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Adapting to change, execution holds key

We attended Cyient analyst meet where management guided its strategy to transform from Pure play services company to solution provider with focus on providing integrated solution services across value chain of clients. Cyient guided global engineering services outsourcing market consist of addressable size of USD 93bn and is projected to grow at a CAGR of 6% with new trend of Innovative Centric / IP based solutions against earlier manpower based engineering services with shift of commercial model from Fixed cost/ T&M to Risk/ reward pricing. Management believes that its ability to address end to end value chain through its enhanced capabilities will be the key differentiator and help the company scaling in this new evolving environment. Cyient has missed either revenue guidance or margin guidance over past 4-5 years. Cyient’s margin trajectory has remained weak and is likely to remain at the lower end among mid-sized IT peers. Cyient expects services business to grow in high single digit (cc terms) and 15% YoY growth in DLM. We expect Cyient to deliver 8.1% USD revenue growth for FY20E (7.3% growth in Services business and 14% growth in DLM business). We remain watchful on margin trajectory & expect margins to remain flat inFY20E-21E. We value Cyient at 13x FY21E EPS & arrive at an unchanged target price of Rs.621. Maintain Accumulate.

New journey from Services to Solution:

Cyient currently generates revenues in ratio of 80:20 from services and solutions. Management guided its focus of scaling its solution based revenues to 80% (and IT to 20%) with significant investments in developing technology focused solutions. Company will focus on digital with IoT, AR/VR, TRM, Spacebots, Machine learning and key partnerships with ecosystem players will help in this transformations. Management articulated its strategy to target the USD 93 bn spend (estimated growth: 6% CAGR) by becoming an integral part of clients’ value chain and evolving to a solutions-led company from a servicesled one.

Proposed Aggressive investment:

Cyient has made nearly 28 acquisitions over last decade with success rate of ~60%. Management guided for higher investment in FY20 with focus on creating different solutions. Management guided for ~USD400mn of inorganic investment and ~USD 150mn of organic investment over FY20-22E. Investment themes revolves around four key areas: 1) Embedded software 2) Connected Assets 3) Mechanical manufacturing 4) Design led manufacturing. Company will focus on investing mainly to enhance its capabilities and service offerings.

Near term volatility in some verticals; Overall steady outlook:

Management cited Aerospace and communication to be soft with deferment of revenues and client specific issue however demand environment looks healthy and remains confident on growth outlook with recovery from Q2 onwards. Guided for High single digit growth in Aerospace vertical, Higher then single digit growth in communication vertical (was lower in FY19) and lower then single digit growth in transportation vertical as management cited that opportunities are limited in this vertical.

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