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Headwinds persists, yet sees healthy orders

Cyient Ltd., is one of the leading players in the IT-enabled services space, providing services to the Engineering Research and Development segment.

* In Q1FY25, Cyient reported revenue decline of 0.6% YoY on delaying of projects. DLM segment revenue surged by 18.8% YoY, attributed to defense & aerospace, whereas DET softened by 3.5% YoY.

* EBITDA margin declined by 700bps YoY to 15.8% due to an increase in sales & marketing costs. Simultaneously, PAT declined by 14.4% YoY at Rs.143.9cr, due to a decrease in other income.

* The company secured five large deals with a total value of $52.4 million.

* Despite multiple headwinds, we foresee easing in supply chain issues, ramp up in demand, expecting an increase in orders from Sustainability and Transportation, and a rebound in Connectivity & New growth areas segments to drive future revenue.

* We expect earnings to grow by a CAGR of 14% during FY24–26E. Therefore, we retain our rating to Accumulate with a revised target price of Rs. 1,922 based on SOTP valuation.

Supply chain challenges & delaying projects deters topline growth

In Q1FY25, Cyient Group reported a 0.6% YoY reduction in Rs. 1,675.7cr, primarily due to a decline in Cyient Digital, Engineering & Technology (DET) on the delaying of certain projects, which impacted revenue. While design-led manufacturing (DLM) reported a robust quarter. The revenue of Cyient DET declined by 3.5%YoY Rs.1,417.8cr, led by Connectivity & Transportation segments due to supply chain issues in the aerospace business. Revenue increased in the sustainability and new growth areas by 8.1%/2.9%, respectively, in dollar terms. While the revenue from DLM grew by 18.8% YoY to Rs.257.9cr. The revenue in DLM is mainly supported by Defence (79.6%) YoY and Aerospace (78.1%) in YoY terms, While the Industrial and MedTech areas witness a YoY degrowth of 81.6% and 16.1%, respectively, in dollar terms, The DET order intake stood at $182.7million, down 5.4% YoY, and closed 5 large deals with a total contract size of $52.4million, which is from Connectivity, Sustainability, and Aerospace. EBITDA margin declined by 700bps YoY to 15.8% due to an increase in sales, general & administration expenses. However, PAT declined by 14.4% YoY at Rs.143.9cr, due to an decrease in other income. The total headcount decreased by 1.45% YoY to 15,083, The attrition declined 700bps to 16% on a YoY basis.

Focusing on new growth trajectories.

The company has a strong order intake in Connectivity and New growth areas during the quarter and expects improvement in converting orders in Q2FY25, and EBIT margins will normalise in the range of 16% in FY25E. While growth in Sustainability is expected to continue. The company received more than 15 Gen AI projects in the last quarter, and more deals are expected in FY25 and the company is developing an ASIC (Application-Specific Integrated Circuit) for an intelligent neural system with advanced electronics, designed for specific applications instead of general-purpose use, which is expected to be a significant benefit in terms of revenue and capability. Through DLM, the company is looking to strengthen its position in electronic manufacturing services (EMS) by suitable acquisitions and focussing to enter the EVs segment.

Valuation

Despite multiple headwinds, we foresee easing in supply chain issues, ramp up in pent up demand, expecting an increase in orders from Sustainability and Transportation, and a rebound in Connectivity & New growth areas segments to drive future revenue. We expect earnings to grow by a CAGR of 15% during FY24 –26E. Therefore, we retain our rating to Accumulate with a revised target price of Rs. 1,922 based on SOTP valuation.

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