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Healthy revenue, margin trajectory…

Cyient reported a healthy set of Q4FY21 numbers. Overall revenues increased 6.0% QoQ to US$149.9 million mainly led by 3.7% QoQ (2.5% QoQ organic growth) growth in services revenues to US$119.6 million and 16.4% QoQ growth in DLM revenues to US$30.3 million. The growth in services revenues was due to 2.9% QoQ growth in transportation, 2.5% QoQ growth in communication and utility segment. Overall EBIT margin increased 148 bps QoQ to 12.6% mainly led by 233 bps QoQ growth in services margins (at 13.6%). The company has declared a dividend of | 17 per share.

Better order book, recovery in vertical to drive growth

The company has seen healthy traction in aerospace, energy & utility vertical and communication segment in Q4FY21. In addition, Cyient expects Q1FY22E services revenues to register improved growth on a QoQ basis. Further, for FY22E, the company expects improved demand from aerospace in H2FY22E, traction in communication (led by 5G rollout (10% of revenues), cloudification and enterprise network transformation), energy & mining and transportation.

This, coupled with focus on large deals (won eight large deals in Q4FY21), healthy order book, traction DLM business (led by strong pipeline) and organisation restructuring to accelerate growth point to a healthy revenue trajectory in coming years. Hence, based on the company’s guidance of double digit growth in services and 20% YoY growth in DLM business we expect 12% YoY growth in FY22E and 10% growth in FY23E.

Margins to improve gradually

The company expects 50 bps QoQ improvement in margins in Q1FY22E despite wage hikes. This, coupled with improved revenue growth and SG&A rationalisation, prompts us to believe the company will be able to surpass its guided 200 bps YoY improvement in margins. Hence, despite supply side constraints, we expect the company to register ~300 bps improvement in EBIT margins to 13.1% in FY22E and further 30 bps improvement in FY23E.

Valuation & Outlook

The company’s focus on large deals, client mining, healthy order book (up 22% QoQ in Q4FY21E) and organisation restructuring to accelerate growth point to healthy revenue trajectory in coming years. This, coupled with recovery in aerospace division and healthy deal pipeline in DLM bodes well for revenue growth. Further, improving margin trajectory prompts us to be positive on the stock. Hence, we maintain BUY with a revised target price of | 825 (16x P/E on FY23E EPS) (earlier target price | 690/share).

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