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Defense momentum fuels growth trajectory PAT misses estimates due to higher interest cost

* Cyient DLM (CYIENTDL) reported a strong quarter, with revenue growth of ~33% YoY in 2QFY25, led by significant traction in the defense (up 82% YoY) and aerospace (up 20% YoY) verticals. Margins were flat YoY at 8.1%.

* However, the order book continued its downward trend, with 13% YoY/ 7% QoQ decline in 2Q to INR19.8b. The management indicated the trend will change in 4Q, with a healthy order pipeline and the finalization of key deals. We believe the order book will witness an uptick in 4QFY25, factoring in the conversion of orders from new client additions happened over the last few quarters.

* Factoring in the higher-than-anticipated interest cost in FY25 due to an increase in debt, we reduce our FY25E EPS by ~5%, while we increase our FY26E EPS by ~12% considering the recent Altek acquisition (integration from 2HFY25). We retain our BUY rating on the stock with a TP of INR870 (35x FY26E EPS). Margins remain soft due to unfavorable business mix

* Consol. revenue grew 33% YoY to INR3.9b (in line with est.) in 2Q, mainly led by the defense (+82% YoY) and aerospace (+20% YoY) verticals. The order book stood at ~INR19.8b as of 2Q (down 13% YoY and 7% QoQ).

* Margin was flat YoY at 8.1% (est. 8.4%); however, it is still lower than historical margins due to a higher mix of low-margin business. EBITDA grew 34% YoY to INR316m (in line).

* Adjusted PAT grew 6% YoY to INR155m (est. INR197m). Adjusted PAT missed our estimate due to higher interest costs (INR110m vs. est. INR50m) in 2Q as the company took incremental short-term debt to fund the business due to negative cash flow from operations in 1HFY25.

* For 1HFY25, revenue/EBITDA/adj. PAT grew 27%/19%/30% YoY to INR6.5b/INR516m/INR261m. Based on our estimates, implied revenue/ EBITDA growth for 2HFY25 is 58%/74% YoY, led by the integration of the Altek acquisition. Organic growth is likely to contribute to 32% of revenue growth, with incremental growth expected from acquisitions in 2HFY25.

Highlights from the management commentary

* Outlook: The company maintains its guidance of ~30% revenue CAGR. It expects EBITDA margins to reach near to its earlier guidance of double digits, but they will be largely flat YoY.

* Altek’s EBITDA margin and business profile (low volume high margin) is similar to that of CYIENTDL. Accordingly, this acquisition will be EPSaccretive for the company from FY26 (CYIENTDL will incur one-time transaction cost in FY25). The company will have better client proximity and will get access to multiple fortune 500 clients through this acquisition.

* The Middle East conflict is impacting the supply chain of the business. Apart from this, there is no significant impact on the operations, although company is closely monitoring the situation.

Valuation and view

* CYIENTDL witnessed strong revenue growth during the quarter, led by robust traction in the defense segment, while margins remained flat. Going ahead, the growth is likely to accelerate with 2H being seasonally strong for the company. This, coupled with the integration of Altek, will lead to strong financial performance from the company.

* In the medium term, we expect CYIENTDL to sustain its growth momentum, aided by: 1) expected healthy order inflows (from 4QFY25 onward); 2) integration and synergy from the Altek acquisition.

* We estimate CYIENTDL to report a CAGR of 38%/51%/64% in revenue/ EBITDA/ Adj. PAT over FY24-27E. We retain our BUY rating on the stock with a TP of INR870 (35x FY26E EPS).

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