Maintain ADD on Cyient - Gradual acceleration - HDFC Securities

We maintain ADD on Cyient, based on improving growth outlook in the services business and strong margin recovery in DLM. The services segment (~82% of revenue) was up 0.3% QoQ CC, led by ENU (+13.9% QoQ) and Communication (+5.2% QoQ), offset by A&D (-5.7% QoQ) and Transportation (-2.5% QoQ). The aerospace vertical (27% of rev) has been under stress due to the pandemic and gradual recovery is expected in FY22E. The focus is on growing services business by winning large deals (won 5 deals with TCV of USD 106mn) and mining Top-30 clients. The growth outlook for Transportation, Medical, and Communication are positive while A&D will stabilise in 4QFY21. Services margin contracted only 90bps QoQ despite wage hike and furlough impact, offset by offshoring benefit and lower sub-con. DLM (+24.9% QoQ) is driving growth and reported a margin of 10.5% (+597bps QoQ), which is sustainable. The FCF generation is strong (FCF/EBITDA at 113%), led by higher collections and net cash stands at Rs 7.7bn (~18% of Mcap). Based on better margin performance, we increase our EPS estimate by +2.7/6.7% for FY22/23E. Our target price stands at Rs 600, based on 14x Dec-22E EPS, ~8% premium to 5Y average 1Y-fwd P/E multiple. The stock trades at 15.5/13.5x FY21/22E, a discount of ~50% to LTTS.

3QFY21 highlights: (1) USD revenue grew 4.7% QoQ vs. expectation of 2.0% QoQ. (2) Services EBIT margin declined 90 bps QoQ to 11.3% (estimate 9.5%) due to wage hike (-150 bps), furlough (-90 bps) offset by cost optimization (+150 bps). (3) DLM margin was at 10.5% vs. 0.3% YoY. (4) Management indicated a recovery in deal activity and growth in DLM to continue.

Outlook: We have factored in -11.7/+9.2% USD revenue growth for FY21/22E respectively; FY21E implies -16.6/+24.6% growth in Services /DLM. EBIT margin in 4Q will be better than 3Q. We have factored in 9.8/10.8% EBIT margin for FY21/22E resulting in EPS CAGR of 9.4% over FY20-23E.

Shares of Cyient Limited was last trading in BSE at Rs.602.85 as compared to the previous close of Rs. 507.45. The total number of shares traded during the day was 406189 in over 22400 trades.

The stock hit an intraday high of Rs. 608.9 and intraday low of 511. The net turnover during the day was Rs. 233453803.

Source : Equity Bulls

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