How Is Cyient Doing with its DLM Business?
I have had several readers requesting to do down one level, and get more granular on the activities of the major ER&D vendors. Point taken! am starting today, with Cyient, a firm that has not had a lot of coverage in ERDservices.org, and that clearly deserves more attention.
Cyient’s DLM business is based on its 2015 acquisition of a 74% stake in Rangsons Electronics, a Mysore, India systems integrator (in the manufacturing sense) and small series manufacturing firm. Rangsons had in FY14, revenues of USD 66m, and EBITDA margin in the range of 10-12%. The company serviced mostly defense and aerospace clients (69% of revenues), manufacturing (18%), and medical (11%). Its main clients were ABB, Honeywell, Thales, and GE. The acquisition of Rangsons was part of the company’s services, systems, and solutions (S3) strategy to expand from ER&D services, and bring higher margins.
More than three years after the acquisition, the performance of Rangsons, now called DLM, has been disappointing. In FY18, revenues of DLM were USD 62m, up 13.2% during the year, and its operating margin was 0.6%. FY16, right after the acquisition of Rangsons was a difficult year, with revenues declining in USD terms, by 20m. And in the past two years, DLM has been impacted by contract delays from aerospace clients, and also in industrial. To counter-balance this decline, DLM has focused on servicing the telecom sector, from a tactical perspective even if margins were not satisfying, and on revenue synergies with the rest of Cyient in aerospace, and medical devices. The DLM business has provided lumpy.
Cyient, however, does believe its DLM business bottomed out in FY16, and had guided the market of a 16% revenue growth in FY19 (excluding the impact of two recent acquisitions) and of an operating margin increase.The turn-around is proving time-taking.
Meanwhile, Cyient maintains its S3 strategy, with DLM being a cornerstone of its build strategy, along with design, and maintain services, and continues to invest in DLM through acquisitions. It acquired in the past 12 months two U.S. firms: B&F and New Tech.
B&F Design (January 2018) has brought tool design, manufacturing, and precision engineering capabilities. The company, which is based on New Britain, CT, has joined Cyient Defense Services. It has a team of 47 FTEs and revenues of USD 8m-USD 9m. A Q1 2018 addition to DLM is the USD 1m Jupiter, FL, New Technology Precision Manufacturing (New Tech). New Tech provides, like Cyient, prevision manufacturing services.
So what to think of the DLM business and of Cyient’s intentions of going into the manufacturing area? What comes to mind is that DLM as a manufacturing business, has a business model that is very different from the service business. Sales seasonality, capex, and margins are different. Cyient has made the right thing in putting its DLM business in a different structure, and has the long-term commitment to invest in it. Cyient is therefore very aware that DKM by nature cannot be managed like an ER&D service business. I think the size of DLM is manageable for Cyient: DLM represented ~10% of Cyient’s total revenues in FY18, and therefore remains somewhat negligible for Cyient, especially since DLM is now breaking even. So, let’s give Cyient the chance to prove its strategy is relevant, within the context of ER&D services.