Cyient DLM Limited (CYIENTDLM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Cyient DLM Limited Q3 FY '25 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, Non-Executive Chairman, Cyient DLM Limited. Thank you, and over to you, sir.

Thank you very much, and good evening, ladies and gentlemen. I'm Krishna Bodanapu, Non-Executive Chairman of Cyient DLM. Welcome to Cyient DLM's earnings call for the quarter 3 of FY '25. Present with me on this call are our Chief Executive Officer, Anthony Montalbano; and our Chief Financial Officer, Shrinivas Kulkarni. Before I begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in our investor update which has been posted on our website. In the last quarter, we announced the acquisition of Altek Electronics, a leading PMS company based in Torrington, Connecticut in the U.S. The strategy behind this deal was clearly on leveraging synergy benefits. I'm excited to share an update that the process of integrating -- integration is going exceptionally well and per plan. We are pleased to report our Q3 performance, including Altek Electronics [aspect]. With the addition of the client base, the synergy conversations are increasing significantly, and I had the opportunity to have 3 synergy conversations last week when I was in the U.S. It is very encouraging to be a part of these discussions and expansion plan, and I'm confident that we will see the synergy revenue coming in, in the next quarters. The political developments in the U.S. are also going to be a significant opportunity since they create localization requirements and Altek could benefit from these requirements. For those of you who heard a speech last night, President Trump, who is very aggressive in setting his intent of increasing manufacturing in the U.S. These industrial policies will be aimed at strengthening domestic manufacturing and it is perceived as an opportunity by many OEMs and Tier 1s in the U.S. to manufacture locally, and they're already reaching out proactively to us to manage this growth to manufacture components locally. This with the outcome will be several opportunities for Altek. And I'm very happy and I'm very glad that the leadership teams were able to proactively identify an opportunity to create significant manufacturing capability in the U.S., and that is going to benefit us as President Trump's industrialization policies start to take shape and all indications made in the U.S. will be a big part of that. On the other hand, our revenue mix is slowly changing, and this is having an impact on the medium term. We are looking at it positively to both on our profitability and cash flow. Having said that, some of the large contracts that we signed during last year are starting to see traction, and we see this further increasing in the coming quarters. We're also gearing up to make sure that we are able to beat these requirements. With the industrial and medical science showing recovery and clients of Altek looking at our manufacturing facilities in India for India requirement, I can assure you that the road looks quite -- or the future looks quite positive for us. And I am confident that we are headed in the right direction and getting ready for the next phase of growth. Now I will hand it over to Anthony and Shrini to provide more updates to the business and finance in more detail. Anthony, over to you.

Thank you, Krishna. So as Krishna highlighted, the Altek has been part of the business now for one quarter. And I thought it would be important just to kind of highlight some of the key aspects of the business as well as the integration highlights in that regard. So Altek has been providing services in the EMS industry based in Connecticut for about 50 years. Primary sectors for the business include industrial, medical and defense. And this aligns with our current portfolio allows us to expand and potentially take the ITAR program into the U.S. defense sector of the market. It also provides some overall business diversity in terms of business sectors that we operate in, giving us additional industrial and medical sector opportunity. The client process -- a lot of our clients within Cyient DLM, our based -- are Western-based clients. And there are many opportunities that are now available to us by having U.S. manufacturing available that were not part of the discussion earlier. This geographic footprint aspect of the business will create growth opportunities for us and also complement the addition of client access that we can get as part of the Altek's portfolio. The capabilities of the site are also very complementary and the DNA of the business, focusing on very high-value, low volumes, high mix, mission-critical type of electronics are very complementary to a business that we've been operating under for many years and allows our clients to have a similar experience, whether they are working with us in India or in the U.S. as we now are providing global offering. On the integration progress, there's been considerable focus on the go-to-market aspects of that. That includes integration of working with top key clients across both of our businesses, working with the go-to-market leaders that focus on these clients with both of our businesses. They are now integrated as we look at opportunities. We now collectively plan and execute on how to make that -- make those opportunities to transform into business. The operations integration and HR integration aspects are also underway, and this is the first quarter that we will be providing the consolidated view as well. This is a reflection of that. Supply chain synergies are also being mapped right now, which brings certain aspects in terms of what we can do with certain key aspects in the supply chain, part of the business that can -- with key components, distribution, overall spend we bring in certain aspects to help provide greater value that we can bring to our clients in that regard. And then also the financials have been integrated, and we'll be discussing some of those here going forward. Some key wins for this quarter, we secured one leading global technology company focused on the energy services and solutions space, which we put under our industrial sector is a leading multinational OEM that we look to be a key growth and overall revenue line for us in the future. This is in addition to at least 6 new logos, a similar scale that we announced in earlier the quarters. From a pipeline perspective, our pipeline is considerable with over $1 billion in TCV of opportunities that we did try and convert. And also, we are currently working on specific large opportunities that are in advanced stages that we hope to provide more updates on in the coming quarters. Some other aspects of the business from a recognition perspective are some of our largest customers this year, BEL has recognized us as a valued partner. This is another testament to the services we provide and quality in these types of applications. Also some other aspects from -- on the business highlights. Focusing on our environmental initiatives, we did announce a strategic partnership with Arcedo for a rooftop solar power plant that we've applied to our Mysore facility, this will a key aspect to help our ongoing commitment to renewable energy. We've also received some awards, prestigious award from the State of Karnataka for overall export business growth in that sector. Those are some of the key highlights for this quarter. I'll turn it over to Shrinivas for some of the finance aspect.

