Cyient Ltd : Services growth picking up, margins improve; Buy - Anand Rathi Shares and Stock Brokers
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Buy Cyient Ltd For Target Rs.1,060
At $168m (1.4% q/q, ~8% y/y; both est. org.), Cyient’s Services growth has persisted over the last few quarters amid the brighter outlook on Aerospace. Outside acquisitions, growth was higher in core services. Orders were $237m, up 18% y/y (LTM up 14% y/y) with management expecting higher growth in Q4. The Services EBIT margin was 13.9%, up from 12.5% in Q2 on stretched utilization though. The DLM Business grew well in Q3 but operating and order details were not published due to the ongoing IPO process. No major change to estimates, barring legal expense in FY23 and FY24. The TP is slightly higher at Rs1,060, 16x FY25e EPS.
Aerospace back in the groove, Rail drag to reduce. Aerospace (up 4.4% cc) grew the most in the last four quarters and the company is hoping for ~10% q/q growth in Q4, based on orders won and large client ramp-ups. Rail (down 4.9% q/q, 21% y/y) has dragged over the last six quarters but is now likely to return to growth in H1 FY24. Communications (up 1.3% q/q cc), its largest vertical, is likely to be steady to marginally slow (per industry outlook by peers). Cyient closed five large deals in Q3, adding $59.2m.
FY24 margin expansion could be limited, as utilisation cools. Cyient’s Q3 Services EBIT margin was up q/q, aided by higher utilisation (90.9% vs 84.6% in Q2) but affected by lower offshoring (down 180bps q/q). Ahead, offshoring is a lever for margins but utilisation normalisation will generate headwinds. Headcount declined by 311 to 14,693, and LTM attrition is still high at 26.5%. Therefore, we expect limited margin expansion in FY24. The Q3 consolidated PAT margin was 9.6% (up 397bps q/q, down 147bps y/y), affected by legal expenses (Rs67m, post-tax) which are likely to continue in FY24.
Buy, target revised to Rs.1,060 (from Rs.1,030). The stock quotes at 13x FY25e EPS of Rs.67, attractive given our expectation of a 14% revenue CAGR (Services 10.5%) and after factoring in risks due to the company’s acquisitive nature. Reflecting these concerns, we value Cyient at 16x FY25e EPS. DLM (~15% revenue contribution, ~10% EBITDA contribution) value unlocking is going well. Risk: Slow growth in the communication vertical.
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