Analyst corner: Maintain ‘buy’ on Cyient; revised target price of Rs 632

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Published: July 23, 2019 1:28:47 AM

However, we remain bullish on ER&D and its demand prospects, and expect Cyient to participate in demand once its client-specific issues are resolved.

While the management believes that key verticals should recover from Q2FY20, we expect recoveries in top accounts to take longer.

Cyient suffered a disappointing Q1FY20—revenue at $156.6 million declined 5.2% q-o-q in dollar terms, a major miss vis-à-vis the Street’s estimate of a 1% q-o-q growth. Operating margin, which dipped 360bps q-o-q, too greatly undershot consensus numbers. The management has refrained from giving a revenue guidance for FY20, citing weaker-than-expected recovery in key verticals, i.e. aerospace & defence and communications. We believe Cyient faces a tough challenge on FY20 revenue growth, driving down our EPS estimates by 14.5%/10% for FY20/FY21. However, we remain bullish on ER&D and its demand prospects, and expect Cyient to participate in demand once its client-specific issues are resolved. In addition, factoring in the valuation comfort, we maintain ‘Buy’ with a revised TP of Rs 632 (versus Rs 688 earlier).

Revenue in Q1FY20 decreased 5.2% q-o-q (dollar) as the performance of two key verticals — A&D (flat q-o-q) and communications (down 10.3% q-o-q) — was marred yet again by client-specific issues. Energy & utilities (down 5.7% q-o-q) and transportation (down 1.6% q-o-q) struggled as well. While the management believes that key verticals should recover from Q2FY20, we expect recoveries in top accounts to take longer.

The deep cut in Q1FY20 Ebit margin, down 360bps y-o-y, is attributable to declining volumes and investments in new business accelerator (150bps). The management believes it can recoup at least 250bps in Q2 as volumes come back; however, we point out that this is likely to be partially offset by the staggered wage hikes. While we believe Q1FY20 would turn out to be the bottom for margins, we consider Cyient’s double-digit Ebit growth guidance for FY20 a difficult ask after such a stark decline in Q1FY20.

We retain our positive stance on Cyient anchored by strong demand for ER&D services and its cut price valuations. That said, we are cutting FY20/FY21E EPS by 14.5%/10% factoring in persistent challenges for revenue growth in a few verticals. The stock is trading at an attractive 11.9x FY20E EPS. Retain ‘Buy/SP’ with a revised target price of `632 (14x Q3FY21E EPS, Rs 688 earlier).

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