“Acquisitions That Help Address Gaps In Our Design Capabilities….. Interest Us”

Over the past five years, Cyient DLM (formerly Rangsons Electronics), a subsidiary of Cyient Limited, has rapidly expanded its footprint in the design-led manufacturing industry through strategic acquisitions. EFY’s Yashasvini Razdan interviewed Cyient’s CFO, Shrinivas Kulkarni, to explore the company’s inorganic growth strategy amidst shifting market dynamics over the past six months.

Q. What is the strategy behind an acquisition?

A. Acquisitions are often undertaken to address strategic gaps and position the company more effectively. In many cases, an inorganic approach enables faster progress than organic growth. Cyient DLM actively seeks assets that align with its strategic goals and accelerate progress.

Our recent acquisition of Torrington-based Altek Electronics not only aligns with our operations but also introduces new capabilities. With North America as a key market, given the concentration of our customer base there, this acquisition strengthens our manufacturing presence in the region while facilitating business expansion and customer acquisition.

Q. How do you think this acquisition will impact the revenue growth for Cyient DLM in FY25?

A. The volatile nature of our industry prevents us from providing a yearly outlook, as a single deal can significantly alter projections. However, we are confident about achieving a 30% CAGR over a three- to five-year period.

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Strong industry tailwinds, particularly the emphasis on manufacturing in India, underpin this confidence.

Inorganic growth supports this outlook, though it was not the primary driver of the Altek acquisition. The acquisition was driven by the capabilities it brings, access to new customers, diversification into industrial and medical sectors and ITAR certifications. With Cyient DLM’s legacy, we are seeing a lot of traction in aerospace and defence. The company we acquired generates 90% of its revenue from industrial and medical sectors, which fits well with our diversification strategy. These were the primary considerations and growth is more a sweetener on top of the other strategic considerations.

Q. How does acquiring companies outside of India help in the push towards manufacturing in India?

A. There are two distinct considerations—a push towards manufacturing in India to cater to the domestic market and for exports. We are leveraging the benefits available in these areas.

The acquisition serves a different purpose: it aims to serve global customers who require proximity. Proximity to customers often makes a significant difference in meeting their requirements. For instance, certain needs, such as ITAR-related projects, cannot be fulfilled from India.

In this sense, the approaches are complementary rather than mutually exclusive. We can effectively operate both outside of India and within India.

Q. Cyient Limited recently divested a significant stake in Cyient DLM. How does this impact mergers and acquisitions across different industry segments?

A. Cyient Limited has its own strategy, with a clear focus on industries with growth potential. For example, the semiconductor industry is experiencing a global push for manufacturing and design, including in India.

The stake sale was one of several options to fund such initiatives. Cyient Ltd continues to hold a majority stake in DLM, and the divestment was part of a strategy to fund strategic initiatives, including acquisitions.

Cyient acquired Belgium-based AnSem for analogue ASIC design capabilities and inaugurated a centre of excellence (CoE) for Allegro Microsystems. It also invested in Azimuth AI, a fabless ASIC startup developing energy and power solutions. These efforts reflect a targeted approach to carve out the semiconductor business as a standalone entity.

Each segment of engineering services has unique nuances. Focusing on individual industries with tailored operating and capital structures is often more effective. This rationale underpins the decision to create a separate entity for the semiconductor business.

Q. What are the criteria that Cyient DLM uses to evaluate potential M&A targets, particularly in the automotive and semiconductor space?

A. I think our M&A strategy is increasingly shifting towards product-focused opportunities. Cyient DLM’s strength lies in its build-to-spec capabilities, where we contribute to both design and manufacturing. Almost 25% of our sales pipeline today comprises build-to-spec models and opportunities. Investing in design not only enhances customer ownership and stickiness but also offers greater flexibility in the supply chain, resulting in higher margins.

Our M&A strategy aligns with this approach. We are looking for companies that provide complementary capabilities to strengthen this journey. Adding capacity or merely gaining new clients through inorganic means is not our primary focus. We are not facing capacity constraints and are currently operating at 55-60% capacity. We can generate an additional $100 million in revenue without requiring significant capacity expansion. Acquisitions that address gaps in our design capabilities or bring expertise advancing our strategic goal of transforming from a pure-play build-to-print manufacturing company into a product-focused organisation interest us.

