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Wider services and Sales investments to improve FY24 growth; Buy

To reduce concentration and thus raise expectations of steady organic revenue growth, Cyient diversified its services portfolio in FY23 via acquisitions. It is working toward building a sharper sales organization to benefit from its wider services. Order intake (in Q2) has yet to improve notably but the large-deal pipeline ($1bn+) reflects early gains. Services margins are likely to touch 15% with operational rigor (mostly higher offshore) and capex is likely to be lower, converging to peers, thus raising FCF. DLM would be an additional value driver, with growth acceleration ahead, suggested by Q2 orders. TP unchanged at Rs1,030, 15x FY25e EPS.

15% Services growth with 15% EBIT margins to be the yardstick. Cyient believes its 5x5 (five industry verticals and five service lines) operating model, reduced portfolio drags (Rail down 24% y/y as in Q2), brighter outlook in Aero (up 8% y/y) and investments in large deals ($530m won in H1, $1bn+ pipeline) should help it grow 15% organically. Besides, it believesit can operate at 15% EBIT margin with ~3% gains expected in operational efficiency (50% offshore offers opportunity). In Q2, Cyient had 12.5% (adj.) Services margins (15.3% in FY22).

DLM to be growth driver ahead, closes large deals in Q2. Cyient has not seen growth in DLM in the last three quarters. However, improvement is likely as it has signed large orders in Q2. TTM order intake in Q3 FY22 was $150m, which came down to $104m in Q1. However, in Q2, it rose to $189m, with Q2 intake of $118m. This will accelerate growth to a ~17% FY23-25 CAGR. The company has decided to carve out this division to capture better scale-up opportunities and sharpen management’s focus on the Services division. DLM’s EBITDA margins are likely to be ~11-12%.

Buy, with unchanged target of Rs.1,030. The stock quotes at 12x FY25e EPS of Rs.68, attractive, given expectations of rising organic growth, potential value creation opportunities in the DLM carve out, and after factoring in some risks due to the company’s acquisitive nature. Cyient is currently net-debt, which restricts its ability to wade through in a tough environment. Therefore, we value the stock at 15x FY25e EPS. Risk: M&A-integration-related.

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