Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Cyient Limited (Cyient).

 

In the first quarter of fiscal 2023, revenue grew by 18% on-year to Rs 1,250 crore, driven by healthy growth from the services segment and key sectors such as aerospace, communications, mining and utilities, as well as consistent client additions. Earnings before interest, tax, depreciation and amortization (EBITDA) margin moderated to 15.5% as compared to 17.6% during the same period last fiscal owing to higher employee related costs as well as moderation in the margins of the design led manufacturing (DLM) segment. Earlier, in fiscal 2022 company’s revenue growth remained healthy at 8% on-year while EBITDA margin reached an eight-year high of 17.4% led by cost optimisation programs, favourable product mix and improvement in margins of the Design Led Manufacturing (DLM) segment.

 

Cyient, on April 25, 2022, announced acquisition of 100% stake in Citec, a Finland-based plant and product engineering services company at an enterprise value of EUR 94 million (~Rs 760 crore), funded 50% by debt and the remaining by cash. On April 28, 2022, the company also announced the acquisition of 100% stake in Singapore-based Grit Consulting (Grit) for an enterprise value of USD 37 million (~Rs 280 crore), 50% of which will be paid now and the remaining as an earnout over the next two years. While the acquisition of Grit was closed on April 28, 2022 that of Citec is expected to be completed in the second quarter of this fiscal. Further, on June 6, 2022, Cyient announced signing of an agreement to acquire Celfinet, a Portugal based international wireless engineering services company for EUR 41 million (Rs 330 crore), of which 65% is to be paid up-front. The Celfinet acquisition became effective June 30, 2022. Aided by the acquisitions, gradual recovery in product development spending by clients across sectors post the Covid-19 pandemic, stronger deal wins following revival of end-market demand globally and healthy customer additions, revenue is expected to grow 25-30% in fiscal 2023. Furthermore, with the sustenance of cost optimisation and volume benefits, EBITDA margin is expected to remain at 15-16% in fiscal 2023.

 

The ratings continue to reflect the healthy business risk profile of Cyient, driven by niche engineering services, strong client relationships and timely acquisitions to support the product solutions profile. The ratings also factor in the strong financial risk profile, with minimal debt and healthy debt protection metrics and liquidity. These strengths are partially offset by customer and segment concentration risks and modest scale of operation.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Cyient and all its subsidiaries. This is because the entities are under a common management and in related businesses. Cyient Ltd has given corporate guarantee for bank borrowings of its subsidiary, Cyient DLM Pvt Ltd, which has been consolidated. 

 

With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are being treated as debt while related adjustments are also made in depreciation and amortization and interest cost components.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths

Healthy business risk profile, driven by niche engineering service and strong client relationships: Cyient offers niche product and process engineering services in domains such as aerospace and defence (A&D), communication, transportation and semiconductors. Also, the company had acquired Cyient DLM to impart system integration and prototyping capabilities to its engineering services, thus enabling it to provide design-to-production solutions to its clients. Furthermore, Cyient has built strong relationships with industry leaders, such as Raytheon Technologies Corp (rated ‘A-/negative/A2’ by Standard & Poor’s Global Ratings [S&P]), Bombardier Inc (rated ‘CCC+/Positive’ by S&P), Boeing Co (rated ‘BBB-/Negative/A-3’ by S&P), British Telecommunications Plc (rated ‘BBB/Stable/A-2’ by S&P) and Tele Atlas, as is evident from high repeat orders of over 90%. The company’s niche offerings and strong client relationships have driven healthy revenue growth over the last five years.

 

Strong financial risk profile: Sizeable networth of more than Rs 2,450 crore and cash and equivalents of Rs 1,569 crore as on March 31, 2022, drive the strong financial risk profile. Debt protection metrics were robust, backed by minimal debt of Rs 326 crore, of which Rs 103 crore has been availed of by Cyient DLM to support the working capital and capacity enhancements. While debt is expected to increase by about Rs 380 crore on account of the Citec acquisition, financial risk profile should remain strong.

 

Weaknesses

Customer and segment concentration risks: In fiscal 2022, Cyient derived about 33% of its revenue from the aerospace and defence industries and about 23% from the communication sector, while its top five customers contributed about 27%. Slowdown in any of these large segments (as witnessed in the aerospace and defence segment in the last two years) or delay in capital expenditure (capex) by one or more of the top five clients could significantly impact growth prospects. Despite reduced dependence in recent years, the business risk profile of Cyient will remain exposed to customer and segment concentration risks over the medium term.

