IGI Logo

Strong margin outlook to drive further re-rating

Valuations inexpensive; maintain Buy

* Cyient (CYL)’s 2QFY22 revenue grew 4.6% QoQ in USD terms (moderately higher than our estimate of 4% QoQ growth). This was led by broad-based growth in Services (+4.4%) and DLM (+5.4%). The recent acquisition of Workforce Delta contributed 0.7% to Services revenue in 2QFY22. The management retained its double-digit growth guidance in FY22 in the Services business, while DLM growth is expected to be 15–20% (v/s the 20% growth guidance earlier).

* Within the Services business, growth in Aerospace (4% QoQ) and Utilities (27% QoQ) drove performance, partially offset by decline in Comm. (-4% QoQ).

* The EBIT margin increased 100bp QoQ to 14.0% (the highest in the past seven years), led by Services (+90bp QoQ to 15.5%). The DLM margin increased 90bp QoQ on operating leverage.

* Strong demand in ER&D, Services order intake, and the bottoming out of the Aerospace business (32% of revenue) gives us confidence in CYL’s FY22 USD double-digit revenue growth guidance in Services, although off a low base. Growth in 2H is expected to be strong despite seasonal headwinds.

* The margin improvement story should continue in FY22 and beyond. The management has raised its margin guidance for FY22, with at least 300bps YoY margin expansion. Moreover, over the medium term, the management expects a 17% EBIT margin for the Services business (currently at 15.5%) and a consolidated margin of ~15.5% (currently at 14%).

* We see increasing spends in the ER&D industry and CYL’s strategy to digest these spends as supportive over the near-to-medium term.

* We increase our EPS estimate for FY23 on a potentially better margin performance, led by the management’s medium-term outlook. We maintain our Buy rating on attractive valuations. Our target multiple of 24x FY23E EPS takes our TP to INR1380/share, implying an upside of 19%.

Marginal beat on revenue; strong performance in margins

* Revenue at USD150m grew 11.2% YoY (moderate beat), EBIT at INR1,557m increased 41% YoY (higher than our estimate of INR1,517m), and PAT at INR1,212m rose 44% YoY (in-line).

* 1HFY22 USD revenue / INR EBIT/ INR PAT grew 11%/82%/43%.

* USD revenue grew 4.6% QoQ, moderately higher v/s our expectation. In CC terms, revenue was up 5.6% QoQ CC.

* Services revenue at USD124.6m grew 4.4% QoQ and 9.2% YoY.

* DLM revenue at USD25.5m increased 5.4% QoQ and 22% YoY.

* Order intake for the quarter grew 22.5% YoY and stood at USD156m. CYL won six large deals with TCV of USD63.5m (four in Services, one in DLM, and one composite B2S deal).

* Within the Services business, growth in Aerospace (4% QoQ) and Utilities (27% QoQ) drove performance, partially offset by decline in Comm. (-4% QoQ).

* The consolidated EBIT margin stood at 14%, up 100 bps QoQ – the highest ever reported by the company in the last seven years.

* Services margins improved 90bps sequentially and stood at 15.5%; DLM margins expanded to 6.8% (v/s 5.9% in 1QFY22).

* QoQ margin improvement was driven by improved operational metrics (155bps), the revenue mix (110bps), and cost optimization levers (110 bps). This was partly offset by higher SG&A investments (-220 bps) and merit increase (- 100bps).

* PAT stood at INR1,212m (+5.4% QoQ), in line with our estimate of INR1,219m, led by higher-than-expected margins and lower other income.

* FCF/EBITDA came in at 97% and FCF/PAT at 169%.

* The management continues to expect double-digit growth in the Services business in FY22, with growth continuing in 3Q. On the other hand, DLM should grow 15–20% (v/s the ~20% YoY guidance earlier), impacted by supply-side constraints.

* FY22 margins are expected to improve by at least 300 bps YoY (v/s 200bps earlier).

Key highlights from management commentary

* The Services business is expected to grow in the double digits – the growth seen in 2QFY22 should continue. The DLM business is expected to grow 15–20% (v/s the earlier guidance of ~20%), impacted by supply chain challenges.

* 3Q would see the impact of furloughs; however, robust demand and deal rampups would offset this. Despite seasonality, 3Q would see good growth.

* The EBIT margin is expected to increase at least 300bps YoY for FY22 (v/s the 200bps improvement guided earlier). Margins would sustain at 13.5–14% in 2HFY22.

* Over the medium term, the Services margin could reach 17% and the consolidated margin may be 15.5%.

Valuation and view – maintain Buy

* We continue to see a strong rebound in ER&D spending, led by increasing outsourcing and larger deal sizes. The management strategy to leverage these spends – led by a refreshed GTM strategy and increased focus on large deal wins – should dwell well with its growth performance. We expect CYL to deliver a 14% USD revenue CAGR over FY21–23E.

* Growth momentum in verticals such as Communications, Utilities, Semiconductor, Automotive, Medical Devices, and Mining is expected to continue for the next 2–3 years. Aerospace is expected to bounce back to pre-COVID levels in FY23.

* High growth visibility, coupled with margin expansion over the medium term, should bring good earnings visibility. We expect a 30% EPS CAGR over FY21–23.

* We raise our estimates on a potentially better margin performance, led by the management’s medium-term outlook. We maintain our Buy rating on attractive valuations. Our target multiple of 24x FY23E EPS takes our TP to INR1,380/share, implying an upside of 19%.

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