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Revenue uncertainty a key hangover…
Cyient Ltd (Cyient) hosted a conference call to highlight the business impact of Covid-19. The company acknowledges that while the revenue trajectory remains uncertain, Cyient would aggressively focus on cost rationalisation to keep margins under control. The company expects some impact of Covid19 in Q4 with full visible impact in FY21E. We believe more than 50% of Cyient’s revenues would be impacted by Covid-19. The company’s exposure to aerospace (~35%), transport (~12%), energy (~5%) and semiconductor (~5%) is expected to face headwinds due to Covid-19 related issues. In order to mitigate the headwinds, Cyient is focusing on cost rationalisation by measures like hiring freeze, no salary hikes, rationalisation of variable pay, rationalisation of cost relating to new business accelerators, travel freeze and reduce sub-contracting cost. However, the company plans to invest in improving the quality of salesforce, some hikes in lower band employees and bonus for productivity target in work from home.
Other key conference call highlights
* The company has enabled work from home for 80% of employees in India and plan to bring it up to 85%. Also, 98% of employees are on work from home outside India. Total 93% of clients have given approval to work from home while 100% clients have given approval outside India
* The company has not seen widespread layoff across its customers. Cyient expects some clients to reduce discretionary spend and conserve cash. The company highlighted that a lot of its service provided to clients is non-discretionary. Cyient’s clients are ABB, Airbus and Rio Tinto. The company has signed an agreement with Hitachi Rail, which will be ramped up probably after May 2020. Cyient has not witnessed any pricing discount from clients but the company is preparing for such contingencies. Cyient expects a delay in new programs and expects existing programs to continue
* Vertical wise there are headwinds in aerospace, transport, energy & semiconductor but the company is seeing healthy traction in medical, communication (as telecom witnessed a 20% increase in traffic and 5G opportunities) and mining (led by a reboot in China and cost redundancy). Energy is 40% of energy and utility vertical
Valuation & Outlook
Considering various headwinds due to Covid-19, we lower our FY21E and FY22E revenue and margin estimates downwards. We revise our EPS estimates from | 42.6 & | 46.6 in FY21E and FY22E to | 26.7 & | 27.6, respectively. Accordingly, we revise our PE multiple and target price downwards to | 255. We maintain our HOLD rating on the stock.
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