.

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 from being part of Cyient. The unsupported rating takes into account 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%.

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. 

 

In the first three months of fiscal 2025, Cyient reported consolidated profit after tax of Rs 147.6 crore on operating income of Rs 1,676 crore against Rs 169.1 crore and Rs 1,687 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars	Unit	2024	2023
Operating income	Rs crore	7,147	6,016
Profit after tax (PAT)	Rs crore	514	326
PAT margin	%	7.2	5.4
Adjusted debt / adjusted networth (including lease liabilities)	Times	0.20	0.37
Interest coverage	Times	11.84	12.68

*CRISIL Ratings adjusted

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