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Value BUY in an overheated small cap universe!

Revenue was marginally ahead of our estimates. Services segment remained stable while DLM (-20% QoQ, USD) witnessed a sharp drop led by seasonality. Within services, aerospace, communications and utilities verticals grew in the range of 2-4.4% QoQ (USD).

Services’ EBIT margin expanded 100bps QoQ – led by operational optimization and lower SG&A spends. However, negative operating leverage at DLM remained a drag on overall margins. While Q1FY22 growth in services was impacted due to Covid second wave, FY22 growth and margin outlook remained upbeat. Order intake (Services) increased ~22% YoY. On revenue growth, company reiterated its earlier guidance (services – double digit growth; DLM – 20%).

In DLM and even at the group level, margins are guided to increase by 200bps for FY22. We upgrade our FY22-24E EPS by ~8%. We continue to believe that some of the structural changes being undertaken by the company are bearing fruit. Multiples (16x FY23E EPS) are still undemanding especially in the context of overheated valuations of mid-caps / small caps. Cyient continues to be our TOP BUY across our small cap coverage.

* Beat on both revenue growth and margins. Revenues declined 4.3% QoQ (CC), ahead of our estimate (decline of 5.2% QoQ, CC). As anticipated, decline was driven by DLM (20% QoQ, USD) while services was largely stable (-0.4% QoQ, CC). Within services, Aerospace (+2.0% QoQ, US$), and C&U (+2.4% QoQ, US$) fared well. Group EBIT margin (13.1%) was 50bps ahead of our estimate. Services segment delivered 100bps QoQ expansion in EBIT margin led by operational improvements and operating leverage. Overall, at group level, normalised EBIT margin expanded 50bps QoQ.

* Healthy order intake. Stable outlook on growth and margins. Order intake was stable at ~US$140mn (+20% YoY) on top of the strong order booking in Q4FY21 (~US$238mn, +22% QoQ). For FY22, the company maintained its outlook of double-digit growth in services and 20% in DLM. While the management has conservatively guided for ~200bps YoY improvement in EBIT margin, we see further upside risk (+50 bps) to this guidance. We upgrade our FY22-24E EPS by ~8%. We continue to believe that some of the structural changes being undertaken by the company are bearing fruit. Multiples (16x FY23E EPS) are still undemanding especially in the context of overheated valuations of mid-caps / small caps. Cyient continues to be our TOP BUY across our small cap coverage.

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