Broad-based traction dragged by DLM
Services growth robust
* Performance dragged by DLM: Rangsons (DLM) dragged 1QFY18 performance vis-à-vis expectations on both revenues (3% impact) and margins (60bp impact) front. Having started the year at USD12m, CYL maintained DLM outlook of 20% growth, citing healthy visibility to reach USD65m for the full year (we estimate 12% growth). Operating loss of INR53m in DLM also dragged the EBITDA margin by 50bp QoQ to 12.8% v/s our estimate of 13.2% (ex-DLM margin was 13.3%). PAT of INR878m (+18.6% QoQ) came in below our estimate of INR955m, led by operational miss. Also, the reported tax rate during the quarter was 31%, but 27% excluding one-offs.
* Broad-based YoY traction is a positive: Communications continued to run the show at CYL, growing 35.2% YoY. However, growth was far from lopsided, as six out of the eight segments grew in double-digits YoY, with the exception of Aerospace & Defense (A&D; 2% YoY) and IENR (-4.9% YoY). CYL expects to struggle only in IENR for the year, citing ample opportunities in A&D in the manufacturing and after-market segments.
* Estimates pruned on higher tax rates: Our earnings estimates for FY18/19 are down by 3/2% owing to higher effective tax rates of 26-28% v/s 24% earlier. Barring that, growth and margin estimates are largely unchanged, despite the 1Q miss, as we expect catch-up in DLM in the remaining quarters to compensate for the same.
* Industry-leading growth, coupled with long-term opportunities: At current momentum, we expect CYL to continue leading industry growth (~12% YoY CC in FY18E), and over the longer term, it remains well placed to address opportunities in the Engineering and Defense segments. Additionally, insulation from any regulatory adversities, unlike peers, places the company in a favorable intersection of performance and protection. We see favorable risk-reward at 14.5/12.5x FY18/19E earnings. Our price target of INR600 discounts FY19E earnings by 14x. Buy.
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