Thank you, Anthony. Thank you, ladies and gentlemen, for joining the call today. I will walk you through the Q3 financials. This will be consolidated financials for us, including Altek and I'll also follow some of the key aspects of this particular quarter which are the one-off expenses we have incurred for concluding the M&A, right? And then we've sort of shown an adjusted EBITDA and a PAT number so that the sustainable performance becomes clear to you, but we've also showed you what the reported numbers are in the comments. So to start with, we did a revenue of INR 444.2 crores, which is a 38.4% growth year-on-year. Now this, of course, includes the Altek's number as well, and the standalone revenue for the period was INR 357.3 crores, which is a growth of 11.3% year-on-year. From an EBITDA perspective, INR 359 million is adjusted EBITDA which started to a margin of 8.1%. Now this is lower year-on-year by 109 basis points due to a few reasons, and we'll talk about that in detail. But the reported number is about INR 8 crores lower than this because of the one-off expenses we have incurred in terms of the banker fees and the loyal fees, et cetera, that were used up to conclude the M&A transaction. Similarly, the Q3 reported PAT after adjusting for these expenses is about INR 108 million, but the correct number to look at, which is the adjusted number is INR 166 million, which translates to 3.7% in percentage terms and also it's a degrowth year-on-year which is about 10%. Order backlog now includes the Altek numbers. So this stands at INR 2,149 crores. And the number from Altek that is included in this is INR 291.5 crores. So the stand-alone order backlog is the difference between the two. Looking at some of the key KPI trends and this again, the Q3, the latest numbers in this chart are all the consolidated numbers which includes Altek numbers. And it just gives a trend for you in terms of how we have performed on the important metrics of revenue, EBITDA and PAT over a period of time or over several quarters. The non-P&L metrics, we will take a look at the -- how we have done on the net working capital, right? In terms of DSO, we are at 76 days. This is a drop quarter-on-quarter as well as -- from a year-on-year as well, right? And there is improvement that we see in the DSO metrics. In DIO, we are at 129 days. Again, this is a little bit higher than the last quarter, but we have a road map to get to about between 90 and 100 days, and we are still at a level which is slightly elevated more than where we would like to be. DPO has improved to about 69 days and customer advances as in the nature of the business has dropped to about 16 days in this quarter as we consume some of the revenue from the customers who have given advances, this number will continue to drop. We are not expecting any new advances in the near future. So this is something that we will see as a trend. And so all in all, the net working capital is about 120 days, which is an improvement from our previous quarter as well as -- it's almost in line with where we were last year in the same quarter. And I'm also happy to report that at the consolidated company level, we've had free cash flow, which is positive for the quarter. Now this slide gives a trend of the industry mix, the product categories and the mix between the rest of the world and India revenue. Now you will find this interesting in terms of the industry mix. This is significantly different from how we have shown in the past, right, in terms of it being very heavy on aerospace and defense. Now you see a big chunk coming from industrial and med tech as well. And this was one of the reasons why we did the acquisition. It diversifies our industry base very nicely and this has led to a growth of 47% Y-o-Y on industrial and about 156% on medical, right? So this chart looks more balanced now with the acquisition of Altek. Now the mix of the PCBA, Box Build and Cables has not changed significantly, but we continue to see a large portion of our business coming from PCBA and the Box Build growth now stands at 16% year-on-year. Similarly, the mix between geography, now the Altek's business is counted in the rest of the world which is at 61% and the India business is at 39%. And we will continue to watch this trend going forward as well. The chart just gives a tabular view of the financials we just reviewed. It has more granular details in terms of the various cost elements. I think you can go through it in detail. As you know, the financial footprint of a U.S. company is different from Indian EMS company. The ratio of material and employee cost is different there and therefore, you see some changes as we go forward, right? The employee cost will be higher, material cost will be a little bit lower as we consolidate. The other thing you will see in the financials here is also the depreciation and amortization. As you know, when you make an acquisition, there is a purchase price allocation and the intangibles start getting amortized over a period of time that is discussed with the auditors. Now this number is not really a cash expenditure. It is just allocation of the intangibles and write-off of the same. And so with all of that, I think you will see a profit which is adjusted and reported here for the quarter. And just to give further clarity on how those one-off expenses are treated between EBITDA and PAT, this slide will give you more color in terms of how we treated the M&A expenses are onetime transaction related. This will not repeat going forward. So that's why it's called out as an exceptional item. The slide on the IPO proceed utilization. As we had stated in the objects of the issue, we had earmarked 10% of the entire issue proceeds towards inorganic. So we have used that as a part of the general corporate proceeds to make the current acquisition. We have repaid all the external borrowings. And the trend on the working capital and CapEx is lower than what we had expected. We have used up only INR 135 crores so far, but we'll roughly use up about INR 190 crores by the end of the year, and we'll have another INR 100 crores left for the next financial year in terms of the working capital requirements. But on CapEx, we have excess capacity right now. So there is no need for a substantial expansion of CapEx at the moment, right? And so we have enough capacity for even the next year. There will be incremental CapEx additions during the year, and we will call that out as we use the funds towards our CapEx. There are some more annexures as well in the presentation. I will not go through that right now. We will give a better color on the difference between the stand-alone and the consolidated numbers. We also have a slide on the 9-month performance. Please go through those. And if you have any questions, we can address them. But with that, I conclude the financial presentation, and we can go to Q&A.

