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Our Take:

Cyient (formerly known as Infotech Enterprises Ltd) is witnessing continued opportunities in the communication space due to increasing investments in broadband networks across the globe especially in North America and Europe. It also won a major multiyear deal in Q2FY22 from a UK client to accelerate broadband deployment. Cyient expects demand from mining sector in H2FY22 as mining activity remains strong. Besides, the growth opportunity could continue in medical devices and mining segment for the next two to three years; it has guided for 20%+ growth in medical devices segment. This was mainly driven by the demand for their digital engineering services for Imaging Equipment, IVD and Connected Care products.

Cyient reported order intake in Q2FY22 at US$ 156 mn, up by 22.4% QoQ. The company won 6 large deals with total contract potential of ~US$ 63.5 mn (4 from services, 1 from DLM and 1 composite B2S deal). The company expects the commercial aviation to improve including air traffic, and that will result into significant growth by H2FY22 and growth in communication vertical could continue. Aviation as a segment comprises of 1/3rd of Cyient revenues. We expect to see growth momentum in verticals such as Communications, Utilities, Semi-conductor, Automotive, Medical Devices, and Mining for the next two to three years. Moreover, the company expects an opportunity on both consulting and digital transformation for natural resources, and energy and industrial products and utilities. We expect that the company will continue to invest in key growth areas such as digital, embedded software, geospatial, and networks. As per the management, ER&D as a space is at an inflection point and has been witnessing strong demand from digital transformation, hyper-connectivity, 5G. Supply chain disruption in Semiconductor industry is also an opportunity for Cyient as it is helping clients manage efficient sourcing of supplies. Cyient is likely to benefit from huge opportunities which has been evolving due to the structural shift in the engineering space post emergence of need of an alternative to China.

The company expects to grow double digit in FY22E, with growth continuing in Q3FY22, DLM growth will be in the range of 15 to 20%. DLM revenue drop in Q1 is seasonal and for the full year, DLM could grow about 20%. For the full year margin could improve by roughly 200 bps. In terms of margins, we expect the company to post a healthy improvement in FY22E and FY23E led by various cost rationalisation measures undertaken by the company.

On 23 Nov, 2020, we had initiated coverage on Cyient Ltd and recommend to buy the stock in the Rs 405-409 band and add further on dips to Rs. 372-376 band for base case target of Rs 439 and bull case target of Rs 488. Given healthy growth outlook and strong set of numbers in Q2FY22, we have now revised earnings and increased target price for the stock.

Valuation & Recommendation:

Cyient offers niche products and process engineering services in domains such as Transportation (Aerospace & Railway), Communication, Utilities, semiconductors etc. Cyient has also developed DLM business to impart system integration and prototyping capabilities in Cyient's engineering services and it provides design-to-production solutions to its clients. Company specializes in Engineering, Design Led Manufacturing (DLM), Network Engineering Operations, IT Service Management, Data Management, Geospatial Solutions, Big Data Consulting, IoT/M2M and Advanced Analytics.

Cyient’s focus on large deals, client mining, strong relationship with clients, healthy order book and timely acquisitions to support its product solutions profile could result in healthy revenue trajectory in coming years. This, coupled with recovery in aerospace division and healthy deal pipeline in DLM bodes well for revenue growth. ER&D segment in India is on a structural upmove and Cyient being one of the key players could benefit out of it. Also the worst phase of commercial aerospace is over; from here on, there should be gradual pick-up, led by Avionics upgrades and MRO revival.

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