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Demand getting more robust and clear

Cyient reported Q3FY22 revenue of USD157.9mn (up 5.2% QoQ), slightly ahead of our/Street’s estimate of USD156mn/USD157.6mn. Margin stood at 13.9%, beating our and Street’s estimates of 12.8% and 13.1%, respectively. Normalised PAT stood at INR1,317mn, up 8.5% QoQ. The company won seven large deals with total contract potential of USD68.8mn: six from Services, one from DLM.

Management highlighted that demand is robust and there is a structural change in the form of demand for the next 3–5 years wherein industry growth could be in the range of mid-teens. Maintain ‘BUY’ with an unchanged TP of INR1,350.

Well-rounded performance

Strong growth in portfolio (10.2% QoQ), Aerospace (3.9% QoQ), Communications (3.5% QoQ) and Utilities (2.3% QoQ) was partially offset by contraction in rail transportation (-9.5% QoQ). By segment, services grew 3.6% driven by growth in the Semiconductor, Mining & Natural Resources, Medical Technology & Healthcare sectors and DLM grew 12.8% QoQ. Order intake grew by 16% YoY with multiple large deal-wins and 18 new logo additions. It expect 80–90% of the order book to be executed over the next 12 months. Utilisation for Q3FY22 at 86.2%, up by 128bp QoQ, is highest ever. Attrition inched up to 29.3% in Q3FY22 from 24.3% in Q2FY22 due to lower headcount addition; although it is focussing on ramping up in Q4.

Outlook remains positive

Margins stood at 13.9%, down 14bp QoQ with 80bp headwinds from semi-conductor segments and 107bp headwinds from lower billing days, but offset by tailwinds from volume impact on SG&A of 139bp and operating leverage of 87bp. Management guided FY22 EBIT margins would improve by 350bp vis-a-vis a 200bp uptick envisaged at the beginning of the year. Management maintained double-digit revenue growth in services in USD termsin FY22; however, DLM revenue growth will be impacted due to global chip shortage, which may persist for 12–15 months.

Outlook and valuation: Strong demand; maintain ‘BUY’

Management is focussed on achieving industry-leading earnings growth. We believe the ER&D industry in India is witnessing a long-term structural upcycle, which will drive Cyient’s long-term revenue growth. The stock is trading at 18.3x Q1FY24E. We maintain ‘BUY/SO’ with an unchanged TP of INR1,350.

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