[Operator Instructions] The first question is from the line of Deepak Krishnan from Kotak Institutional Equities.

Sir, Am I audible?

Sir, you are audible, you may proceed.

Yes. So just wanted to check. So essentially, if we look at the order book number, adjusted for the INR 2,915 million which is the Altek impact, we've again sort of seen an order book decline, comes to a number of [indiscernible] or somewhere close to that. So essentially, in terms of new order wins or you've indicated we are at final stages of negotiation. But when do we start seeing large orders coming in? And thus, obviously, whatever comes from Altek, maybe just an outlook in terms of what is the U.S. growth that you're expecting for the next maybe 2 years essentially because of all the potential impacts due to the localization of manufacturing there?

Yes, I think on the order backlog, right, I think we've seen -- from organic business, yes, we have seen a degrowth this quarter as well. The pace at which the large order from one of the key customers is being consumed is higher than where we are seeing the growth, right? So look, I mean, it's a little hard to call what the outlook will be. We are definitely working on several large opportunities. As Anthony also highlighted, the pipeline is large, right? And there are several deals and actually 3 large deals where there is active conversation at an advanced stage. So as those convert, I think we will see the order book growing up from where we are today. Altek has a shorter sales cycle compared to Cyient DLM. So they will fill a lot of orders even during the year. So we start with, let's say, 90% visibility. They start with a 50%, 60% visibility, just to give some perspective of how that business runs, right? And definitely, we see a growth in North America, I think for 2 reasons. One is with the acquisition, I think it gives us a footprint of having manufacturing presence in North America, which -- and a lot of clients have been demanding sort of [indiscernible] to their centers. And the other is what Krishna mentioned, just the sort of political changes that have happened in the U.S. and the outlook that is there in terms of keeping America first and manufacturing in the U.S., I think we will definitely see much higher growth in North America compared to what we see...

Sure. Maybe just a second question, if I just look at the difference between the stand-alone and the consol and adjust for the INR 80 million sort of one-off expense. I think Altek, this quarter reported an EBITDA margin of closer to 7.6% versus standalone about 8.3% prior to other income. So is Altek EBITDA margins more in the 7% to 8% range? Or do we also see that this segment can potentially help us get to 10% EBITDA margin that -- we've indicated that's sort of a stated goal that we want to reach at.

Yes. So first of all, the Altek EBITDA margins are similar to ours in this particular quarter, right? And -- but they have a road map of getting to over 10% at least. And then even when the acquisition was made and we have seen the historical performance, I think they have operated at around 10%. We have a few expenses which are sort of -- just immediately after the acquisitions that have taken place this quarter, but we have a clear line of sight to get to 10% on a sustainable business in Altek.

Maybe just wanted to understand sort of do we still stand by the 30% CAGR guideline for a 3-year time frame and any particular revenue guidance that you want to give for this particular year, given that organic growth this quarter has slowed down to about 11%? I just wanted to sort of understand these 2 points.

Yes. Regarding the 30% figure that we've discussed, that's just been more of a guidance -- as more of a CAGR year-on-year. I think you're going to find some variability. I think the first year, we delivered over 40%, then we'll find -- I think we delivered in the '20s. And so that's going to vary. I think that is still a healthy number to consider on just the mid- to long term of our business. We -- as we look at certain programs transferring out and as we ramp the business up, there definitely could be some lag on your in that number. So it's not meant to be a firm 30% year-on-year guidance.

