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Navigating Growth in the Aerospace and Defence Sector

CyientDL is a well-integrated EMS solution provider, deriving majority of its revenue (69% in 9MFY24) from the high-margin and critical end-user industry of Aerospace and Defence (A&D).

* The global A&D space is poised to grow at a healthy pace (5.9% CAGR over CY22- 26), led by technological advancements, rising defence spending, and the emergence of new markets such as space exploration. This is, in turn, translating into higher growth for the A&D EMS industry, led by the growing trend of outsourcing, which provides cost savings and access to advanced technologies.

* CyientDL is better placed to grab the growing EMS opportunity in this space, leveraging its strong client relation and multi-decade experience in the A&D sector (both domestic and exports).

* The India defence sector is under prime focus with defence spending rising steadily, hitting INR6.22t in FY24B, up 4.7% from FY23A. The government targets USD25b in defence manufacturing by CY25, including USD5b from exports. Initiatives such as the Defence Offset Policy are geared toward reducing reliance on foreign arms imports. As of Mar’22, a total of 57 contracts have been signed under this policy, amounting to USD13.5b.

* To align with the nation’s focus on the indigenization of defence, the company has hired key personnel with robust backgrounds in defence and deep connections to drive the company’s domestic defence growth story.Of the total exports (~60% in FY23), CyientDL generates majority of its export revenue from the Aerospace industry, backed by its strong clientele. The company is in advanced talks with new and existing clientele, expecting the Aerospace segment to grow the fastest among other segments.

* Overall, the A&D segment will continue to be the key growth driver for the company in the coming years, capitalizing on both the global and domestic upcycle in the A&D industry.

India’s Defence industry to witness a strong growth through indigenization

* India's defence spending is consistently increasing, with the annual budget growing 4.7% to INR6.22t in FY24 from INR5.94t in FY23.

* The government aims for USD25b in defence manufacturing by CY25, with USD5b from exports. CyientDL generates approximately 60% of its revenue from exports, with a significant portion from the A&D sector.

* As per SIPRI, India accounts for ~11% of the total global arms imports, prompting initiatives to bolster domestic defence manufacturing. One such measure is the Defence offset policy, which mandates foreign vendors to reinvest at least 30% of the contract value in the Indian defence sector.

* It applies to procurement categories with contract values exceeding INR20b, requiring foreign OEMs to fulfil the offset obligation. Contract value below INR20b are exempt from offsets.

* Additionally, defence public sector undertakings (DPSUs) have partnered with foreign countries under this policy for equipment production. (refer Exhibit 7)

* India's defence spending is consistently increasing, with the annual budget growing 4.7% to INR6.22t in FY24 from INR5.94t in FY23.

* The government aims for USD25b in defence manufacturing by CY25, with USD5b from exports. CyientDL generates approximately 60% of its revenue from exports, with a significant portion from the A&D sector.

* As per SIPRI, India accounts for ~11% of the total global arms imports, prompting initiatives to bolster domestic defence manufacturing. One such measure is the Defence offset policy, which mandates foreign vendors to reinvest at least 30% of the contract value in the Indian defence sector.

* It applies to procurement categories with contract values exceeding INR20b, requiring foreign OEMs to fulfil the offset obligation. Contract value below INR20b are exempt from offsets.

* Additionally, defence public sector undertakings (DPSUs) have partnered with foreign countries under this policy for equipment production. (refer Exhibit 7)

Valuation and view

* CyientDL, an integrated EMS and solutions provider, with strong presence in high-margin and rapidly growing critical end-user industries, is likely to capture its share of the pie, on the back of its strong core competencies and high technical capabilities. ? The company’s focus on the domestic defence offset opportunities, alongside its efforts to scale up exports in the aerospace sector, is poised to drive the growth for the company.

* Going ahead, we expect CyientDL to sustain its growth momentum, aided by: 1) strong order book coupled with healthy order inflows; 2) high customer stickiness; and 3) strong promoter heritage.

* We estimate CyientDL to report a CAGR of 39%/42%/79% in revenue/EBITDA/ Adj. PAT over FY23-26

* We reiterate our BUY rating on the stock with a TP of INR810 (35x FY26 EPS).

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