Cyient DLM trading 183% higher than IPO price. Is it still a ’buy’? Here’s what LKP Securities says

Shares of Cyient DLM, which hit the Indian secondary market on July 2023, have been maintaining a steady upward trend, rewarding their shareholders handsomely. During this period, the shares have jumped from ₹265 (IPO price) apiece to the current level of ₹751, translating into a gain of 183%. 

The company is an integrated EMS company, which is one of the emerging sectors with a focus on the entire life cycle of a product. The company is placed in an exciting Indian EMS space that is at a nascent stage (0.6% of GDP in 2022), foresees longer tenure, and offers huge growth potential (expectations of 32% CAGR growth over CY21–CY26E). 

In light of anticipated growth in the EMS sector, domestic brokerage firm LKP Securities in its recent note initiated coverage on the Cyient DLM with a 'buy' rating and set a target price of ₹851 apiece. 

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It said that the global electronics market reached $2.5 trillion in CY21, with the electronic manufacturing services (EMS) sector accounting for $880 billion. Despite India's modest 2.2% share ($20 billion) in the EMS market, it is poised for rapid growth, projected at a 32% CAGR from CY21 to CY26E.

India's domestic electronics industry is experiencing robust expansion driven by a shift from China, government initiatives to establish India as a global electronics hub, and increasing exports.

Strong parentage 

Cyient DLM’s strong parentage (promoter – Cyient Ltd), long-term relations with clients, strong order book, healthy order inflows, strong pipeline, and differentiated capabilities in key higher growth areas are expected to keep the company on a higher growth path than its peers.

High entry barriers in a highly regulated industry

In a highly regulated industry with high entry barriers, Cyient specialises in serving complex sectors such as the aerospace and defence (A&D), medical technology, and industrial sectors. 

The company's unique focus within these sub-segments distinguishes it from competitors, enabling Cyient to maintain a competitive advantage and create significant barriers to entry, noted the brokerage. 

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Strong order book and healthy order inflows to boost revenue growth

According to the LKP Securities, the company has experienced robust growth in consolidated orders over the past few years, with a notable CAGR of 64% from FY21 to FY23. This growth has been supported by strong order inflows, amounting to around ₹10.1 billion in FY22 and ₹20.6 billion in FY23. 

Notably, the company secured a substantial large-scale order in addition to several multi-year orders from key customers during this period. During FY24, the order book was a bit muted due to lumpiness in the order book conversion, which is expected to be converted in FY25E. 

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Consequently, the order book as of FY24 reached ₹21.7 billion with a book-to-bill ratio of 1.8x. The brokerage expects the export revenue to jump 75% from 66% in FY24, alongside the expansion of the aftermarket and value-added service portfolio, which it anticipates will serve as pivotal growth drivers for Cyient DLM.

Expansion into value-added segments

The company’s current capacity is poised to meet a significant portion of its order book. The brokerage notes that the company's expansion into value-added segments and a shift towards ODM and B2S services are projected to contribute to margin and revenue growth. 

Furthermore, the company’s increasing focus on high-value customers, coupled with a growing portfolio in the aerospace and defence (A&D) sector, is positioning Cyient DLM as an expert player in the industry, the brokerage underscored. 

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Further, it believes that favourable industry trends will also be anticipated to support growth. These combined factors are forecast to result in impressive CAGRs of 33%,49%, and 70% for revenue, EBITDA, and PAT over the period from FY24 to FY26E, respectively.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.