Cyient may partially divest its DesignLed Manufacturing business

Cyient announced its intention to partially divest its DLM business in order to scale up this business and participate in the electronic manufacturing services (EMS) opportunity in India. A sub-committee has been formed to evaluate options such as an IPO, spin-off, or partnership with a strategic investor, among others.
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Mumbai: Cyient announced its intention to partially divest its DLM business in order to scale up this business and participate in the electronic manufacturing services (EMS) opportunity in India. A sub-committee has been formed to evaluate options such as an IPO, spin-off, or partnership with a strategic investor, among others.
Morgan Stanley sees a potential part divestment of the DLM business as incrementally positive for Cyient given it would provide greater flexibility to scale up that business and may unlock shareholder value. With the options being considered, the brokerage believes the company would be open to both minority and majority divestment at this stage, although the company has not provided any specific comments regarding this. However, it is still at a very early stage.
DLM background: Cyient acquired this business in FY15 in order to increase its presence across the entire value chain of engineering services and move one step closer to becoming a complete solutions provider from being provider of discrete services. Later in its 2019 analyst meet, Cyient announced that solutions form <10% of total revenues at that stage (and its aim to take that to 80% by 2030 as part of its S3 strategy) and that it plans to transition its DLM business completely away from legacy low-margin business.
While the margins in the business have improved over the last three years, Morgan Stanley believes synergies with the core services business have been limited so far and have not been realized as anticipated in the beginning.
Morgan Stanley sees a potential part divestment of the DLM business as incrementally positive for Cyient given it would provide greater flexibility to scale up that business and may unlock shareholder value. They however maintain an underweight call on the stock with target of 700.
For Q2; Morgan Stanley expects DLM business to continue to be soft (mid-single-digit decline QoQ),as they expect the company to deliver better in H2 in this business. They expect cross-currency headwind of 170bp.
On the group level, they expect revenue growth of 11.3% QoQ in constant-currency terms (includes inorganic component of 8.2%) and 9.6% in reported terms. Margins could be largely flat as operational improvement in margins (despite wage hikes) could be offset by one-time acquisition-related costs, as per Morgan Stanley.
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