Analyst Corner: Recommend ‘buy’ on Cyient with TP of Rs 785

By: | Published: October 24, 2018 1:08 AM

Cyient Q2FY19 revenue grew by 5.1% q-o-q in dollar term to $169 million ahead of our estimate of $166.4 million. Services grew by 2.3% and DLM revenue grew by ~27% sequentially in dollar terms.

Cyient Q2FY19 revenue grew by 5.1% q-o-q in dollar term to $169 million ahead of our estimate of $166.4 million. Services grew by 2.3% and DLM revenue grew by ~27% sequentially in dollar terms. Ebitda margin expanded 152 bps q-o-q to 13.7% (65 bps beat) on rupee depreciation and operating efficiencies. Cyient revenue grew by 5.1% sequentially in dollar terms v/s our estimate of 3.5%. Service revenue included revenue from AnSem, which was acquired during the year.

Margins were 152 bps higher q-o-q but down 90 bps y-o-y, including the NBA (new business accelerator) impact. Services margins expansion was a function of currency benefits (+80 bps), operating efficiency, SGA optimisation offsetting wage hike . Cyient has revised its FY19 margin guidance by 50 bps if the rupee stays at Rs 72/USD for the rest of the year without any cross-currency headwinds, but we build in flat margins for FY19 due to business investments (NBA) and seasonal weakness in Q3.

The total order intake during the quarter grew by 65% y-o-y and stood at $196 million. Service order intake was at $157 million, up 46% y-o-y, and that for DLM was at $39 million, up 233% y-o-y. Healthy order wins and growth in non Top 5 clients reaffirm strong growth momentum, in our view.

We believe Cyient is well placed to address opportunities in ER&D over long term and expect a CAGR of 11% revenue growth in dollar terms and ~17.5% in earnings over FY18-20. We believe Cyient’s performance in FY19 will be better than that of its peers, and execution of its strategy of design plus manufacturing should be reflected in financials from FY19. We value stock at 15x FY20E earnings. We recommend ‘buy’ with a target price of Rs 785 (Rs 810 earlier).

Cyient guided for a double-digit growth in its service business and 20% growth in DLM. Including the integration of acquired B&F, DLM business is expected to grow by 35%. DLM margins will improve slightly but are expected to remain in low single digit due to backlog of low margin business.

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