Published on 23/11/2020 12:07:08 PM | Source: HDFC Securities Ltd

Buy Cyient Ltd For Target Rs.488 - HDFC Securities

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Buy Cyient Ltd For Target Rs.488 - HDFC Securities

Our Take:

Cyient added 16 new clients in Q2FY21, 25 new clients in Q1FY21 and had signed 2 multimillion deals in Q1FY21 that indicate deal pipeline is strong. Order intake in Q2FY21 stood at US$127.3 Mn, increased by 9% QoQ. We expect a positive outlook for the second half of the financial year led by growth based outlook in the industry and deal pipeline across most sectors. Company expects communication, transportation and medical segment to drive revenue growth and believes aerospace revenues bottomed out in Q2FY21. Hence, we expect revenues to improve on a QoQ basis, going forward. In terms of margins, we expect the company to post a healthy improvement in FY22E and FY23E led by various cost rationalisation measures undertaken by the company. Relatively higher mix towards mechanical services and stressed sectors like Aviation and Travel has been impacted due to covid-19. We believe, restart of commercial airlines activity and European railways will accelerate the recovery process. Cyient has been constantly investing and strengthening its capabilities in emerging areas and is likely to continue to leverage partnerships and alliances to strengthen its offerings portfolio

Cyient is undertaking various cost rationalisation measures like lower travel cost, no salary hikes, and lower sub-contracting cost. We expect margins to improve QoQ led by a recovery in revenue growth, absence of one-time restructuring cost and cost rationalization. However, margin in Q3FY21E will be impacted by wage hike (effective Oct-20), and FY21E exit margin will be similar to Q2FY21 level. Company plans to invest in improving the quality of sales force, some hikes in lower band employees and bonus for productivity target in work from home. Cyient has not witnessed any pricing discount from clients but we could be ready for such contingencies going forward.


Valuations and Recommendations:

Despite near-term headwinds in key sectors mainly on account of Covid19, Cyient is expected to maintain its healthy financial profile which is supported by moderate debt, high liquid surplus and conservative financial policies. Cyient’s world-class facilities, project management, sourcing, supply chain management, production processes, buoyed by investments in the latest technologies as well as expertise in the delivery of quality products, make it a preferred manufacturing partner for aerospace, defence, medical and industrial customers globally. Business risk profile will continue to be supported by long-term relationships with clients and demand for niche engineering services in diverse verticals. We remain optimistic on its revenue and profitability trajectory as well as cost rationalisation efforts going forward. Cyient quotes at a discount to its midcap peers in terms of P/E and EV/EBITDA due to its lower OPM, RoE and dependence on niche sectors that are vulnerable to cyclical downturns. However we feel that the initiatives taken by the management will result in better visibility of growth and hence the discount in valuations to its peers could narrow. We think the Base case fair value of the stock is Rs 439 (13.5x FY22EPS) and the bull case fair value of the stock is Rs 488 (15.0x FY22EPS) over the next 2 quarters. Investors can buy the stock in the Rs 405-409 band (~12.5x FY22EPS) and add further on dips to Rs. 372-376 band (11.5xFY22E EPS). At the LTP of Rs 462.5, stock trades at 14.2x FY22E EPS.


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