Q. Why does Cyient DLM emphasise design-led-manufacturing, unlike other EMS manufacturers in India?

A. We are accelerating our build-to-spec offerings. The more we engage in this industry, the clearer it becomes that differentiation is crucial. Without build-to-spec, companies risk becoming commoditised, which might lead to growth but without margin expansion or better returns for shareholders. The only way to command higher margins and achieve a leadership position is through greater ownership of the product.

For us, this means aggressively pursuing models with higher design elements. Eventually, the next step would be developing our own designs and creating products that solve specific customer problems.

This evolution is key for Cyient DLM going forward. We have built a robust team and invested ahead of time in capacity and leadership. Now, it is about executing on that investment and delivering the growth we promised to our shareholders.

Q. Startups are also doing some amazing work with respect to R&D and product development and design. Has Cyient considered acquiring any Indian startups?

A. Absolutely, if there is a startup with a cool idea and intellectual property (IP), that would be of great interest to us because it could accelerate our journey toward creating our own products. However, the challenge with most startups today is that they are often at a conceptual stage or in very early phases where the technology is yet to be proven.

Where we are operating today involves commercial aerospace and applications that are already established, so the time to market needs to be much shorter. With startups, that journey can be a bit longer. That said, we are not overlooking the opportunities in this space. There could be many startups with excellent ideas, and we would be very happy to partner with them or even consider them as potential acquisition targets.

Q. How does the company balance its financial stability with all these aggressive mergers and acquisitions?

A. We did an IPO about two years ago, and raised funds specifically for this purpose. There are two significant funding requirements in this industry. One is inorganic, related to making acquisitions, and the second is working capital. Working capital is a bit of a challenge in this industry. You have to manage inventory, receivables, and other related aspects, which consume a lot of cash. The more you grow, the higher the demand for working capital. With the hyper-growth phase we are currently experiencing in the industry, this becomes even more of a challenge.

We raised funds during the IPO, which is why we have been able to address some of these needs. However, as we consume the funds raised through the IPO, we also need to improve operational efficiency in managing our working capital. This ensures that growth remains manageable and doesn’t become unsustainable or difficult to fund.

Every company has its own strategy. In addition to the funds we’ve raised, there are also several working capital lines available from banks and other short-term financing options that we can leverage as needed.

Q. What kind of operational and supply chain challenges does the EMS division face?

A. Managing the supply chain especially with low volume manufacturing is a challenge. There are several parts where the MOQ (minimum order quantity) is high and you need to use a lesser number for a product and the leftover components sit on the shelf till we find the demand for it again. These are practical challenges that every EMS company faces, and we are no different.

There are additional challenges such as customers pushing out demand, leaving us holding inventory for longer than expected. To address this, we ensure we have contractual protections in place to limit our inventory obligations to manageable levels.

Q. EMS shares have shown significant growth over time, despite occasional dips. From a long-term perspective, the trend has been steadily upward. How do you see this growth being sustained in the future, and what potential risks should investors be aware of when investing in this segment?

A. I think the valuation of all EMS companies is a bit stretched right now because the market is already factoring in the next 2-3 years of growth and building that expectation into the prices. It’s almost a given that everyone will grow by 30-40%, with some companies even exceeding that growth rate. So, if that growth doesn’t sustain, it will inevitably reflect in the share prices.

That said, the tailwinds in this industry are quite significant. The optimism around growth and share prices is supported by the track record of companies consistently delivering on that growth. The growth we’ve witnessed so far has been unprecedented—I don’t know of any other industry that has grown this much, this quickly.

The EMS space will continue to be very exciting, but it is undoubtedly a high-risk, high-reward scenario at the moment.

Q. How do you foresee the evolution of Cyient DLM along with the EMS industry in the coming months in the wake of these acquisitions?

A. Over the next few months, we will be focused on integrating Altek and realising the synergy benefits of this acquisition. Secondly, our India sales team is now well staffed, and the team is actively building a strong sales pipeline, particularly for the Indian market.

It’s an exciting time for the electronic manufacturing services (EMS) industry in India, especially with strong government support. The incentives from the government and the competition among state governments are particularly refreshing. States like Karnataka, Telangana, and Andhra Pradesh are actively competing to offer the best possible benefits, such as land and subsidised power, to attract businesses. Entrepreneurs no longer have to run from office to office for approvals. Instead, states are inviting and competing for investments.