Sure, sir. And just wanted to understand the strong free cash flow generation that we had this quarter, given that there's only a slight decrease in net working capital days, anything else that sort of aided this INR 478 million of free cash generation because it's only about a 7-day decline Q-o-Q in WC?

So can you please repeat that question?

Just wanted to understand the INR 478 million of free cash that was generated this quarter because working capital is not really changed that much, it has gone from 127 to 120 days. So any other factors that led to such a strong free cash generation?

No. I mean, the release of working capital was significantly even though it looks like 7 days, I think that does translate to a big number, right? So you will see the -- I mean, the INR 47 crores also includes some of the cash generation that is coming from Altek. But yes, I mean, that 7-day release is a big number, and that does translate to the number.

Yes. Maybe just a final question from my end. I wanted to understand, last quarter, we had an FX loss, this quarter, we had an FX gain, but net-net, the other income has not really jumped. So any other factors that's sort of is causing the other income to be lower this particular quarter?

No, I think that has 2 aspects. I think that also has an aspect of the sort of the interest yield on the deposits that we have, right? I think even that number may have come down in the current quarter. I don't have a specific number in front of me, but yes, that also has a bearing. We don't see other income going down because of the interest yield on the -- as we consume the cash from the IPO, I think that number is going to sort of shrink, right? Unless we have surplus cash and start generating interest income, that number will go down. So -- and exchange fluctuation impact will be there. There will be realized and unrealized gain, both coming up in the other income. So -- and that's something we can't really predict.

[Operator Instructions] We have the next question from the line of Vipraw Srivastava from PhillipCapital.

I'm audible, right?

You are audible, sir. Please go ahead.

Firstly, on the stand-alone margin, why are other expenses as a percentage of sales relatively higher because revenue has degrown Q-o-Q, but other expense has gone up. So any thoughts on that?

Yes. So other expense this time includes the other expenses of Altek, right? And like I said, I think the financial footprint, while at EBITDA level, the businesses are comparable, I think the mix between the 2 businesses are different.

No, sir stand-alone level I'm talking, sir. There you don't have Altek, right?

Yes, on the stand-alone level there are a few operational expenses that have gone up this time, namely sort of the bad debt provisions and some of the other provisions that we have taken in the business. That's more on -- we take the provisions on an expected credit loss, which is basically on the aging of receivables. Some of our receivables have moved to the right which as per policy we have taken. This is recoverable next quarter as we collect those amounts. But for the quarter, we have taken a conservative view and provided as per the volume.

Sir, what would be the quantum of the receivable number, if you can give INR 8 crores, that's the number?

What is the number you wanted?

What's the quantum of that extra credit loss you have taken in receivables?

No, I'll not quantify that separately.

Okay. Sure, sir, sure. So I mean, on a gross margin level, you have maintained a gross margin that's commendable. But going forward, how do you see EBITDA shaping up? I mean, this quarter, you were expecting EBITDA to ramp up. But again, because of this other expense, it has again come down. So how do you see EBITDA progressing in coming quarters?

Yes. So the mix of the business has a big bearing referral, we've discussed this in the past as well. As we get into Q4, I think the one large deal, which is slightly a drag on the margins is going to ramp down significantly, right? And therefore, I think our margins will improve in Q4 and beyond. So you will see substantial improvement in the margin for the Q4 quarter.

Right. Fair enough, sir. And sir, on a stand-alone level, we've only grown at 11%. So I mean, this order book you are mentioning, this a few large deals you are in discussions with, what will be the quantum of these orders? I mean, will it be big enough to move the needle on a consol level? I mean, anything on that, any quantum you can give -- rough quantum, anything on that?

Yes. These programs do have impact on our next 2 fiscal years. And so definitely some on FY '26. And they really are dependent on the -- a couple of these are transfer programs and a couple other are [indiscernible] programs. So there is some variability there as to how fast they come in. But again, we do see the impact on these deals starting next fiscal year.

So you are saying by FY '26, you will see these converting into full-time orders, right?

Yes. We will definitely start to recognize them as part of our backlog as soon as we get those closed and then as far as impacting the revenue and all the other aspects of that, that would come in the quarters following.

Right. And a question for Shrini. Sir, I mean, obviously, you mentioned about the ECL expected credit loss on receivables, which resulted in higher other expense. But I mean, going forward, do we see such a surprise because is it a onetime thing? Or is there further receivables which can have ECL in future? What are your thoughts on that?

