Cyients 1QFY18 revenue declined 0.24% QoQ to USD140.65mn v/s our estimates of USD142.7mn. Services business reported good growth of 3.1% sequentially whereas DLM business disappointed with a sharp decline of 26% sequentially. Growth within service business was led by communication, semiconductor and transportation growing at 10%, 11% and 11.7% respectively. We expect traction to continue in communication and transportation with growth slowing down in semiconductor vertical due to increased off shore. Management remains confident of achieving 20% YoY growth for DLM Business for the full year. Margins were in line with our estimates at 12.8%, down 50bps sequentially due to wage hike, rupee appreciation and decline of margins within DLM Business. We cut our earning to Rs.36.4 and Rs.43.4 from Rs.40.09 and Rs.44.05 earlier for FY18E and FY19E respectively. due to increase in tax rate. We await a sustained revival in the core service business . Positives are more or less priced in and the stock is fairly valued at ~11.9x FY19E EPS. We maintain REDUCE with revised target price of Rs.521 (Rs.526 earlier).
* Revenue growth for Cyient has remained volatile and has also under-performed expectations for the past few quarters.
* While 1QFY18 revenue were almost in line with our expectation, the company needs to sustain growth within service business and better visibility for DLM business.
* At the current levels, our FY19 estimates are discounted by about 11.9x, which we believe is adequate, in the backdrop of volatility in the revenue.
* We maintain REDUCE with FY19 based price target of Rs.521 (Rs. 526, earlier).
* A consistent and higher organic revenue growth trajectory will make us more positive on the stock.
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