‘Buy’ on Cyient with a revised TP of Rs 605

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Published: April 22, 2017 4:00:41 AM

Cyient's Q4FY17 revenue, at $141.0 million (up 3.8% q-o-q), was ahead of Street's 3.2% growth estimate.


EBITDA margin, at 13.3% (down 10bps q-o-q), was lower than Street’s 13.8% estimate. (Reuters)


Cyient’s Q4FY17 revenue, at $141.0 million (up 3.8% q-o-q), was ahead of Street’s 3.2% growth estimate. EBITDA margin, at 13.3% (down 10bps q-o-q), was lower than Street’s 13.8% estimate. Management has guided for ~12.5% revenue growth and 50bps margin expansion for FY18 leading to double-digit earnings growth. We remain positive on the stock given its significantly better growth profile versus peers due to exposure to the Engineering Research & Development (ER&D) & IoT segments. Maintain ‘Buy’ with a revised target price of Rs 605 (Rs 620 earlier) as we change dollar rates to Rs 67 from Rs 69. Cyient reported 3.8% revenue growth with 3.6% cc growth in a seasonally weak quarter as core business and DLM (design led manufacturing) grew 3.2% and 8.7% q-o-q, respectively. Core business revenue growth was led by semiconductors (up 10.7% q-o-q) and utilities & geospatial (up 10.8% q-o-q). EBITDA margin declined by 10bps q-o-q to 13.3%, impacted by rupee appreciation and weak DLM margin.

Management anticipates improvement in DLM margin as it focuses on profitability over growth. Management expects core business revenue growth to be at same levels as last year (~12%), while DLM business is expected to grow at ~20%. This translates into ~12.5% growth for FY18. Cyient expects 50bps margin expansion, driven by improvement in operational efficiency, leading to double digit earnings growth. We have pruned our currency estimate to Rs 67 from Rs 69, leading to 4.3%/3.7% lower revenue and therefore 1.1%/2.3% cut in earnings for FY18E/19E. We believe that double-digit revenue growth guidance in core business, in an environment where most IT companies are guiding for mid-single digit revenue growth, demonstrates Cyient’s significantly better portfolio mix, led by ER&D and IoT.

However, there could be volatility in revenue and margins due to lumpy nature of DLM business and high client concentration. At CMP, the stock is trading at 11.6x FY19E EPS. We maintain ‘Buy/SP’ with a revised target price of Rs 605 (14x FY19E EPS; Rs 620 earlier) as we revise dollar rates to Rs 67 from Rs 69. Revenue grew 2.6% q-o-q to Rs 9,410 million. In dollar terms, revenue stood at $141 million, up 3.8% q-o-q. EBITDA stood at Rs 1,247 million; EBITDA margin, at 13.3%, contracted 10bps. Net profit came in atRs 784mn versus Rs 942mn in Q3FY17. Excluding exceptional item of `261million related to RSU expenses, adjusted net profit stood at Rs 1,045 million (up 11.1% q-o-q). Segmental performance: While core revenue rose 3.2% q-o-q, DLM revenue jumped 8.7% q-o-q, in dollar terms.

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Utilisation in core business declined 90bps q-o-q to 77.4%. Client addition: During the quarter, 11 new clients were added in core business (20 in previous quarter). Employee metrics: Core employee count fell by 10, while DLM employee count stood higher by 10. DSO of core business fell to 73 from 75 in Q3FY17, while DSO in DLM business rose to 83 days from 77 in Q3FY17. Top-5 and -10 clients: Top-5 clients grew 2.4%, while top-10 clients grew by 1.9% q-o-q in core business. Capex: Stood at Rs 250 million (Rs 263 million in Q3FY17). Hedge: Cyient has outstanding hedges worth $71.5 million, EUR20.0 million, GBP 8.4 million and AUD 13.3 million. Cash and cash equivalents in hand: Stood at Rs 9.7 billion, i.e., Rs 86.2/share, as at March end.

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