No, this is a one-off thing. I think we've had some of the receivables not getting collected during the December quarter owing to holidays and a few other factors like that. Definitely one-off thing, we will see substantial improvement going forward. And also, I mean, the provision that we have created is more sort of this quarter on a conservative basis as we just [indiscernible] right? But as we collect -- we have system of collecting those, right? So we will [indiscernible] accounting standard is you show efficiency in your collections, the provision automatically goes down, right? So we obviously will our target our DSO to be between 60 and 70 days, it is currently at 85 days. I think we will start seeing that fairly soon.

All right. And sir, last question. This ECL is from a foreign client or domestic client?

It's from the domestic client.

The next question is from the line of Arafat Saiyed from InCred Research.

So my first question is on your order book. Let's say, despite adding Altek on your order book, it still [indiscernible] more about the defense and aerospace around 6%, 8%. So in the future, you expect this should go more in the medical industry or this will remain as it is on...

So if I understood the question correctly, I think you're asking regarding which business sectors the order book is aligned towards. We do see -- if I got that correct, we do continue to see strong aero and defense as part of that order book. That being said, we also have -- that still is more dominant, but we still do have some new opportunities in this regard that will impact our medical and industrial as well.

And sir, my second question is on your recent order from Honeywell and that will be for 15 years...

Sorry to interrupt, but you do sound a little muffled on your line. We request you to please check the mode that you're using on your handset.

Yes, now am I audible now?

Yes, it's slightly better. So please go ahead.

Yes. Yes. So my question is on your order book which you recently got from Honeywell order inflow of around $550 million, that's for 15 years. So what are the status of that, sir? Have you executed anything on that? Or this will remain, let's say, in the long term only?

Yes. So regardless of that deal, that's a very strategic opportunity that we commented on and are planning to continue to support that. Regarding getting into more specifics of that would compromise client information in that regard.

The next question is from the line of [indiscernible] Shah from RBSA Investment Managers.

Am I audible?

You are audible, sir. You may proceed.

Yes. It's more of a clarification first is, what I understood is that the margin profile of Altek is very much similar to Cyient DLM. And Altek as well as we both aspiring to grow for 10% margin. So is my understanding correct?

No. Altek is already at around 10%. This is a one-off quarter, right? I think we should also look at these businesses on a full year basis, not on one quarter. Quarters have some seasonalities in the cost, et cetera. On an annual basis, I can assure you that Altek is more like a 10% business.

Okay. So that's what was my understanding. So I was also, I think, for the full year basis only, not only quarter basis. So the margin profile of Altek is very much similar to Cyient DLM is aspiring. So we are also aspiring for the 10% margin, right?

Yes. See, we are -- we will also end with the higher margin on a full year basis this year as well. And yes, 10% is just the starting one milestone. It's not something that stops at 10%, right? I think our aspiration is bigger than that. But I think the first milestone for us is to consistently deliver 10% and then grow from that point on.

Okay. Fair enough. And my next question is to Krishna. So while we alluded about the U.S. opportunity for Altek, which is a good deal for us, just wanted to understand how the Altek business in the EMS is different from Cyient DLM doing it right now. So how the written profile are different? So if I want to break down the ROE, so how is it different? So what the Altek's ROE looks and Cyient DLM's?

See, I think the -- from an ROE perspective, both businesses will end up being quite similar. If you look at the advantage that Altek brings, 2 things, right? One is Altek works in some very sophisticated sectors like industrial, safety critical industrial or safety critical medical, which is a complement to what Cyient DLM does because -- of course, we do some work in those sectors, but a significant portion of our work is also concentrated in aerospace and defense. So the first element of what Altek brings to the table is some very sophisticated work in the safety critical industrial and medical sectors. The second thing is the defense angle that Altek brings to the table. Now by law, U.S. -- anything manufactured for U.S. defense has to be made in the U.S., which means that so far, while we've had some big customers and as you know, in the wider science ecosystem, aerospace and defense is a critical industry, and we work with pretty much all the large aerospace OEMs who also happen to be defense OEMs. We're now seeing manufacturing opportunities from these customers because they also need equipment to be made in the U.S. We already do a lot of design in the U.S., as you know, in Cyient, but now we can also make in the U.S. So in that sense, the Altek business is a great complement to the Cyient DLM business. And it's again, I'd say, complement, not supplement, in the sense that it's very unique, it's very adjacent. And therefore, we believe that there's a good growth opportunity. Again, from a metrics perspective, over a period of time, we believe that both from a margin perspective, ROCE perspective and cash generation perspective, by the nature of the businesses, both will be very similar.

The next question is from the line of Jinesh Shah from RSPN Ventures.

Am I audible?

Yes, you're audible, sir.

Yes. Okay. So my first question was, I think the previous participant already asked. So I just wanted to understand that we have a couple of one-off expenses like [indiscernible] provision for debt and M&A expenses in this quarter. So it will be helpful for me if you will be able to quantify cumulatively that amount?

