Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank loan facilities of Cyient Ltd (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 fiscal 2024, revenues grew by ~18.8% on-year (~15.6% on constant currency [CC] terms) to Rs 7,146 crore, driven by healthy demand from transportation, sustainability (energy and mining), in Digital Engineering and Technology (DET) and Cyient DLM segments while EBITDA margin improved 156bps to 18.4% owing to improvement in utilization, rate hikes, and cost optimisation steps taken. Further, revenue during the first quarter of fiscal 2025 de-grew 0.7% (1.5% CC decline) to Rs 1,676 crore mainly due to delay/extension in execution by clients given large dependence on project-based business despite healthy growth in Cyient DLM sales with reduced fixed cost absorption leading to moderation in EBITDA margin to 15.8%.

 

Medium-to-long term demand for Engineering Research and Development (ER&D) services remains in-tact within the Information Technology (IT) services domain given healthy 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, DET revenue growth in fiscal 2025 is expected to remain flattish  owing to certain delays/extensions seen despite expected ramp-up seen in later quarters this fiscal with consolidated revenue growth being largely driven by Cyient DLM which is expected to report strong organic growth well supported by the acquisition of Altek Eletronics Inc (Altek); with aggregate EBITDA margin continuing to be healthy in 16-18% range.

 

Financial risk profile of Cyient continued to remain strong as represented by sizeable networth, net debt free status, cash surplus maintained in excess of Rs 1,000 crore since past few years, and healthy cash accruals. 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) last year with support from ~Rs 700 crore in equity issuances and IPO proceeds on stake sale in its 100% subsidiary, Cyient DLM Ltd completed during June/July-2023. Cyient further sold 14.5% stake in August-2024 and received gross proceeds of ~Rs 879 crore which is expected to be utilised for investments into semi-conductor business and for debt pre-payments making it debt-free (in the DET business). In October-2024, Cyient DLM has also announced acquisition of Altek which is expected to be funded through a mix of debt and cash surplus. 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 (apart from new Altek acquisition debt) post the pre-payment of existing debt leading to maintenance of strong consolidated cash surplus position which stood at Rs 1,061 crore as of March 31, 2024, over the medium term.

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 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.

 

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:

• 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 ‘BBB+/Negative’ by Standard & Poor’s Global Ratings [S&P]), Bombardier Inc (rated ‘B+/Stable’ by S&P), Boeing Co (rated ‘BBB-/CreditWatch Negative’ 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 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 in 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. In October-2024, Cyient DLM has also announced acquisition of Altek which is expected to be funded through a mix of debt and cash surplus. 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 (apart from new Altek acquisition debt) 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.

 

Weaknesses:

• Customer and segment concentration risks: In fiscal 2024, Cyient derived about 25% of its revenue from the transportation (aerospace and rail) industries and about 20% from the Connectivity sector, while its top five customers contributed about 31% share. Slowdown in any of these large segments (as witnessed in the connectivity segment during the first quarter of fiscal 2025) 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 7,147 crore in fiscal 2024 and employee strength of ~15,400 as on March 31, 2024. 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 7,147 crore in fiscal 2024 while EBITDA margin has improved to 18.4% from 13-15% earlier.

Liquidity: Strong

Liquidity remains strong, driven by cash and equivalents of Rs 1,061 crore as on March 31, 2024, remaining steady from Rs 1,077 crore last year despite debt repayments and capex funding. Surplus levels are expected to remain strong at Rs 1,000+ crore over the medium term with healthy cash accruals of Rs 700+ crore, support from stake sale proceeds in Cyient DLM despite investments into working capital, pre-payment of debt, and funding of small-to-medium sized acquisitions upto Rs 300-500 crore. Capex of Rs 300-500 crore per annum over the medium term may be used to fund internal product development, marketing, and client acquisition costs as well as small to medium 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 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 9381 tco2 in fiscal 2024 from 15,825 tco2 in fiscal 2020
• In fiscal 2024, about 38% of electricity consumption was generated using renewable sources as compared to 20% in fiscal 2020.
• Company has 23.29% 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 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

Any other information: Not Applicable