Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRIAIL A1+’ ratings on the bank facilities of Cyient Limited (Cyient).

 

The ratings continue to reflect the healthy business risk profile of Cyient, driven by niche engineering services, strong client relationships and timely acquisitions to support the product and services profile. The ratings also factor in the strong financial risk profile, with minimal debt and healthy debt protection metrics and liquidity. These strengths are partially offset by customer and segment concentration risks.

 

In the first six months of fiscal 2024, revenues grew by 31% on-year to Rs 3,465 crore, driven by healthy growth from the services segment across sectors such as sustainability, transportation, connectivity, DLM, and continuing support from acquired businesses. Earnings before interest, tax, depreciation and amortization (EBITDA) margins improved to 18.5% as compared to 16.8% during fiscal 2023 driven by continued improvements in selling, general and administrative (SG&A) costs, resulting from optimization initiatives. CRISIL Ratings expects strong demand from end-user industries including aerospace, transportation, and connectivity as well as support from acquired businesses to drive revenue growth of 14-16% during fiscal 2024 with cost efficiency initiatives driving the improvement in EBITDA margins by 200-250 bps y/y.

 

Earlier, in fiscal 2023, company’s revenue growth grew by 32% on-year supported by acquisitions as well as steady 12.1% organic growth while EBITDA margins moderated to 16.8% owing to one-off led by cost optimisation programs, favourable product mix and improvement in margins of the Design Led Manufacturing (DLM) segment. Financial risk profile of Cyient continued to remain healthy despite debt-funded acquisitions. Consolidated debt (including finance lease liabilities of Rs 284 crore) increased to Rs 1,218 crore as on March 31, 2023 from Rs 573 crore last year while consolidated cash surplus remained healthy yet moderated from last year levels to Rs 1,077 crore (Fiscal 2022: Rs 1,570 crore). Cyient DLM’s IPO was completed in July-2023 with proceeds of about Rs 700 crore. As of September 30, 2023, consolidated debt and liquid surplus stood at Rs 1,039 crore and Rs 1,042 crore, respectively. Over the medium term, credit metrics and liquid surplus levels are expected to improve with healthy accruals and debt repayments.

Analytical Approach

• CRISIL Ratings has combined the business and financial risk profiles of Cyient and all its subsidiaries. This is because the entities are under a common management and in related businesses. Cyient Ltd has extended a corporate guarantee for bank borrowings of its subsidiary, Cyient DLM Pvt Ltd, which has been consolidated. 
• With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are being treated as debt while related adjustments are also made in depreciation and amortization and interest cost components.
• CRISIL ratings has amortised goodwill of Rs 941.9 crore recognised due to acquisitions during fiscal 2023 for five years beginning fiscal 2023.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile, driven by niche engineering service and strong client relationships: Cyient offers niche product and process engineering services in domains such as aerospace and transportation, communication, mining, energy, and utilities. Also, the company had acquired Cyient DLM to impart system integration and prototyping capabilities to its engineering services, thus enabling it to provide design-to-production solutions to its clients. Furthermore, Cyient has built strong relationships with industry leaders, such as Raytheon Technologies Corp (rated ‘A-/negative/A2’ by Standard & Poor’s Global Ratings [S&P]), Bombardier Inc (rated ‘CCC+/Positive’ by S&P), Boeing Co (rated ‘BBB-/Negative/A-3’ by S&P), British Telecommunications Plc (rated ‘BBB/Stable/A-2’ by S&P) and Tele Atlas, as is evident from high repeat orders of over 90%. The company’s niche offerings and strong client relationships have driven healthy revenue growth over the last five years.

 

• Strong financial risk profile: Sizeable networth of Rs 3,261 crore and cash and equivalents of Rs 1,077 crore as on March 31, 2023, drive the strong financial risk profile. While debt funding of acquisitions in fiscal 2023 led to increase in consolidated debt as of March 31, 2023 to Rs 1,218 crore (from Rs 573 crore last year), healthy accruals of Rs 700+ crore and support from DLM’s IPO should lead to overall improvement over the medium term.

 

Weaknesses:

• Customer and segment concentration risks: In fiscal 2023, Cyient derived about 25% of its revenue from the transportation (aerospace and rail) industries and about 24% from the Connectivity sector, while its top five customers contributed about 28%. Slowdown in any of these large segments (as witnessed in the aerospace and defence segment during the pandemic) or delay in capital expenditure (capex) by one or more of the top five clients could significantly impact growth prospects. Despite reduced dependence in recent years, the business risk profile of Cyient will remain exposed to customer and segment concentration risks over the medium term.