No, it will not be fair to call out specific amounts like that. What I'll tell you is these are one-offs and they will not repeat, right? I think on the M&A, we've already quantified that is an INR 8 crore expenditure, right, because it is a very straightforward [indiscernible] item. But whatever -- I mean -- and then some of the other operating expenses have gone up this quarter. They will not repeat in Q4. And the other operating expenses have not been called out as one-offs. So what you will see is the operating performance itself showing a better number next quarter. But from an Altek's perspective or the M&A integration perspective, there is a one-off cost that was incurred and that has been called out.

Okay. Fair enough. So like as you mentioned in the last call that overall margin for the entire year should be flat as compared to the previous year. So if I take consideration the [indiscernible] of this quarter, then for this quarter, at least, we'll be able -- we'll be doing little bit less -- we will be earning little bit less margin than 9% to 9.5%, right, then we'll be able to try to achieve milestone of 10% probably in the next year. That's what the outlook is from your end?

Yes. I mean, as I mentioned, I think the margin has several factors, right, which is taken into account. The business mix is one of the largest factors that [indiscernible] margin. Now when you look at our current business mix, it has a certain mix of low-margin business which is going to drop in Q4 and further substantially drop in Q1, okay? So both these will lead to better margins in quarter 4, leading to a full year margin being more closely -- it's closer to being flat year-on-year in margin terms. But the exit quarter for the current year in margin terms will be good, right, which will argue well for the next year, that is the next financial year as we go into it. Of course, there is another factor to consider here, but the first half of next financial year may not be high on growth, right? It will be a [indiscernible] given where we are in terms of our overall order book and the large order coming down. So there might be some absorption impact et cetera, that we will see in the first half of next year. But having said that, overall, from a full year perspective, the margin is likely to improve from where we are today and the first demonstration of that will be in Q4.

Okay. Understood. Got it. And my last question would be, if you can talk about the macroeconomic environment, like do you anticipate any headwinds across the -- like based on the talks with the customers or the opportunities that you see in the market, if you can talk a little bit more about that in a couple of 1 or 2 years, you can...

Yes. It's an important question. This is something that we talked to all our top clients about on kind of what we're seeing and what they're seeing. So on one aspect, if you look at our top -- if you take the one large contract that will be completed next quarter, if you kind of take that one out of the equation and you look at really our top 3, 4 clients, we've seen pretty strong favorable outlook in that regard. Those tend to be a little bit more aero and defense focused. And -- but then as you go down from there and start getting into the following clients that follow those, it's a little bit more of a mixed feedback. We're seeing some softness in certain areas there from some clients, specifically in the industrial and medical segment. And then -- so it does get a little bit more mix there. It's not that they're guiding down, but I think it's just client by client outside of aero and defense. So this is something we do have our thumb on the pulse on and outside of aero and defense, it gets a little bit more mixed.

We have the next question from the line of Mihir Manohar from Carnelian Asset Management.

I wanted to understand this between consol and stand-alone. Is that different completely attributable to Altek? Or is there any other subsidiary where the numbers would also...

No, it's completely attributable to Altek, Mihir. So the stand-alone means the traditional business, which we have been reporting till last quarter, the consolidated number just includes that.

Okay. Sure. Understood. Second question was on this order book. Now this is like almost 7, 8 quarters, we have seen order book remaining largely flat or going down. I wanted to understand, I mean, what is the reason that the discussions are not fructifying into order booking because the pipeline has remained over that number, $1 billion kind of a number. But why is it not converting into order book? Some color around that will be helpful.

Yes. I think one key aspect is that we have been consuming the backlog and so as the orders come in, you kind of have to try and offset that. But these programs as well, they are larger, longer-term programs. The award on them can shift in terms of timing. They can even shift a quarter or maybe even more time. But we also have announced some large contracts as well in prior quarters. So I think it's more of a timing issue as those orders come in and just the nature of those types of programs, especially on the A&D side. I think you'll find a little bit more consistency when you start to look at medical and industrial, similar to the profile that was highlighted earlier where that business would have kind of a quicker churn on the deal and on the business compared to the other sectors.

No, sure. I understand that this is a lumpy business. It becomes difficult to guess it from a quarter-to-quarter perspective. But I mean, is it the case that the client has decided to defer this program? Or is he evaluating an alternative vendor? Or is the rate negotiation going on? Or are the supply chain issues there, which are resulting into these problems? So what exactly is it leading to because these are lumpy orders, I understand, but there should be some specific reason around it.

I don't think there's really a specific reason. I think it really comes down to -- there are several deals that we are working, and we're not going to win all of them, but we have announced the ones that we have closed and we do plan to close more. There can be various considerations as to why one may or may not come our way. But I would not try and categorize any specific trend or anything in that regard. We are -- our clients really aligned to us on these types of programs based on our capability and strong track record we have in these sectors with the clients.

