Buy Cyient DLM Ltd For Target Rs.700 by Motilal Oswal Financial Services Ltd
Slowdown in order flows dampens growth visibility
Earnings below our estimates
* Cyient DLM’s (CYIENTDL) 3QFY25 consolidated revenue/EBITDA grew by ~38%/23% YoY. However, EBITDA missed our estimates as margins declined 90bp YoY due to a high mix of low-margin business (BEL order execution). Standalone revenue (excl. Altek – recently acquired) grew only ~11% YoY in 3QFY25.
* The order book continued its downward trend, down 19% YoY/6% QoQ in 3Q to INR18.5b (consol. order book at INR21.4b, including Altek order of INR2.9b). Order book growth remains a key concern amid a delay in ordering from some clients; however, the conversion of orders from new clients added over the last few quarters and ongoing discussions with some large global potential customers can boost growth visibility.
* We reduce our earnings estimates for FY25/FY26/FY27 by 14%/25%/26%, due to softness in order flows (lack of BEL orders), lower margins due to unfavorable operating leverage, and uncertainty about large order flows in the near term. We retain our BUY rating on the stock with a TP of INR700 (31x FY27E EPS).
Margins remain soft due to unfavorable business mix
* Consol. revenue grew 38% YoY to INR4.4b (in line with est.) in 3QFY25, mainly led by the medical technology (+2.1x YoY), defense (+33% YoY) and aerospace (+14% YoY) verticals. The order book stood at ~INR21.4b as of 3QFY25 (down 7% YoY/up 8% QoQ).
* Adj. margin contracted 100bp YoY to 8.1% (est. 9.6%). Adj. EBITDA grew 23% YoY to INR361m (est. INR433). EBITDA was adjusted with one-time M&A integration expenses of INR80m in 3QFY25. Adjusted PAT declined 8% YoY to INR170m (est. INR265m).
* In 9MFY25, revenue/EBITDA/adj. PAT grew 32%/20%/12% YoY to INR10.9b/INR878m/INR429m. In 4QFY25, we estimate consol. revenue/EBITDA/adj. PAT growth of 38%/47%/48%, led by the integration of Altek. Standalone growth is likely to be 11%/21%/29%.
Highlights from the management commentary
* Outlook: The company maintains its guidance of a ~30% revenue CAGR over the next three to five years; however, FY26 consol. revenue growth would be in mid-teens due to the lack of BEL orders. EBITDA margins may remain flat in FY25, with margin expansion expected after 1HFY26.
* Altek: The emphasis on local manufacturing in the US, aided by favorable regulations introduced by the new administration, offers strong growth opportunities for Altek, which will bolster the company's manufacturing capabilities and expand its footprint in the US market.
* Order book remains under pressure as consumption growth by major clients outpaces new order growth; however, management anticipates strong traction in the North American markets going ahead, with the company already in talks with three big global players.
Valuation and view
* Going ahead, we expect the growth momentum to slow down in the near term due to the lack of BEL orders and a delay in order flows from existing and new clients. However, the integration of Altek, should drive healthy financial performance due to synergy benefits and industry tailwinds.
* For the medium to long term, the conversion of orders from new clients added over the last few quarters and ongoing discussions with some large global potential customers should boost growth visibility.
* We estimate CYIENTDL to report a CAGR of 27%/34%/43% in revenue/ EBITDA/adj. PAT over FY24-27E. We retain our BUY rating on the stock with a TP of INR700 (31x FY27E EPS).
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