 

• Moderate but growing scale of operation: Cyient is a medium-sized Tier II player in the Indian services industry, with a net operating income reaching Rs 6,016 crore in fiscal 2023 and employee strength of ~15,800 as on March 31, 2023. Size is critical in the Indian services industry, as companies seek complete solutions and delivery capabilities from their vendors. The moderate scale of operation constrains the ability to undertake large orders. With support from acquisitions, Cyient’s revenue has grown at a CAGR of 9% over last five years to Rs 6,016 crore in fiscal 2023 while EBITDA margin has improved by ~300bps to 16.8%. Besides it achieved a strong 31% growth during the first half of fiscal 2024 at 18.5% EBITDA margins. CRISIL Ratings expects revenue growth of 14-16% during fiscal 2024 with cost efficiency initiatives driving the improvement in EBITDA margins by 200-250 bps y/y.

Liquidity: Strong

Liquidity remains strong, driven by cash and equivalents of Rs 1,077 crore as on March 31, 2023, reducing from Rs 1,570 crore last year due to acquisition funding. Surplus levels are expected to recover over the medium term with healthy cash accrual and support from Cyient DLM IPO proceeds despite increased investments in its working capital requirements and pre-payment of debt. Net cash accrual, expected at Rs 700+ crore per annum, will sufficiently cover debt obligation of Rs 58 crore in fiscal 2024 and Rs 123 crore in fiscal 2025 apart from the incremental working capital and capital expenditure (capex) requirements over the medium term. Capex is expected at about Rs 300 crore per annum over the medium term to fund internal product development, marketing, and client acquisition costs as well as small acquisitions. Cyient continues to scout for strategic acquisitions to grow its business and efficiently employ its surplus liquidity.

 

ESG Profile

CRISIL Ratings believes that Cyient’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The IT sector has a low impact on the environment because of the inherent nature of digital services, core operations as well as products. The sector has a social impact because of its large workforce. Cyient Ltd has continuously focused on mitigating its environmental and social impact. 

 

Key ESG highlights:

• Cyient began releasing its sustainability report from fiscal 2021 setting out detailed parameters of the ESG and set specific goals for 2025 adopting Holistic Sustainability Framework
• Company has been consistently improving on its green-house gas related Scope 1 and 2 emissions having reduced scope 1 and 2 emissions to 12911 tco2 in fiscal 2023 from 15,825 tco2 in fiscal 2020
• In fiscal 2023, about 32% of electricity consumption was generated using renewable sources as compared to 20% in fiscal 2020.
• Company has 24.47% women in the workforce and intends to become gender neutral by 2025.
• It has adequate governance structure with 50% of its board comprising independent directors and extensive disclosures

 

There is growing importance of ESG among investors and lenders. Cyient’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes Cyient will maintain its healthy business risk profile driven by demand from key end-user industries of aerospace, automotive and sustainability, long-term relationships with clients, support from recently acquired businesses with continued focus on cost efficiencies. Cyient will continue to maintain its healthy financial risk profile over the medium term, with moderate debt, high liquid surplus in absence of any large debt funded acquisition and a conservative financial policy.

Rating Sensitivity factors

Upward factors

• Sustained substantial revenue growth combined with increased customer and market segment diversification
• Steady improvement in operating efficiency with EBITDA margin remaining higher than 18% on a sustained basis
• Healthy financial risk profile in absence of any large debt-funded acquisition

 

Downward factors

• Steep decline in revenue or sustained fall in the EBITDA margin to less than 10% weakening cash generation
• Higher-than-expected, debt-funded capex or acquisition weakening the credit metrics; for instance, gearing exceeding 1.0 time on a sustained basis

About the Company

Cyient (formerly Infotech Enterprises Ltd) was originally 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 geographic information systems 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 (earlier Rangsons) provides design integration and production facilities to designs created in the engineering stage, thus enabling Cyient to provide design-to-production solutions to its clients. Cyient has operations across the globe.

 

In the first six months of fiscal 2024, Cyient reported consolidated profit after tax of Rs 353 crore on operating income of Rs 3,365 crore against Rs 195 crore and Rs 2,646 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars	Unit	2023	2022
Operating income	Rs crore	6,016	4544
Profit after tax (PAT)	Rs crore	326	522
PAT margin	%	5.4	11.5
Adjusted debt / adjusted networth (including lease liabilities)	Times	0.37	0.18
Interest coverage	Times	12.68	1700

*CRISIL Ratings adjusted

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 levels	Rating assigned with outlook
NA	Bank Guarantee	NA	NA	NA	15.0	NA	CRISIL A1+
NA	Letter of Credit	NA	NA	NA	5.0	NA	CRISIL A1+
NA	Loan Equivalent Risk Limits	NA	NA	NA	10.0	NA	CRISIL A1+
NA	Packing Credit&	NA	NA	NA	30.0	NA	CRISIL AA/Stable
NA	Packing Credit in Foreign Currency	NA	NA	NA	30.0	NA	CRISIL A1+

& - Sub limit of Rs 30 crore with CC limits

Annexure – List of entities consolidated

S. No.	Name of Entity	Extent of Consideration	Rationale for consolidation
1	Cyient Inc., United States of America	Full	Strong business and financial linkages
2	Cyient Canada Inc., Canada	Full	Strong business and financial linkages
3	Cyient Defense Services Inc., United States of America	Full	Strong business and financial linkages
4	Cyient Insights Private Limited, India	Full	Strong business and financial linkages
5	Cyient Europe Limited, United Kingdom	Full	Strong business and financial linkages
6	Cyient Benelux BY, Netherlands	Full	Strong business and financial linkages
7	Cyient Schweiz GmbH, Switzerland	Full	Strong business and financial linkages
8	Cyient SRO, Czech Republic	Full	Strong business and financial linkages
9	Cyient NV, Belgium	Full	Strong business and financial linkages
10	Cyient GmbH, Germany	Full	Strong business and financial linkages
11	Cyient AB, Sweden	Full	Strong business and financial linkages
12	Cyient KK, Japan	Full	Strong business and financial linkages
13	Cyient DLM Limited, India	Full	Strong business and financial linkages
14	Cyient Singapore Private Limited, Singapore	Full	Strong business and financial linkages
15	Cyient Israel India Limited, Israel	Full	Strong business and financial linkages
16	Cyient Solutions and Systems Private Limited, India	Full	Strong business and financial linkages
17	Cyient Australia Pty Limited, Australia	Full	Strong business and financial linkages
18	Integrated Global Partners Pty Limited, Australia	Full	Strong business and financial linkages
19	Integrated Global Partners Pte Ltd, Singapore	Full	Strong business and financial linkages
20	lG Partners South Africa Pty Ltd, South Africa	Full	Strong business and financial linkages
21	Integrated Global Partners SpA, Chile	Full	Strong business and financial linkages
22	Work Force Delta Pty Ltd, Australia	Full	Strong business and financial linkages
23	Grit Consulting Pte Ltd, Singapore	Full	Strong business and financial linkages
24	Celfinet- Consultoria EM Telecomunicm;0es, S.A, Portugal	Full	Strong business and financial linkages
25	Metemesonip, Unipessoal Lda, Portugal	Full	Strong business and financial linkages
26	Celfinet UK Telecommunications Consulting Services Ltd, United Kingdom	Full	Strong business and financial linkages
27	Celfinet Espafla-Consultoria en Telecomunicaciones S.L, Spain	Full	Strong business and financial linkages
28	Celfinet (Brasil)-Consultoria em Telecomunica90es, Ltd, Brazil	Full	Strong business and financial linkages
29	Celfinet Mozambique- Consultoria em Telecommunications Limited, Mozambique	Full	Strong business and financial linkages
30	Celfinet Mexico- Consultoria de Telecomunicaciones AS, Mexico	Full	Strong business and financial linkages
31	Celfinet Germany - Telecommunications Consulting Services GmbH, Germany	Full	Strong business and financial linkages
32	Sentiec Oyj, Finland	Full	Strong business and financial linkages
33	Citec Group Oy Ab, Finland	Full	Strong business and financial linkages
34	Cyient Oy Ab (formerly known as Citec Oy Ab), Finland	Full	Strong business and financial linkages
35	Citec Engineering France Sarl, France	Full	Strong business and financial linkages
36	Cyient Engineering AB (formerly known as Citec AB), Sweden	Full	Strong business and financial linkages
37	Cyient Engineering & Information GmbH (formerly known as Citec Information & Engineering GmbH), Germany	Full	Strong business and financial linkages
38	Cyient Group France SAS (formerly known as Citec Group France SAS), France	Full	Strong business and financial linkages
39	Akilea Overseas Ltd., France	Full	Strong business and financial linkages
40	Citec Norway AS, Norway	Full	Strong business and financial linkages
41	lnfotech HAL Limited, India	Proportionate	Strong business and financial linkages