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 had a weak quarter, with revenue down 4.3% in QoQ (as per estimate), but margin performance was better than expected. The services segment was stable in QoQ, driven by continued weakness in the aerospace vertical (- 6.1% QoQ). The worst phase of commercial aerospace is over (traffic is at about 60% of the pre-COVID level), but MRO-related activity will take 2-3 quarters to recover. Management has guided double-digit growth in services, which will be led by the communications, utilities and transportation verticals. The DLM forecast of 20% year-on-year growth in FY22 is maintained despite a weak start. The focus is on winning large contracts (four contracts won for a TCV of $ 46 million) and the company will step up its investments in sales and marketing. The expansion of margins has been impressive over the past four quarters. Further margin expansion will be capped due to supply issues. We are increasing our EPS estimate by + 6 / 4.3% for FY22 / 23E, based on an expected recovery in core activities and a better margin in Q1FY22. Our price target is INR 970, based on an EPS of 18x as of June 23. The stock is trading at 22.2 / 18.1x FY22 / 23E, a discount of around 50% to LTTS. Hold ADD.

Highlights for the first quarter of fiscal 22: (1) USD revenue decreased 4.3% quarter on quarter compared to expectations of a 3.6% decline, while revenue in USD Basic services business remained stable and DLM business declined 20.1% qoq in the first quarter due to seasonality; (2) Services EBIT margin improved by 330 basis points QoQ to 14.6% (estimate 13.6%), supported by operational efficiency (+93 basis points), lower general and administrative expenses (+176 basis points), partially offset by an increase in salaries (-176 basis points) (3) partial impact of the upcoming salary increase in T2FY22, which will impact margins; (4) The DLM margin, at 5.8%, fell by -309 bps in QoQ; (4) the company won four large TCV contracts of 46 million USD, including three in services and one in DLM.

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

Shares of Cyient Limited were last trading in the BSE at Rs. 1061.7 from the previous close of Rs. 947.45. The total number of shares traded during the day was 203,885 in more than 15,225 transactions.

The stock hit an intraday high of Rs. 1091.4 and an intraday low of 910.95. The net turnover during the day was Rs. 202,471,709.

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