IGI Logo

Good margin performance and valuation adds to comfort

* CYL reported a 2QFY23 revenue growth of 10% QoQ in USD CC terms (largely due to acquisition-related benefits), 110bp below our estimate. Excluding the inorganic impact, its Services business grew 3% QoQ CC (in line). DLM remained weak, declining by 3.3% QoQ.

* The management maintained its organic revenue growth guidance of 13-15% in CC terms in FY23. With the closure of the Citec acquisition in 2Q, it expects acquisitions to add an additional 14-15% to growth in FY23. With supply challenges easing in DLM and improved deal flows, it reiterated its high singledigit growth guidance in DLM.

* Operating profit in 2QFY23 was impacted by one-off cost from a US class action suit (CYL is contesting it) and a one-time fee related to acquisitions. The adjusted EBIT margin was broadly stable in 2QFY23 at 12.5% (down 30bp QoQ) and was 120bp above our estimate, despite a wage hike impact. The management maintained its FY23 EBIT margin guidance of 13-14%.

* CYL guided at an initial revenue run-rate of USD1b for FY24, along with an EPS of at least INR60/share. While we expect it to achieve its EPS guidance, we remain skeptical of it meeting its revenue outlook.

* Strong deal pipeline and order book in 1HFY23 should support its growth trajectory for FY23. Moreover, the company should see a big inorganic growth component with recent acquisitions. This should result in a strong reported USD growth of 28.6% YoY.

* CYL should improve margin with better pricing, pyramid rationalization, and operating leverage, which should result in improved profitability over 2HFY23. We expect it to deliver an EBIT margin within its guidance range of 13-14% (MOFSLe of 13.2%).

* We continue to see a long-term growth in spends in the ER&D industry, although there are near-term concerns emanating from a macro slowdown. We view current valuations as attractive as it factors in all concerns on the macro and execution front, but not on long-term business opportunities.

* We increase our FY23/FY24 EPS estimate by 6%/5% on better growth and margin. We maintain our Buy rating on the stock on attractive valuations. Our target multiple of 14x FY24 EPS implies a TP of INR910, with a potential upside of 18%.

Good margin performance and order book

* Revenue grew 20.4% YoY in CC terms, EBIT in INR terms rose 6.6%, and PAT in INR terms grew 0.5% in 2QFY23.

* In USD terms, revenue grew 10% QoQ to USD174.8m in CC terms largely driven by acquisitions, 110bp below our estimate.

* Revenue from Services rose 12.3% QoQ in CC terms (3% QoQ organic). DLM declined by 3.3% QoQ.

* The management maintained its FY23 organic revenue growth guidance at 13- 15% YoY in CC terms. It said it will add 14-15% from acquisitions in CC terms.

* CYL maintained its EBIT margin guidance at 13-14% for the organic business. EBITDA will be in the 16-17% range as acquisitions are marginally accretive.

* PAT grew 5% QoQ to INR1.2b, above our estimate of INR1.14b on better margin.

Key highlights from the management commentary

* The management sees significant growth opportunities in Europe and America in the Defense space. Around 15-20% of its Aero-related orders are in the Defense industry and CYL is seeing opportunities there.

* Shortages continue to impact the Rail vertical, and a recovery is expected by 4QFY23.

* Though there are some delays and hiring freezes from customers that need to work with external partners, CYL is not seeing any meaningful impact as of now.

* It expects DLM to do well in 2HFY23 due to seasonality and supply-chain visibility. It sees opportunities to grow the DLM business by five times in five years.

Maintain our Buy rating

* We continue to see a strong rebound in ER&D spending, led by increased outsourcing and larger deal sizes. The management’s plan to leverage these spends, led by a refreshed GTM strategy and increased focus on large deal wins, should bode well for its growth performance.

* The growth momentum in verticals such as Communications, Utilities, Medical Devices, Automotive, and Mining is likely to continue for the next two-to-three years.

* We maintain our Buy rating led by attractive valuations. Our target multiple of 14x FY24E EPS implies a TP of INR910, with a potential upside of 18%

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer