Rating Rationale
July 30, 2020 | Mumbai
Cyient DLM Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.393 Crore
Long Term Rating CRISIL AA(CE)/Stable (Reaffirmed)
Short Term Rating CRISIL A1+(CE) (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Cyient DLM Private Limited (Cyient DLM) at 'CRISIL AA(CE)/Stable/CRISIL A1+(CE)'.
 
The ratings continue to reflect the strength of the unconditional, irrevocable, and continuing corporate guarantee provided by Cyient DLM's parent, Cyient Limited (Cyient, rated 'CRISIL A1+'), covering the entire principal and interest payments on the rated bank facilities, including but not restricted to the entire principal and interest amount. The rating is supported by an additional undertaking by Cyient securing the entire debt obligations, and by the payment mechanism that ensures debt obligations on the rated facilities will be met on time, without any set off.

Analytical Approach

For arriving at the rating, CRISIL has factored in the strength of the corporate guarantee provided by Cyient, covering the entire principal and interest repayments on the rated bank facilities.

Key Rating Drivers & Detailed Description
* Unconditional, irrevocable and continuing guarantee from Cyient, covering the rated facilities
The ratings reflect the strength of the unconditional, irrevocable, and continuing corporate guarantee provided by Cyient DLM's parent, Cyient, covering the entire principal and interest payments on the rated bank facilities, including but not restricted to the entire principal and interest amount. The rating is supported by an additional undertaking by Cyient, securing the entire debt obligation and a payment mechanism to ensure that debt obligations are fulfilled in a timely manner.

Cyient has guaranteed to pay any amount payable by Cyient DLM on the rated facilities, not later than six days from due date, in the event of default by Cyient DLM or demand by the lender.

* Credit profile of Guarantor, Cyient
Cyient is an IT services company, offering niche product and process engineering services in diverse domains such as aerospace, hi-tech, heavy engineering, utilities, telecom, and GIS services, to various players in the mining industry, and to government entities. Cyient's revenue declined by 4% during fiscal 2020 due to subdued client spending across key sectors, albeit it has reported healthy compounded annual rate of 16% over the last five years to fiscal 2019.  CRISIL expects Cyient to post healthy growth over the medium term, driven by revival of demand across end markets leading to large deal wins and the ramp-up in acquired entities, especially Cyient DLM. Operating efficiencies of Cyient are healthy and comparable to other Tier-II IT service providers. Cyient maintains a high bench 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 more stable stream of revenues. Going forward, Cyient targets to deliver complete engineering solutions to the end customer through Cyient DLM.

Profitability of Cyient declined to 13.2% during fiscal 2020 from 14.2% during fiscal 2019 mainly due to the impact of lower volume growth during the year. Profitability is expected to revert to about 14-15% over the medium term driven by larger deal wins, benefits of restructuring and cost optimization measures and improving operating efficiencies in core IT services business. Cyient DLM, on increased synergies with Cyient's core design services is expected to support the trajectory over the medium term. RoCE is also expected to improve gradually, in line with profitability.

Sizeable networth of Rs 2250 crore, and cash and cash equivalents of Rs 1000 crore as of March 2020 support financial risk profile. Debt protection metrics are robust, backed by moderate debt of Rs 415 crore, of which Rs 149 crore has been availed of by Cyient DLM to support working capital and capex requirements. Financial risk profile should remain strong, supported by healthy cash generation, which will comfortably cover capex and working capital requirements. Cyient is also scouting for strategic acquisitions to grow its business and employ its surplus liquidity efficiently.

* 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 and Federal Bank. The guarantee covers the entire principal and interest payment obligations on the guaranteed bank facility. Under the guarantee, in the event of default on interest or principal by Cyient DLM relating to the term loan, the Guarantor will make the necessary payments not later than six calendar days from the due date, irrespective of the lender bank invoking the guarantee. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan. It is irrevocable in nature.
Liquidity Strong

Cyient DLM's liquidity is strong, largely driven by the expectation of support from the parent, Cyient to provide ongoing and need based support, in case of exigencies. Albeit, on standalone basis, cash accruals are expected to be adequate at Rs 15-25 Cr against low repayment obligations of Rs 1.58 crore in fiscal 2021. Liquidity also benefits from adequate headroom available in the fund-based bank limits of about Rs. 237 crore, which have been utilized 60% on average, over the last 12 months ended May 2020.
 
Liquidity of guarantor and parent, Cyient remains strong driven by cash and cash equivalents of Rs 1000 crore as of March 2020 and healthy cash accruals over the medium term. Repayment obligations remains low at about Rs 55 crore over the next two years. Capex requirements are also expected to remain moderate at about Rs 175-200 crore per annum to fund the internal product development marketing and client acquisition costs. During fiscal 2020, Cyient completed its manufacturing facility expansion project (total project cost of about Rs 110 crore) for Cyient DLM in Hyderabad. Accruals are expected to remain healthy at Rs 350-450 crore per annum will remain adequate to meet incremental working capital and capex requirements over the medium term. Cyient is also scouting for strategic acquisitions to grow its business and employ its surplus liquidity efficiently.

Outlook: Stable

CRISIL's rating on Cyient DLM's bank facilities reflects the financial and business strength of the parent, Cyient. Hence, the rating and outlook on Cyient DLM's bank facilities may be revised in case of a revision in the rating or outlook on Cyient.
 
Rating Sensitivity Factors
Upward Factors:
* Upward change in the credit risk profile of Cyient could result in similar rating action on Cyient DLM.
* Sustained improvement in operating profitability to greater than 8%, driven by sharp increase in volumes, and material correction in debt levels, including through equity infusion.
 
Downward Factors:
* Downward change in the credit risk profile of Cyient could result in similar rating action on Cyient DLM.
* Sharp decline in business performance, due to delay in ramp up of new capacity or absence of favourable order book, leading to decline in operating profitability below 2% thereby further weakening of credit metrics.

Adequacy of credit enhancement structure

The guarantee provided by Cyient is unconditional, irrevocable, and continuing corporate guarantee and covers the entire rated amount for bank loans. Cyient has shared an undertaking to monitor the timely payment of the interest and principal obligations for rated facilities.
 
CRISIL has fully consolidated the business and financial risk profiles of Cyient DLM and Cyient. The financials of Cyient DLM, including the entire guaranteed debt, are adequately factored in the consolidated financials of Cyient. CRISIL has also considered multiple scenarios to test the adequacy of the credit enhancement structure, including stress scenarios where the performance of Cyient DLM deteriorates. CRISIL believes that the instrument will have the high degree of safety regarding timely servicing of financial obligations even in the most likely stress scenario.

Unsupported ratings:  CRISIL A+

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

The unsupported rating on the bank loan facility of Cyient DLM does not factor in credit enhancement arising from the corporate guarantee from Cyient Limited.  The unsupported rating takes into account standalone business and financial risk profile and notched up for the financial and managerial support from parent Cyient Limited, based on CRISIL's parent notch-up framework.

About the Company

Cyient DLM, incorporated in 1993 as Rangsons Electronics Pvt Ltd, is a leading player in the electronics systems design and manufacturing segment. The company provides system design, integration, testing and manufacturing of electronic components and sub-systems for original equipment manufacturers in aerospace & defense and other high-tech engineering segments. The company is also involved in assembling of printed circuit boards for the telecom and direct-to-home industries.
 
In February 2015, Cyient Ltd purchased a 74% stake in Cyient DLM from the erstwhile promoters, Mr Pavan Ranga and his family, for a total consideration of Rs 283 crore. During January 2019, Cyient Ltd purchased the remaining 26% stake in Cyient for Rs 42.5 crore.
 
About the parent, Cyient
Cyient (formerly known as Infotech Enterprises Ltd) was originally founded as a private limited company in 1991 by Mr. B V R Mohan Reddy, its 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 (GIS) services. In May 2000, the company diversified into engineering services. It currently operates through eight strategic business units: Aerospace & Defence; Transportation; Industrial, energy and natural resources; Semiconductor, Internet of things and Analytics; Medical and Healthcare; Utilities & Geospatial; Communications and Design led manufacturing (Cyient DLM). Cyient DLM's (earlier Rangsons) business provides design integration and production facilities to the designs created in Engineering, thus enabling Cyient to provide design-to-production solutions to its clients. 
 
