Maintain ADD on Cyient - Getting back on track - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain ADD on Cyient, based on strong margin recovery and improving growth outlook ex aerospace. The services segment (~85% of revenue) is down 0.5% QoQ CC, impacted by continued stress in A&D (-11.5% QoQ) offset by strong recovery in Transportation (+21.6% QoQ) and Communication (+7.7% QoQ). The aerospace impact is led by volume contraction in the top account, and recovery will be protracted. The growth outlook for Transportation, Medical and Communication remains positive, based on deal wins. Margin recovery of 586bps QoQ was higher than expected and was driven by offshoring and higher utilisation. DLM (+13.6% QoQ) is driving growth and reported a positive margin in the quarter. The FCF generation is strong (FCF/EBITDA at 131%) led by higher collections and net cash stands at Rs 7.2bn (~18% of Mcap). Based on better margin performance, we increase our EPS estimate by +4.1/4.3% for FY22/23E. Our target price stands at Rs 490, based on 14x Sep-22E EPS, ~10% premium to 5Y average 1Y-fwd P/E multiple.

2QFY21 highlights: (1) USD revenue grew 3.4% QoQ vs. expectation of 1.8% QoQ. (2) Services EBIT margin expanded 540 bps QoQ to 12.2% (estimate 9.5%) due to operational efficiency (+327 bps), lower restructuring cost (+90 bps) and cost optimization (+110 bps). (3) DLM margin was at 4.5% vs. -4.9% QoQ. (4) Management indicated a recovery in deal activity and higher growth in DLM vs. Services.

Outlook: We have factored in -13.8/+5.4% USD revenue growth for FY21/22E respectively; FY21E implies 3/4Q revenue growth of +0.1/+2.5%. Margin in 3QFY21E will be impacted by wage hike (effective Oct-20), and FY21E exit margin will be similar to 2QFY21 level.

Shares of Cyient Limited was last trading in BSE at Rs.366.95 as compared to the previous close of Rs. 374.4. The total number of shares traded during the day was 35490 in over 1159 trades.

The stock hit an intraday high of Rs. 383.95 and intraday low of 365.25. The net turnover during the day was Rs. 13271363.

Source : Equity Bulls

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