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Focus on execution returning

We attended Cyient’s Analyst Meet on 18th Nov-22 in Hyderabad, which provided greater visibility on the company’s efforts to achieve steady profitable growth. The company acknowledged the gaps in its portfolio and operations and has put robust strategy in place to fill those gaps. Key focus areas of the renewed strategy include – 1) investing in 5 pillars (potential high growth industries) to benefit from the ongoing mega trends identified by the company, 2) revamped sales team and optimised sales incentive structure, 3) large deal wins – Mr. Karthikeyan Natarajan (Chief Operating Officer) has brought in rigour in large deals. The company has a pipeline of US$1bn across 12 emerging themes and 4) synergising operations with focus on improving operating metrics like utilisation, employee pyramid, offshoring etc.

Cyient is doubling down on 5 key pillars – 1) digital, networks, geo-spatial, embedded, VLSI (semiconductor chip design) to benefit from mega trends – 1) smarter and intelligent operations, 2) nextgen connectivity, 3) intelligent mobility, 4) sustainability, 5) digital healthcare, 6) data insights and cloud and 7) space systems. For example, it has developed a tool enabling faster automated design of fibre network. This tool uses radar technology, high definition camera and artificial intelligence for intelligent data acquisition (speed of data acquisition improved 7x vs manual data acquisition) required in designing fibre network. The 5 pillars reported strong revenue growth of 33-35% YoY on LTM basis in Q2FY23. On TTM basis, order intake in these 5 pillars grew 40% YoY.

Management believes structurally it can improve margins over the next two years led by levers of 1) discontinuing leases and rationalising investments in real estate, 2) during covid leasing of hardware assets was high due to work from home, but now with return to office, Cyient is also rationalising hardware assets leasing, 3) company is also optimising managerial bandwidth and 4) focusing on improving operating metrics such as utilisation, offshoring and pyramid balancing.

Cyient’s management mentioned that they are still evaluating the method of partial divestment. Management believes that there is strong growth opportunity in EMS (electronic manufacturing services) for DLM driven by shift to alternative locations for manufacturing outside China. Demand for high complexity electronics is expected to increase exponentially over next decade in med-tech, defense, aviation, telecom and electric vehicles segments as per management.

Cyient’s management mentioned that it has the visibility to achieve US$1bn revenue run-rate in FY24 i.e. revenue of US$250mn by Q4FY24 and EPS of at least Rs60 in FY24. We continue to value Cyient at 15x to arrive at a revised TP of Rs932 (prior: Rs966). Cyient is currently trading at valuations of 13x on FY24 EPS of Rs62 with US$ revenue/EPS CAGR of 18.8%/14.1%, respectively, over FY22-24. Maintain BUY

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