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Established player with niche focus
Cyient Ltd, formerly known as InfoTech Enterprises is one amongst the leading players in the IT enabled services space providing services to the Engineering Research and Development segment.
* Stable revenue growth with 16% CAGR in the last 5 years from FY14. Fresh order intake in the services division to propel revenue growth to 14.2% in FY21E from 3% in FY20E.
* Expansion of its R&D facility in Warangal with net addition of 600 employees to support telecom clients indicate strong momentum in communication vertical.
* Well positioned in providing services to aerospace vertical and huge prospect to expand the defence segment which currently accounts to 5% of total revenue.
* Expect operating margin to improve in the range of 14-15% when the cost optimisation program ends by FY21E.
* Currently trading at historically low valuations as weak margins and revenue growth in FY20 is already factored in.
*We expect improvement in growth due to communication and transportation vertical and value Cyient at 9x FY22E EPS with a target price of Rs.540 and recommend Buy rating.
Strong momentum in selected verticals to drive growth
Cyient enjoys strong foothold among the listed Engineering and research development (ER&D) space and generates close to 65% of revenue. Company has been instrumental in providing services to Aerospace and defence segment which has been reporting soft set of numbers since the last 2 quarters due to client specific concerns. Both Aerospace & defence and the second major vertical communication is expected to show growth powered by improvement in client spending, after sales services and 5G deployment. Transportation segment has shown a QoQ growth of 3% Q2FY20 in US Dollar terms which is expected to improve as new orders start coming in.
Cost optimisation program to power margins
Company has initiated a cost optimisation program to achieve sustainable margins for the services business. The move is largely to curtail the sales and administrative expenses and boost margins. We believe the cost optimisation program to end in Q4FY21E, till the time improvement in margins due to a fall in Sales expenses will be impacted by higher wage cost and one time restructuring cost. Margins expected to be in the range of 14-15% once cost optimisation ends.
Investment and past acquisition to aid EPS growth
Cyient continues to invest in projects which is expected to add to the EPS in the near term. Investment in New Business Accelerator program (NBA) which is an in-house investment vehicle created to provide end to end solution to clients is one among the major project of Cyient. In addition to that the acquisitions in the recent past like Ansem which is a 20% margin business is expected to aid EPS growth in the tune of 1.5%-3% in FY 21E.
Growth in ER&D spends across the globe and in key services like aerospace and defence, communication and healthcare to propel order intake and improve the revenue from FY21E onwards. We believe negative factors like client specific concerns and low margins are already factored in the current valuation of 7.2x on FY22E EPS, which is at discount of around 45% compared to the long-term average. We expect improvement in growth due to telecom and transportation vertical and value Cyient at 9x on FY22E EPS with a target price of Rs.540 and recommend Buy rating .
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