 

Moderate scale of operation: Cyient is a medium-sized Tier II player in the Indian services industry, with a net operating income of Rs 4,534 crore in fiscal 2022 and employee strength of ~12,800 as on March 31, 2022. Size is critical in the Indian services industry, as companies seek complete solutions and delivery capabilities from their vendors. The moderate scale of operation constrains the ability to undertake large orders.

Liquidity: Strong

Liquidity remains strong, driven by cash and equivalents of Rs 1,569 crore as on March 31, 2022, reducing temporarily in the near term because of acquisition payments but expected to recover over the medium term owing to healthy cash accrual. Net cash accrual, expected at about Rs 600 crore per annum, will sufficiently cover debt obligation of about Rs 60 crore in fiscal 2023 and will cover the incremental working capital and capital expenditure (capex) requirements over the medium term. Having announced three acquisitions till date in fiscal 2023, capex will likely be low in fiscal 2023 during remainder of the year, and is expected at Rs 200 crore per annum over the medium term to fund internal product development, marketing and client acquisition costs. Cyient continues to scout for strategic acquisitions to grow its business and efficiently employ its surplus liquidity.

 

ESG Profile

CRISIL Ratings believes that Cyient’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The IT sector has a low impact on the environment because of the inherent nature of digital services, core operations as well as products. The sector has a social impact because of its large workforce. Cyient Ltd has continuously focused on mitigating its environmental and social impact. 

 

Key ESG highlights:

• Cyient began releasing its sustainability report from fiscal 2021 setting out detailed parameters of the ESG and set specific goals for 2025 adopting Holistic Sustainability Framework
• Company has been consistently improving on its green-house gas related Scope 1 and 2 emissions having reduced scope 1 and 2 emissions to 15,063 tco2 in fiscal 2022 from 19,548 tco2 in fiscal 2020
• In fiscal 2022, about 26% of electricity consumption in India was generated using renewable sources as compared to 21% in fiscal 2020.
• Company has 25.22% women in the workforce and intends to become gender neutral by 2025.
• It has adequate governance structure with 56% of its board comprising independent directors and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Cyient’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

Cyient will maintain its healthy financial risk profile over the medium term, supported by moderate debt, high liquid surplus and a conservative financial policy. The business risk profile will continue to be supported by long-term relationships with clients and demand for niche engineering services across diverse verticals.

Rating Sensitivity Factors

Upward Factors

• Steady improvement in the business risk profile, driven by sustained 12-15% revenue growth, reduced dependence on the top customers and increasing market share across segments
• Steady improvement and operating efficiency, as indicated by EBITDA margin remaining higher than 18%

 

Downward Factors

• Steep decline in revenue or sustained fall in the EBITDA margin to less than 10% weakening cash generation
• Higher-than-expected, debt-funded capex or acquisition weakening the credit metrics; for instance, gearing exceeding 1.0 time on a sustained basis

About the Company

Cyient (formerly Infotech Enterprises Ltd) was originally founded as a private limited company in 1991 by Mr B V R Mohan Reddy, the 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 services. In May 2000, the company diversified into engineering services. It operates through eight strategic business units: aerospace and defence; transportation; industrial, energy and natural resources; semiconductor, internet of things and analytics; medical and healthcare; utilities and geospatial; communications; and design-led manufacturing (Cyient DLM). Cyient DLM (earlier Rangsons) provides design integration and production facilities to designs created in the engineering stage, thus enabling Cyient to provide design-to-production solutions to its clients. Cyient has operations across the globe. In fiscal 2022, it derived around 54% of its revenue from the Americas, 27% from Europe, the Middle East and Africa and around 19% from Asia-Pacific (including India).

 

In the first quarter of fiscal 2023, Cyient reported consolidated profit after tax of Rs 116 crore on operating income of Rs 1,250 crore against Rs 115 crore and Rs 1,058 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Bank Guarantee	NA	NA	NA	15	NA	CRISIL A1+
NA	Letter of Credit	NA	NA	NA	5	NA	CRISIL A1+
NA	Loan Equivalent Risk Limits	NA	NA	NA	10	NA	CRISIL A1+
NA	Packing Credit*	NA	NA	NA	30	NA	CRISIL AA/Stable
NA	Packing Credit in Foreign Currency	NA	NA	NA	30	NA	CRISIL A1+

*Sub limit of Rs 30 crore with CC limits