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Good 3Q delivery, improving outlook

Sustained performance can drive valuation rerating

* CYL reported 3QFY23 revenue growth of 13.4% QoQ in CC, largely coming through the full-quarter consolidation of Citec. Excluding the inorganic impact, its Services business grew by 3.7% QoQ CC vs our estimates of 3.1% QoQ. DLM grew by 22.8% QoQ, beating our estimate of 18.1% QoQ growth.

* 3Q growth was led by A&D, Energy and Utility verticals, up 10.2%, 5.8% and 4.6% QoQ, respectively. Communications remained muted. Rail/Consulting stayed weak, declining 4.6%/7.8% QoQ. Management has maintained FY23 organic revenue growth guidance of 13-15% in CC terms.

* The normalized EBIT margin stood at 12.9%, up 100bp QoQ, beating our estimate of 50bp improvement. Management has maintained its FY23 EBIT margin guidance of 13-14%.

* Service order intake was strong at USD237m, up 83% QoQ/18% YoY. The deal pipeline also remains healthy, adding to confidence in management’s guidance of delivering better QoQ Service revenue growth in 4QFY23.

* The challenges in the A&D and Rail segments are behind, and the verticals are expected to reverse the trend to stimulate growth going forward. Rail Transportation bottomed out in Q3 and should aid topline growth in coming quarters.

* The DLM transaction (Proposed IPO) is expected to get executed by FY24. The DLM carve-out is another trigger that will release enough resources and management bandwidth currently occupied in running the business. We believe the transaction should be positive for the service segment and it should unlock value for both the entities.

* We have slightly tweaked our estimates to account for better growth. We maintain our Buy rating on the stock on attractive valuations. Our target multiple of 16x FY24E EPS implies a TP of INR1,100, with a potential upside of 25%

Revenue/margin beat estimates

* Revenue grew by 13.4% YoY in CC terms, EBIT in INR terms rose 25.5% QoQ, and PAT in INR terms increased by 33.5% in 3QFY23.

* In 9MFY23, USD revenue/INR EBIT/INR PAT grew by 18%/13%/9% YoY. ? In USD terms, revenue grew by 12.7% QoQ to USD197m, largely driven by Citec (full-quarter consolidation) and other acquisitions.

* Revenue from Services rose 11.9% QoQ in CC terms (3.7% QoQ organic). DLM increased by 22.8% QoQ.

* Management has 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 by ~33% QoQ to INR1.6b, above our estimate of INR1.5b on better margin.

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