Sure, sure. This number of INR [indiscernible] crores, does it include the aircraft tooling technology, I mean, contract, which you declared on 5th of November or 6th of November. Does this number include that or it doesn't include?

I don't think it excludes this.

Okay, sure. And what would be the value of this deal because it's like a 16-year deal, at least the press release mentioned that. So is it a large contract or it is not a large contract?

Which program are you referring to, just to clarify?

Yes, this is the aircraft tooling technology. I mean, on press release you have given on 6th of November?

It's a large OEM.

Yes, yes, sure. So it's a large OEM, very true. But for you, is it a large contract or is not a large contract?

No, it's a large award, right? So we don't have the -- so from a total contract value perspective, that value is high. We have not received specific purchase orders which are large yet. As you know, I think the cycles are very long in this industry. You have to get to the [MDI] and then get to the main production. But once you are there, you will get that order. But right now, we are not counting any significant deal from that program into our order book. As they come in, we will receive contract. But the award letter is there and that quantifies the total contract potential for us...

Okay. Understood. Second question was just on the depreciation side. I mean, we are paying roughly $30 million for this acquisition. So what would be attributable to goodwill customer purchase and how to read the incremental depreciation? I believe the incremental depreciation is close to INR 4 crores to INR 5 crores, right? So should we take this as a ballpark number for the coming quarters as well?

Yes. Look, I think we will report the balance sheet next quarter. That's the balance sheet reporting period, and we have -- we are still going through the purchase price allocation process. But approximately, we will have $1 million every year coming in from the additional amortization and the remaining will be goodwill. As you know, in manufacturing companies, the sort of inventory and other assets that come along with an acquisition are high, the goodwill tends to be low, right? And that -- we are in line with the rest of the acquisitions that happen in this industry, right? So we will have a goodwill which will be substantially lower than the purchase pricing phase. So it also means the amortization might be a little bit higher. So if you net out the amortization, even with that amortization, it's PAT accretive on a full year basis, right? So therefore, from the financial perspective, it's a good acquisition. But if you net out the amortization, it's extremely good deal, right? And so it's not a cash expenditure, it's just the reporting. And so we are okay with whatever purchase price allocation...

Okay. Sure. Sure. And just one last question on the order book side. I mean, let's assume if our order book goes up in first quarter, does it translate to higher revenue in second quarter itself or will that take time?

Again, specific to the industry, Mihir, I think it's very hard to sort of quantify and say what -- which order converts how fast, right? I think in certain industries and with certain clients, it's a very quick turnaround. I think there are sort of orders where the conversion is less than 3 months also. But in most of the A&P contracts, these tend to be longer. I think the order comes in and by the time you see a meaningful revenue, it's at least 9 to 12 months. So it's hard to generalize and answer that question. So it's very client-specific and industry-specific.

The next question is from the line of Deepak Lalwani from Unifi Capital.

Sir, in the stand-alone business, we've only grown by 11%. So what is the reason for the execution being low despite H2 being the seasonally stronger quarter? So any reason for this? And how are we looking at Q4, that is this Jan to March quarter in terms of execution?

Yes. One key element is we did have -- one top key client did have inventory that had built and that caused a reduction in demand. So that did provide some of this. And then it comes down as well to just when you look at the overall mix of the program, again, as we have a very large percentage of our growth coming from a key program that we've been executing over the last several quarters, providing the new business to offset that, those programs ramp at different rates. But again, one big part was a reduction in that one top key program.

Sure. So has the issue of inventory being solved? And how are we looking at Q4 execution?

So we do -- that is being worked through. And again, we do expect demand there to return in the coming quarters. And again, that's specific to end market of that client. And again, it's very much in line as well with kind of the industry sector outlook I gave earlier kind of where we're seeing some strength and where we're seeing some mixed results.

Okay. Okay. And sir, so if you look at the stand-alone order book, it stands at about INR 1,850 crores. So what is the execution time line for this? And if you can tell us what should one work with for the next year's revenue?

The execution time line is between 18 and 24 months depending on client specific needs and scheduling. We are still undergoing the budgeting process for next year. So we have no commentary on next year's number. So I think we will revisit this question at the end of next quarter.

Sure. Got it. And sir, this delay in order book, I understand the client understands the capability and will come. So -- but is there any specific reason for this with regards to the end user industry having some issues or any macro headwinds mentioned in the previous comments also? If you can give more granular sense on it, that would be helpful.

I think it would be difficult to start to give much bigger trends when you look at -- if you're looking at a large part of your business coming from 10, 12 clients, it's kind of hard to start to draw trends in that regard. So I think the level of response I gave earlier is probably the best guidance that we can give. Otherwise, it starts to become really speculation on just probably not enough data point.

