Maintain ADD on Cyient - Recovery expected - HDFC Securities

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

Cyient reported a weak quarter, with revenue down 4.3% QoQ (in line with estimate), but margin performance was better than expected. The services segment was flat QoQ, led by continued softness in the aerospace vertical (- 6.1% QoQ). The worst phase of commercial aerospace is over (traffic is at ~60% of the pre-COVID level) but MRO related activity will take 2-3 quarters to recover. The management has guided for double-digit growth in services, which will be led by communications, utilities and transportation verticals. DLM guidance of 20% YoY growth in FY22E is maintained despite a weak start. The focus is on winning large deals (won four deals worth TCV of USD 46mn) and the company will step up investments in sales and marketing. Margin expansion has been impressive over the past four quarters. Further margin expansion will be capped due to supply side concerns. We increase our EPS estimate by +6/4.3% for FY22/23E, based on expected recovery in core business and better margin in Q1FY22. Our target price stands at INR 970, based on 18x June-23E EPS. The stock trades at 22.2/18.1x FY22/23E, a discount of ~50% to LTTS. Maintain ADD.

Q1FY22 highlights: (1) USD revenue de-grew 4.3% QoQ vs. expectation of a 3.6% decline, while core services revenue remained flat QoQ and DLM business declined 20.1% QoQ in Q1 due to seasonality; (2) services EBIT margin improved 330bps QoQ to 14.6% (estimate 13.6%), supported by operational efficiency (+93bps), lower SG&A (+176bps), partially offset by a wage hike (-176bps); (3) partial impact of the wage hike to come in Q2FY22, which will impact margins; (4) DLM margin, at 5.8%, declined -309bps QoQ; (4) the company won four large deals of TCV USD 46mn, of which three were in services and one in DLM.

Outlook: We have factored in +12.5/+14.4/+12% USD revenue growth for FY22/23/24E respectively; FY22E estimate implies +11/+20% growth in services/DLM. We have factored in a 12.5/13.3/13.1% EBIT margin for FY22/23/24E, resulting in an EPS CAGR of 20% over FY21-24E.

Shares of Cyient Limited was last trading in BSE at Rs.1061.7 as compared to the previous close of Rs. 947.45. The total number of shares traded during the day was 203885 in over 15225 trades.

The stock hit an intraday high of Rs. 1091.4 and intraday low of 910.95. The net turnover during the day was Rs. 202471709.

Source : Equity Bulls

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