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Cyient - 'Persistent' in the making! - ICICI Securities

Posted On: 2021-01-21 22:27:09 (Time Zone: Arizona, USA)


With the objective of accelerating growth and improving profitability, Cyient announced some structural changes which, prima facie, appear promising. These include realignment of its Go to Market (GTM) organisation, higher focus on large deals, process discipline and incentive structure to align employee interests with that of shareholders, etc. Taking cues from recent successes at Mindtree, Persistent, etc., and subject to good execution, the proposed changes in Cyient can improve sales productivity and bring the long pending turnaround. Robust increase in the order intake (~US$195mn, +53% QoQ) with a significant share of it coming from multi-year deals (US$106mn) is a big surprise. With these structural changes and strength in order booking, medium-term revenue growth and margin prospects appear brighter. We expect earnings growth of 25% over FY21E-FY23E. Stock is trading at a significant discount (67% on FY22E) to peers like LTTS. With the likelihood of a unit level improvement on the horizon, we see strong scope for rerating. Cyient remains our TOP BUY idea in the small-cap space.

- In-line revenues; slight margin miss: Consolidated revenues grew 4.1% QoQ (CC) led by strong growth in DLM (+25% QoQ). Growth in services (+0.3% QoQ, CC) was tepid. Within services. growth was driven by E&U (~14% QoQ growth) and communications (5%). Rest of the verticals either remained largely stable or reported revenue declines with Aerospace & Defence (-5.7%) continuing to be the biggest overhang. Barring EMEA (-8%), the other two geographies reported healthy growth.

Sequentially, EBIT margins contracted ~90bps in services segment. Impact on merit increase (-95bps), furlough impact (-90bps) and increase in other direct costs (-55bps) were the key margin headwinds. Improvements in operational metrics (+78bps), lower restructuring costs (+45bps), volume impact and lower spend on SG&A / depreciation (+30bps) were the key tailwinds. Adjusted for DLM impact, overall EBIT margins largely remained stable.

- Robust order intake; expect strong earnings growth over FY21E-FY23E: Robust order intake of ~US$195mn (+53% QoQ) came in as a big surprise. Notably, the company signed five multi-year deals with contract potential of US$106mn. This indicates the company is showing higher focus and seeing better success in winning multi-year deals vs short-duration and small-sized deals, which was the norm earlier. Besides improving revenue growth visibility, this should also drive margin expansion over the medium term.

- Good likelihood of rerating: With the aforementioned structural changes and strength in order booking, medium-term revenue growth and margin prospects appear brighter. We expect earnings growth of 25% over FY21E-FY23E. Stock is trading at a significant discount (67% on FY22E) to peers like LTTS. With the likelihood of unit level improvement on the horizon, we see strong scope for rerating. Cyient remains our TOP BUY idea in the small-cap space.

Shares of Cyient Limited was last trading in BSE at Rs.507.45 as compared to the previous close of Rs. 501.8. The total number of shares traded during the day was 69769 in over 2997 trades.

The stock hit an intraday high of Rs. 526.9 and intraday low of 501.05. The net turnover during the day was Rs. 36025222.


Source: Equity Bulls

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