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Capitalising Opportunities

We hosted Mr. Nikhil Mallavarapu (Executive Director) and Mr. K S Desikan (CFO) to gain insights into the company’s growth strategy and upcoming opportunities in the defense sector. Centum Electronics Ltd (CTE) is a globally recognized electronics player offering services under a) build to specification, b) electronic manufacturing services and c) engineering R&D services and has strong presence in defense, aerospace, space, industrial, medical and telecom sectors. The unique mix of talented professionals consisting of 650 design engineers has been critical in achieving design and product development capabilities. Company’s hi?tech products with flexible engagement models have enabled it to establish strong relationship with marquee global clients.

With over 25+ years of domain expertise in electronics design and manufacturing solutions along with robust order book, proven execution track record and strong relationship with marquee clients has enabled CTE to remain one of the preferred plays in the defense sector. At the CMP the stock is trading at an EV/EBITDA of 8.2x as on FY22 earnings. 

Key Highlights:  

* Built to specification (BTS): BTS are mainly turnkey projects offering build to spec requirements thereby providing a) single point of contact for design / engineering, industrialization and manufacturing, b) fastening the products time and c) reducing the cost. This is a margin lucrative business and with the Govt. push by way of indigenization, management expects there is a good potential in this segment going ahead.  

* Electronic Manufacturing Services (EMS): CTE offers wide range of manufacturing solution from printed circuit board assemblies to complex box builds, line replacement units (LRU) and full system integration. The strategy going forward in this segment is to focus on medium to high volume business. The company is continuously making investment in digitalization and automation which will help to improve operational efficiencies and productivity.  

* Engineering R&D services (ER&D): ER&D mainly involves conceptualizing, designing and certifying of electronic components or systems for large OEMs in high reliability segments. This division has a strong domain expertise with a) unique mix of talented professionals comprising of 1/3 of the workforce being design engineers b) state of art design centers in Europe, North America and India, enabling the company to work on complex problems and provide competitive solution across the globe.  

* The company has a robust order book of Rs10.9bn as on FY22 thereby providing strong revenue visibility across all the segments.

* Defence being the largest vertical of CTE contributes 44% to the revenue. Over the past 2 decades the company has been engaged in development and manufacturing of modules and subsystems for defense industry and has become one of the few Indian players to international defence OEM.  

* Covid led to shortage of semi?conductor components leading to increase in lead times of raw materials impacted the demand. However, management expects revival in demand to happen in FY23E. Management plans to improve the working capital by bringing efficiency in inventory management.

* With the sale of loss?making energy division and revival of demand post covid, management expects double digit growth in revenue for next 2?3 years and aims to improve margins by 200?300bps.

* On the capex front management expects no major capex in FY23E.

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