Sure. Sir, so these 3 large deals that you're talking about, what are the milestones that are pending to fructify these deals into conversions? What are the milestones left? And if you can just indicate broadly what would the quantum of these deals be? Will it be in a INR 500 crore range or will it be smaller deals worth INR 200 crores? Just a ballpark number would be helpful.

Yes. So it's a typical sales cycle aspects associated with the deal. It could be finalizing -- it could be finalized pricing, it could be further negotiations, it could be various aspects of the business award. So all these types of factors kind of come in. There's no really 1 or 2 clean answers there. And then as far as just the specific value of the deal, those we really try and limit providing those types of specific numbers, again, just for client data integrity and appropriate expectation.

Ladies and gentlemen, we will now take one last question which will be from the line of Praveen Sahay from Prabhudas Lilladher Capital.

My first question is related to the current order book. Can you give -- clarify that you had given one that 9- to 12-month execution time line or 18 to 24 months execution time line?

No, 9 to 12 is the execution time line of a new PO. When a new PO comes on board, by the time -- I would say, new prospects, I would not even say PO. From PO to revenue, it's a shorter cycle. But when a new client comes on board and you win an award, by the time it converts to meaningful revenue, it will be 9 to 12 months. So the execution cycle of the order backlog is different. That is more on the current orders, the scheduling between the 2 years is what is 18 to 24 months.

Okay. Okay. Got it. The next question is related to the Altek. And as you had mentioned that the consolidated and the stand-alone difference is only Altek. So Altek has a very high gross margin that's in the range of around 45%, 46%. Is it -- or is something different?

No, it is not that high. You may be referring to the contribution margin. The gross margins are definitely higher, more in the 18%, 19% range when you take the other direct cost as well. But the SG&A also will be higher. So it's a different kind of a business. That's what I said. While at EBITDA level, the comparable -- saw the optics between the line items between, let's say, material and labor, et cetera, are different -- so I think it's best to look at EBITDA level because there are also definitions between companies here and how they classify...

Okay. And second clarification on the ECL. In the previously also, you had accounted such kind of incidences in the business?

No, not in the recent past. I'm sure there have been some instances in the long history of the company, but not in the recent past, not at least for the last 24 months. There is no substantial increase in the [indiscernible]. So like I said, a one-off even for this quarter, it will correct itself for next quarter.

So actually, I'm trying to understand what is the probability of -- as you had also mentioned, it's -- in the coming quarters, it also gets added back. So what is the probability of that actually?

No, no, probably is extremely high. That's the reason why I'm confidently telling you that this is one-off.

Okay. And last clarification on the segment that A&D, I believe, have a very high margin as compared of other industrial or railway. Is this understanding right?

Not necessarily. The sectors between A&D, medical and industrial, at least in sectors we -- within our client base, we see actually find very similar margins. The more -- the variability is really more client-specific or program specific. But as far as to generalize new business in any one of these 3 sectors, they actually deliver very similar profit margins for them.

Okay. Fine. And last clarification related to your 3 large deals, which you are in talk. Those are domestic or rest of the world?

More rest of the world. Yes, I think the 3 you called out are more rest of the world. There are some -- there are definitely quite a few domestic opportunities that we are working, but I don't know if we would necessarily highlight those as a standout large deal, but there's definitely more of those that we'll be announcing later, but not necessarily the 3 that we chose to highlight for this quarter.

I would now like to hand the conference over to Mr. Krishna Bodanapu for closing comments. Over to you, sir.

Thank you very much, and thank you, everybody, for participating in the Q3 conference call. As you see, things are going okay. Things are going well in many cases. There are areas that we need to improve in others. But overall, I would say, we are executing to our plan, which we feel very confident about. I'm very excited for what the business holds, and I also want to complement the Cyient DLM leadership team on identifying, acquiring and now integrating the Altek opportunity. We are one of the few, if not one of the only one EMS company in the world that has this capability, especially at our scale, which is essentially to do safety critical, highly reliable, highly complex engineering-centric electronics from India, from the U.S., and we will, of course, derisk -- further derisk or further expand on our manufacturing base to create a truly global EMS. I think we are -- there are 2 elements to that, that we're working on. One is a truly global EMS capability and secondly, a truly integrated design and manufacturing capability. It is hard work, but I think I'm incredibly proud of the team for the work that they're doing. And I think you will continue to see the results. Obviously, great things have happened this quarter, and things will continue to get much, much better. So I'm very excited for the business. Thank you for the support. And if there's any further questions, I'm sure Shrini will be happy to answer them. Otherwise, we'll speak next week -- next quarter, sorry. Obviously, as you can tell, I'm very excited to speak next week, but thank you very much.

On behalf of Cyient DLM Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.