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Growth uninterrupted; another strong quarter

* Cyient DLM (CYIENTDL) reported another strong quarter with a revenue growth of ~50% YoY in 3QFY24, led by significant traction from the Aerospace and Defense verticals. However, margins declined 40bp YoY to 9.2%, primarily due to higher SG&A expenses.

* We maintain our FY24/FY25/FY26 EPS estimates and retain our BUY rating on the stock with a TP of INR830 (35x FY26E EPS).

Higher employee expenses hurt margins

* Consolidated revenue grew 50% YoY to INR3.2b in 3QFY24, primarily driven by Aerospace (~75% YoY growth) and Defense (over 2x YoY growth) verticals.

* Order book stood at ~INR22.9b as on 3QFY24 (flat QoQ) vs. ~INR23.5b as on 3QFY23.

* EBITDA margins witnessed a slight decline of 40bp YoY to 9.2%. This decrease can be attributed to a rise in employee expenses (stood at ~9.5% of sales vs. ~6.6% in 3QFY23). This increase was led by the company’s continued investments in SG&A (strengthening management team by hiring of CXOs) and additional expenses related to ESOPs. EBITDA grew 32% YoY to INR294m (est. of INR292m).

* Adjusted PAT grew 3.2x YoY to INR184m (est. of INR146m), on the back of high ‘other income’ of INR93m in 3QFY24.

* Free cash outflow for 3QFY24 stood at INR342m due to increased working capital requirement (Net working capital of ~118 days in 3QFY24 vs. ~79 days in 3QFY23).

* For 9MFY24, revenue/EBITDA/Adj. PAT 50%/52%/100% YoY to INR8.3b/ INR730m/INR385m. Gross debt as on Dec’23 stood at ~INR2.5b.

Highlights from the management commentary

* Margins: CYIENTDL has completed its investments in SG&A and expects margin improvements from the next quarter (expecting ~10-10.5% in the near term and ~11-12% in the long term).

* Order Intake for 3QFY24 stood at ~USD41.8m (INR3.3b). Further, the company has won new awards (in addition to order intake) worth USD10m, which will be spread over the next three to four years. Average order execution is over 12-18 months.

* Working capital: The company is expecting a decline in inventory and debtors days in 4QFY24. It plans to bring net working capital down to ~100 days in the short term and ~90 days in the medium term.

Valuation and view

* CYIENTDL, being an integrated EMS and solutions provider in the rapidly growing critical end-user industries, is likely to capture its share of the pie on the back of its strong core competencies and high technical capabilities.

* Going ahead, we expect CYIENTDL to sustain its growth momentum, aided by: 1) strong order book, coupled with healthy order inflows; 2) high customer stickiness; and 3) strong promoter heritage.

* We estimate CYIENTDL to report a CAGR of 41%/44%/ 81% in revenue/EBITDA/ Adj. PAT over FY23-26.

* We maintain our FY24/FY25/FY26 EPS estimates and retain our BUY rating on the stock with a TP of INR830 (35x FY26 EPS).

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