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Ambitious FY23 guidance, but valuations remains inexpensive

See potential upside from an improvement in margin

Revenue fell 0.4% QoQ in USD CC terms in 4QFY22, but was above our estimate of -1.1% QoQ USD CC. The beat was led by both Services (+1.6% QoQ USD CC) and DLM (-9.3% QoQ USD). Growth in Services was driven by Portfolio (10% QoQ), Aerospace (3.9%), and Communications (3.5%), while growth in Rail Transportation (-9.5%) was weak.

EBIT margin rose 60bp QoQ to 14.5% in 4QFY22 (200bp above our estimate), led by tailwinds such as offshoring, pyramid rationalization, higher quality revenue, utilization, and SG&A leverage. The same was offset by headwinds such as higher-than-average wage hikes and investments. It guided at an EBIT margin of 13-14% in FY23.

The management guided at a revenue growth of 13-15% in FY23. The DLM business continues to suffer from supply-side challenges and is expected to grow in the high single-digits in FY23. The Rail business remains sluggish and has back-ended the recovery in FY23.

We view the impact on the DLM business due to the global semiconductor shortage as a negative, given the hit on near term growth. The Rail business will continue to be a drag on revenue in 1HFY23. Nonetheless, the continued outperformance in the larger Services businessshould more than compensate for any impact on earnings.

The management commentary on improving order intake (+13% YoY) further supports our view that the Services vertical should see strong revenue growth in FY23 (MOFSLe of 13.3% YoY). CYL remains on track for its best performance in many years. Despite factoring in a more prolonged recovery in DLM, we estimate mid-to-single digit growth for FY23. CYL should deliver a growth of 11.5% YoY in FY23E.

We continue to see increasing spends in the ER&D industry and view CYL’s strategy to digest these spends as supportive in the near to medium term.

We lower our FY23/FY24 EPS estimate by 5%/6% on account of slower growth in DLM. Although near-term growth remains a concern. We maintain our Buy rating on attractive valuations. Our target multiple of 17x FY24 EPS implies a TP of INR1,000/share, implying an upside of 20%.

Better than expected result with a margin surprise

Revenue declined by 0.4% QoQ CC, INR EBIT grew 24% YoY, and INR PAT rose 39% YoY in 4QFY22. USD revenue/INR EBIT/INR PAT grew 9.2%/51.2%/40.5% in FY22.

In USD terms, revenue declined by 0.8% QoQ, but was 90bp ahead of our estimate. In CC terms, revenue declined by 0.4% QoQ.

Revenue from Services grew 1.1% QoQ and 9.2% YoY to USD130.6m.

Revenue from DLM declined by 9.3% QoQ and 13.8% YoY to USD26.1m.

Order intake from Services grew 13% YoY to USD187.8m in 4QFY22. CYL bagged seven large deals, with a total TCV of USD134.9m, of which six were from Services and one was a composite B2S deal.

Revenue declined by 0.4% QoQ CC, INR EBIT grew 24% YoY, and INR PAT rose 39% YoY in 4QFY22.

USD revenue/INR EBIT/INR PAT grew 9.2%/51.2%/40.5% in FY22.

In USD terms, revenue declined by 0.8% QoQ, but was 90bp ahead of our estimate. In CC terms, revenue declined by 0.4% QoQ.

Revenue from Services grew 1.1% QoQ and 9.2% YoY to USD130.6m.

Revenue from DLM declined by 9.3% QoQ and 13.8% YoY to USD26.1m.

Order intake from Services grew 13% YoY to USD187.8m in 4QFY22. CYL bagged seven large deals, with a total TCV of USD134.9m, of which six were from Services and one was a composite B2S deal.

Key highlights from the management commentary

Order intake grew 13% YoY in 4QFY22. The management is confident that demand will continue to remain robust.

EBIT margin in 4QFY22 stood at 14.5%, led by tailwinds such as offshoring, pyramid rationalization, higher-quality revenue, utilization, and SG&A leverage. However, the same was offset by headwinds such as higher-than-average wage hikes and investments.

The number of large deal wins is increasing. The company had seven large deals with a TCV of ~USD135m, of which six were from Services and one was a composite B2S deal.

The management guided at a revenue growth of 13-15% in FY23, while DLM will continue to face supply changes and grow in the high single-digits, despite a large order book

Valuations and view – maintain Buy

We continue to see a strong rebound in ER&D spending, led by increased outsourcing and larger deal sizes. The management’s strategy to leverage these spends, led by a refreshed GTM strategy and increased focus on large deal wins, should bode well for its growth performance. We expect CYL to deliver 13% USD revenue CAGR over FY22-24.

The growth momentum in verticals such as Communications, Utilities, Medical Devices, Semiconductor, Automotive, and Mining is expected to continue for the next two-to-three years. Aerospace is expected to bounce back to pre-COVID levels in FY23.

Although near-term growth may be soft, a better margin will compensate for the growth. We expect 11% PAT CAGR over FY22-24.

We maintain our Buy rating on attractive valuations. Our target multiple of 17x FY24E EPS implies a TP of INR1,000/share, implying an upside of 20%.

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