Cyient To Divest DLM Seven Years After Rangsons Acquisition
Cyient is exploring the divestment of its DLM unit seven years after the Rangsons Electronics acquisition. The company wants to keep a minority stake in DLM, still offering design-engineering-short series manufacturing. Cyient is considering options such as a spin-off, an IPO, or a divestment.
According to Cyient, DLM still has good growth potential, thanks to electronics growth, manufacturing moving from China to India for political reasons, and Make in India. Cyient has bold ambitions for DLM, planning to multiply the unit’s revenues by 5 in the next five years, from approximately USD 100m to 500m. DLM plans to open two additional factories in Mexico and Vietnam to accommodate this hyper-growth. These new plants will require significant Capex, which Cyient wants to share with a partner.
We think this is good news. Finally, Cyient acknowledges that the business models of Services and DLM differ. While the concept of a design-engineer-short-series-manufacturing is attractive, Cyient has suffered since the acquisition of mixed execution and recently from procurement delays. Nevertheless, the company points to its recent Honeywell contract to design and manufacture Honeywell Anthem digital cockpits. Reflecting this significant deal, DLM’s bookings were up 253% in Q2 FY to USD 118m.
The long-term future may look promising. However, DLM has suffered from electronics supply chain challenges. Revenues were up 9.4% in FY22, decelerating to 1.2% in Q1 FY23 and -7.3% in Q2. Cyient is now planning DLM to grow by high-single digits in full-year FY23, thanks to the high Q2 bookings. The profitability remains average, with Cyient targeting an EBIT margin of 6-8%. This is half of Services’ EBIT targeted band. Clearly, if DLM becomes a USD 500m business in five years, it would very significantly lower Cyient’s EBIT margin. No wonder Cyient wants to divest DLM! We wonder how easy it will be for Cyient to find a buyer.