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Maintain BUY on Cyient - Improving growth vectors - HDFC Securities

Posted On: 2021-10-18 11:42:37 (Time Zone: IST)


Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr Vinesh Vala, Institutional Research Analyst, HDFC Securities

Cyient reported a good quarter; revenue was up 4.6% QoQ (in line with estimate) and margin performed better than expected. The services segment recovered (+5.5% QoQ CC), led by aerospace (+4% QoQ, positive YoY growth after ten quarters). The worst phase of commercial aerospace is over; from here on, there should be gradual pick-up, led by Avionics upgrades and MRO revival. The management has maintained its double-digit growth guidance for services, which would be led by communications, utilities, and aerospace verticals. DLM will grow 15-20% YoY with improvement in profitability. The pipeline of large deals (won six deals worth TCV of USD 63.5mn, up 38% QoQ) remains strong and investments in sales and marketing will continue. Margin expansion has been impressive over the past five quarters. Further margin expansion in the near term will be capped due to supply side concerns, but the company has upgraded the margin guidance for FY22E by 100bps. We increase our EPS estimate by +5.8/6.3% for FY23/24E, based on expected recovery in core business and margin beat. Our target price stands at INR 1,330, based on 22x Dec-23E EPS. The stock is trading at 21.2/18.7x FY23/24E, a discount of ~50% to LTTS. Maintain BUY.

Q2FY22 highlights: (1) USD revenue grew 4.6% QoQ vs. expectation of 3.9% QoQ; core services/DLM revenue grew 4.9/5.7% QoQ; (2) services EBIT margin improved 90bps QoQ to 15.5% (estimate 14%), supported by operational efficiency (+265bps), revenue mix (+110bps), partially offset by wage hike (- 100bps) and higher SG&A (-220bps); (3) additional impact of merit increase will come in H2FY22, which will affect margins; (4) DLM margin was at 6.8%, +99bps QoQ; (5) the company won six large deals of TCV USD 63.5mn, of which four were in services and one in DLM.

Outlook: We have factored in +11.7/+15.5/+13.6% USD revenue growth for FY22/23/24E respectively; FY22E implies +10.5/+17.8% growth in services/DLM. We have factored in a 13.7/13.9/13.9% EBIT margin for FY22/23/24E, resulting in an EPS CAGR of 23% over FY21-24E.

Shares of Cyient Limited was last trading in BSE at Rs. 1158.00 as compared to the previous close of Rs. 1079.55. The total number of shares traded during the day was 64942 in over 5459 trades.

The stock hit an intraday high of Rs. 1172.35 and intraday low of 1103.30. The net turnover during the day was Rs. 73657223.00.


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