KR Choksey has initiated coverage on Cyient DLM Ltd with a “Buy” rating and a 12-month target price of Rs 842, indicating an 18% upside from its current market price of Rs 713. The company is strategically positioned as a leader in the Electronic Manufacturing Services (EMS) space, catering to high-growth sectors such as defense, aerospace, industrial, medical, and transportation. Cyient DLM is poised for significant growth, with a strong order book, expansion plans in the U.S., and a targeted revenue growth of 30% CAGR over the next few years.

Cyient DLM’s Strategic Focus on High-Value EMS Services

Cyient DLM is solidifying its position in the Electronic Manufacturing Services (EMS) industry by focusing on high-value solutions. The company is enhancing its capabilities in critical sectors such as defense, aerospace, industrial, and medical. Notably, Cyient DLM's recent acquisition of Altek Electronics, a U.S.-based EMS provider, underscores its intent to expand its U.S. market presence. This acquisition, executed at a favorable valuation of 0.78x price-to-sales (CY23), strengthens the company’s footprint in industrial, medical, and defense sectors, while Altek’s ITAR certification boosts Cyient’s U.S. defense market capabilities.

Order Book Set for a Rebound by Q4 FY25

While Cyient DLM’s order inflows saw temporary moderation in recent quarters, the company expects a significant rebound in Q4 FY25, supported by new contracts across semiconductors, defense, med-tech, and D&A sectors. Management remains confident of achieving a 30% revenue CAGR over the medium term. The company’s long-term pipeline has exceeded $1 billion, with a weighted pipeline of nearly $500 million, providing a solid foundation for sustained growth.

Expanding Build-to-Specification (B2S) Capabilities

Currently, Build-to-Print (B2P) services account for the majority of Cyient DLM’s revenue. However, the company is making significant investments to expand its presence in the Build-to-Specification (B2S) segment, which offers higher margins. Leveraging the advanced design expertise of its parent company, Cyient Ltd, Cyient DLM aims to increase its B2S revenue contribution to high single digits in the near-to-medium term and eventually achieve 20% over the next five to eight years. This strategic shift positions Cyient DLM for higher profitability as B2S margins are typically in the 13-14% range, significantly higher than B2P margins.

Strong Financial Performance and Growth Projections

KR Choksey expects Cyient DLM to deliver robust financial performance over the next three years, driven by its strong order book and strategic expansions. Key financial projections for FY24-FY26 include:

Revenue growth: 30% CAGR, reaching Rs 26,469 million by FY26.
EBITDA growth: 49% CAGR, with EBITDA expected to reach Rs 3,233 million by FY26, up from Rs 878 million in FY23.
Net profit growth: 59% CAGR, with net profit projected to reach Rs 2,080 million by FY26, compared to Rs 317 million in FY23.
EBITDA margin: Expected to improve to 12% by FY26, up from 9% in FY24.
PAT margin: Expected to reach 8% by FY26, up from 4% in FY23.
These growth projections reflect Cyient DLM’s ability to capitalize on its long-term customer relationships, strong order pipeline, and expanding market presence.

Key Acquisitions and U.S. Market Expansion

Cyient DLM’s acquisition of Altek Electronics marks a pivotal move in its U.S. expansion strategy. With $37.2 million in revenue and a 10% EBITDA margin in FY23, Altek brings significant capabilities in PCB assembly, box builds, and upper-level assemblies. This acquisition not only expands Cyient DLM’s portfolio but also enhances its manufacturing capacity with an additional 80,000 square feet of production space.

Moreover, Altek’s established presence in the medical and industrial sectors will help Cyient DLM address the underlying revenue pressure in these segments, while its ITAR certification strengthens Cyient DLM’s defense capabilities in the U.S. market.

Investment in U.S. Defense and Aerospace Markets

Cyient DLM is well-positioned to tap into the growing U.S. defense and aerospace markets, supported by its U.S. expansion and ITAR certification. The company plans to leverage its Altek acquisition to drive defense-related sales in the U.S., a sector expected to contribute significantly to its long-term revenue growth. With increasing global demand for advanced electronics and defense solutions, Cyient DLM is expected to see continued momentum in its defense and aerospace segments.

Valuation and Investment Rationale

KR Choksey values Cyient DLM at a 43x P/E multiple on FY26E adjusted EPS, arriving at a target price of Rs 842. This represents a potential 18% upside from its current market price of Rs 713. The stock’s current valuation reflects market confidence in Cyient DLM’s ability to deliver sustained growth and margin expansion over the next few years.

Key valuation metrics:

P/E ratio: Trading at 36x FY26 earnings, with an expected improvement as revenue and profitability grow.
EV/EBITDA: Trading at 23x FY26 EBITDA, reflecting strong future growth potential.
With strong fundamentals, a solid order book, and strategic expansions, Cyient DLM offers a compelling investment case for long-term investors.

Risks and Challenges

While Cyient DLM has a strong growth outlook, it faces several risks:

Dependency on key customers: The company generates 91.08% of its revenue from its top 10 customers, making it vulnerable to any client-related disruptions.
Geographical concentration: 89% of its revenue comes from the Mysuru facility, posing operational risks in case of disruptions.
Revenue concentration in B2P solutions: A heavy reliance on Build-to-Print (B2P) services and PCB assembly could impact growth if demand slows in these areas.

Conclusion: Buy Cyient DLM for Strong Upside Potential

KR Choksey’s “Buy” recommendation for Cyient DLM, with a target price of Rs 842, reflects confidence in the company’s long-term growth potential. Cyient DLM’s strategic focus on expanding its Build-to-Specification capabilities, coupled with its strong order book and U.S. expansion, positions it well for sustained profitability. Investors looking for exposure to the fast-growing EMS industry, especially in defense, aerospace, and industrial sectors, should consider Cyient DLM as a compelling investment opportunity.

Disclaimer: This report is for informational purposes only. Investors should conduct their own research or consult financial advisors before making investment decisions.