Cyient has operations across the globe. During fiscal 2020, it derived around 56% of its revenue from the Americas, 26% from Europe, the Middle East and Africa, and around 18% from Asia Pacific (including India).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Crore 482 401
Profit After Tax (PAT) Rs.Crore -0.9 -3.8
PAT Margins % -0.2 -1.0
Adjusted debt/Adjusted networth Times 5.15 4.81
Interest coverage Times 1.49 1.12
List of covenants

The material covenants of the instruments are as follows:

  1. The corporate guarantee shall be irrevocable and enforceable against the Guarantor not withstanding any dispute between Bank and the Borrower.
  2. With respect to credit facilities having a specified payment/repayment schedule, Guarantor shall monitor whether Borrower has made the necessary payments under the above mentioned credit facilities on the due dates as per the terms of the underlying facility agreements or terms of the facility, and in case the Borrower is unable to make payment of the same, Guarantor shall make the necessary payments not later than 06 (SlX) Calendar days after the due date stipulated, irrespective of the Lender bank invoking the Guarantee.
  3. With respect to credit facilities, which does not stipulate any specific payment/repayment schedule, Guarantor shall monitor whether the Borrower has made the necessary payments under the each of these credit facilities on the due dates, and in case the Borrower is unable to make the same, Guarantor shall make the necessary payments not later than O6 (SlX) Calendar days after the due dates stipulated, irrespective of the Lenders banks invoking the Guarantee.
  4. 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.
  5. 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 has not cooperated with India Ratings, which has moved its rating to to 'Non-Cooperating category' vide release dated April  1, 2020.. The reason provided by India Ratings is that the company did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue size (Rs.Cr) Complexity levels 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 Letter of Credit & Bank Guarantee NA NA NA 120.0 NA CRISIL A1+(CE)
NA Term Loan Jun-2015 NA Sept-2020 1.58 NA CRISIL AA(CE)/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 34.42 NA CRISIL AA(CE)/Stable
^Interchangeable with Non Fund based facility upto 40Cr.
*Interchangeable with Non Fund based facility upto 30Cr.
#Fully interchangeable with Non Fund based facility
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  273.00  CRISIL AA(CE)/Stable      30-11-19  CRISIL AA(CE)/Stable  31-08-18  CRISIL AA(SO)/Stable  01-08-17  CRISIL AA-(SO)/Positive  CRISIL AA-(SO)/Positive/ CRISIL A1+(SO) 
            07-09-19  CRISIL AA(CE)/Stable           
Non Fund-based Bank Facilities  LT/ST  120.00  CRISIL A1+(CE)      30-11-19  CRISIL A1+(CE)  31-08-18  CRISIL A1+(SO)  01-08-17  CRISIL A1+(SO)  CRISIL A1+(SO) 
            07-09-19  CRISIL A1+(CE)           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit# 97 CRISIL AA(CE)/Stable Cash Credit# 97 CRISIL AA(CE)/Stable
Cash Credit^ 80 CRISIL AA(CE)/Stable Cash Credit^ 80 CRISIL AA(CE)/Stable
Cash Credit* 60 CRISIL AA(CE)/Stable Cash Credit* 60 CRISIL AA(CE)/Stable
Letter of credit & Bank Guarantee 120 CRISIL A1+(CE) Letter of credit & Bank Guarantee 150 CRISIL A1+(CE)
Proposed Long Term Bank Loan Facility 34.42 CRISIL AA(CE)/Stable Proposed Long Term Bank Loan Facility .64 CRISIL AA(CE)/Stable
Term Loan 1.58 CRISIL AA(CE)/Stable Term Loan 5.36 CRISIL AA(CE)/Stable
Total 393 -- Total 393 --
^Interchangeable with Non Fund based facility upto 40Cr.
*Interchangeable with Non Fund based facility upto 30Cr.
#Fully interchangeable with Non Fund based facility
Links to related criteria
Criteria for rating instruments backed by guarantees
Rating criteria for manufaturing and service sector companies
Rating Criteria for Engineering Sector
CRISILs Bank Loan Ratings

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