Analyst Corner: Downgrade Cyient to ‘neutral’, EPS estimate cut

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Published: January 18, 2020 1:24:10 AM

CYL is creating a new RSU scheme for top-100 leaders in lieu of cash bonus.

cyient, epsInvestments in new business accelerators (NBA) will be rationalised in FY21. Nevertheless, they will continue to be margin overhang.

Commentary around headroom for margin expansion (250bp from FY20 level) is disappointing. This expansion should be largely led by the absence of restructuring costs in FY21, implying no material net benefits from cost rationalisation. Also, the ongoing forced attrition may impact employee morale, posing further growth challenges (like in case of Cognizant). We cut our EPS estimate for FY20-22 by 3%.

Given the subdued outlook on growth/margins and the potential risks because of softer aspects, we Downgrade to Neutral, valuing it at 11x one-year forward P/E.
Revenue declined 6% Y-o-Y to $155m, in line with our estimate. Overall revenue decline was largely led by the sharp reduction in DLM (~37% QoQ). Within services, key verticals like A&D (~5% QoQ, USD) and transportation (~15% QoQ, USD) reported a sharp decline.

The impact was partly offset by strength in communications (~12% QoQ, USD) and E&U (~9% QoQ, USD). Benefits from cost optimization (~30 bps) in 3Q are disappointing.
One-off investment associated with conversion of a project in transportation (from T&M to Risk-Reward) impacted growth and margins. Boeing 737 Max issue is not expected to be a further drag on growth. However, the management expects only modest growth in A&D.

Investments in new business accelerators (NBA) will be rationalised in FY21. Nevertheless, they will continue to be margin overhang. CYL is creating a new RSU scheme for top-100 leaders in lieu of cash bonus. This should have a slight impact on the company’s P&L.

The outlook on key verticals like aerospace and defence (~35% of revenue) remains subdued. Trajectory of order intake is not encouraging either. In addition, the ongoing forced attrition may impact employee morale, posing further growth challenges (like in case of Cognizant).

Disappointing outlook on post restructuring margins is another negative. Given the subdued outlook on growth/margins and the potential risks because of softer aspects, we Downgrade to Neutral, valuing it at 11x one- year forward P/E.

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