Commendable Show on All Counts; FY18 Looks Encouraging
Cyient has delivered a strong show in 4QFY17 - on expected lines - with its USD revenue growing by a healthy 3.8% QoQ (3.6% in CC terms) to US$141mn. A healthy 3.3% sequential growth in Core Services business is a positive factor, in our view. While the DNO business grew by a good pace of 3% QoQ, the ENGG business clocked a solid 3.5% QoQ growth. DLM segment grew by 8% QoQ vs. our expectation of double-digit growth. The Management looks forward to an encouraging FY18 with double-digit growth in the Core Services business, 20% growth in DLM, 50bps expansion in EBITDA margin (led by Core Services) and double-digit growth in earnings. Vertical-wise, the outlook remains strong as well, with positive trends in key segments including Aerospace, Communications, Medical and Utilities. Notably, the worst appears to be behind in the Semiconductor vertical.
Key Verticals Drive Growth
Cyient’s revenue grew by 3.8% QoQ (3.6% in CC terms) to US$141mn in 4QFY17. Though implied volumes declined by 1.2% QoQ owing to lower utilisation and flattish headcount, a strong 4.6% sequential improvement in pricing drove quarterly growth. The DLM business grew by 8% QoQ, below our expectation of double-digit growth, which is a negative, in our view. In Core Services, Aerospace & Defence (+3.6% QoQ), Transportation (+6.6%), Semiconductor (+11.3%), Medical & Healthcare (+3.3%) and Utilities & Geospatial (+11.1%) were key verticals that drove growth. While Communications saw a 3.1% QoQ decline in revenue, the Management believes it to be an aberration, as it expects the vertical to witness healthy growth in FY18. Cyient’s EBITDA margin saw a moderate 11bps QoQ decline on higher SG&A cost, lower utilisation and INR appreciation.
Outlook & Valuation
At CMP, the stock trades at a PE of 13.5x/11.3x FY18E/FY19E EPS, which we believe to be reasonable owing to improving growth in core services business metrics, expected margin expansion in FY18E, strong traction in most of its verticals, strong long-term client relationships, decent dividend yield, quality balance sheet and healthy EPS growth (>20% CAGR) over FY17- FY19E. We believe that Cyient should command a higher multiple in light of better growth trajectory and thus, we retain our BUY recommendation on the stock with an unrevised Target Price of Rs565.
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