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Momentum remains strong; robust outlook for FY24

Another quarter of solid performance

* CYL reported 4QFY23 revenue growth of 6.6% QoQ in CC, beating our estimate of 5.4% QoQ CC. Growth was largely driven by the consolidated service business (+3.2% CC QoQ). DLM grew ~26.5% QoQ v/s our estimate of 24.2% growth.

* Q4 growth was led by the Transportation vertical (up 12.9% QoQ CC), followed by sustainability (3.1% QoQ CC). Growth in connectivity (3.3% QoQ CC) and new growth areas (0.8% QoQ CC) remained weak.

* The normalized operating margin on the consolidated services came in at 15.1%, while group margin came in at 14.3%, up 140bp QoQ and beating our estimate by 60bp QoQ.

* Overall, from a macro standpoint, the business outlook remained strong with no material impact on the BUs, except for few sub-segments. All growth engines are firing well for the company. Aerospace, Communication, Mining and Auto are expected to deliver double-digit growth, while other segments are on the verge of recovery and should incrementally contribute to its overall growth in FY24E.

* Service order intake was strong at USD213m, up 13.3% YoY in Q4. FY23 order book (core service) stood at USD720m (+14.2% YoY), translating to 1.1x of Book-to-Bill. Additionally, the deal pipeline also remained strong, with five large deals signed in Q4 with total contract potential of USD185.1m, which gives confidence to the management to deliver consolidated service revenue growth of 15-20% YoY CC in FY24E (translates to ~4% CQGR).

* On EBIT margin, the management has guided for a 100-200bp YoY gain for the consolidated service business for FY24 v/s 13.7% in FY23. Margin would be supported by 1) strong cost control, 2) ability to draw price hikes, 3) improved offshoring, and 4) focus on fixed-price projects.

* Given the significant beat in revenue and margin in Q4, we raise our USD revenue growth estimates by 2%/3% for FY24/FY25, leading to a 5%/4% increase in EPS estimates. Our target multiple of 16x FY25E EPS of INR85.3 implies a TP of INR1,360. Maintain Buy.

Beat on both revenue and margin

* Revenue grew 39.1% YoY in CC terms, EBIT in INR terms rose 46% QoQ, and PAT in INR terms grew 14% YoY in 4QFY23.

* In FY23, USD revenue/normalized INR EBIT/normalized INR PAT grew by 23%/22%/8% YoY.

* In USD terms, revenue grew 8.1% QoQ to USD213.0m driven by the consolidated service business (+5% QoQ).

* Revenue from core services rose 2.6% QoQ in CC terms, while DLM revenue increased by ~26% QoQ.

* FCF/PAT conversion was strong at 150.3% in Q4 and 95% in FY23.

* CYL paid a dividend of INR26 in FY23 with a payout ratio of 50%

Key highlights from the management commentary

* The management indicated that the acquired businesses (Citec, Celfinet and Grit) are in the turnaround phase and would start contributing to margin once the actual benefits are realized through synergies. 4

* The company was able to improve realization in few accounts and it expects Q4 to become a new base for such price increases.

* Overall on a macro standpoint, there is no material impact on the business, except in few sub-segments.

* However, it remains watchful on the demand environment as it expects some projects might be paused (it does not have visibility currently). It has maintained some caution on the energy, medical and sustainability verticals.

* Aerospace growth is likely to be supported by the supper investment cycle (3 years) that will provide an opportunity to procure engines and design aircraft, leading to an increase in after-market and MRO services in the space.

Valuation and Outlook

* CYL’s service segment is shaping up quite well, with positive momentum in most of its growth engines (excluding Rail, Consulting and Utility).

* Conversely, other segments are on the verge of recovery and should incrementally contribute to its overall growth in FY24E.

* Current valuations at 14x/12x FY24E/FY25E EPS of INR73.9/INR85.3 appear attractive, giving us more comfort to maintain our BUY rating. Our target multiple of 16x FY25E EPS implies a TP of INR 1,360 (25% potential upside).

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