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Revenue growth remains strong

* Cyient DLM (CYIENTDL) reported another quarter of strong revenue growth. Its revenue jumped ~30% YoY in 4QFY24, fueled by significant traction from the Defense (+78% YoY) and Aerospace (+52% YoY) verticals. However, EBITDA margin contracted 100bp YoY to 10.5%, primarily due to the increase in SG&A expenses.

* We broadly maintain our FY25/FY26 EPS estimates. Reiterate BUY with a TP of INR840.

Margin contracts YoY due to higher SG&A expenses; likely to improve from hereon

* CYIENTDL’s consolidated revenue surged ~30% YoY to INR3.6b in 4QFY24 (est. of INR3.8b), primarily driven by the Defense/Aerospace/Med-Tech verticals with ~78%/52%/26% YoY growth. Conversely, Industrial declined ~57% YoY due to lower sales to a key client.

* The order book stood at ~INR21.7b as of 4QFY24 (down 5%/11% QoQ/ YoY). The muted 4QFY24 order book was due to lumpiness in the order book conversion, which is expected to be converted in FY25.

* EBITDA margin contracted 100bp YoY to 10.5%, primarily due to the increase in employee expenses (at ~9.9% of sales vs. ~9.6% in 4QFY23), as the company invested in strengthening the management team by hiring CXOs. This, coupled with ESOP-related expenses in 2Q/3QFY24, elevated the cost run rate. EBITDA grew 19% YoY to INR380m (est. of INR398m).

*  Adjusted PAT jumped 81% YoY to INR227m (est. of INR238m), supported by high other income of INR83m in 4QFY24.

* For FY24, CYIENTDL’s revenue/EBITDA/Adj. PAT grew 43%/26%/93% YoY to INR11.9b/INR1.1b/INR612m. Net cash outflow stood at INR705m vs. cash inflow of INR540m in FY23, while net debt declined 61% YoY to INR919m as of Mar’24.

Highlights from the management commentary

* Guidance: Management is targeting a 30% revenue CAGR over the next three years with an improving margin trajectory. CYIENTDL’s RoCE is likely to reach 15% in a couple of years and ~25% over the next five years.

* Management is expecting an order win in 1QFY25, which will significantly increase the order backlog. The orders will be from existing as well as new logos added during FY24.

* Working capital: The company is aiming to reduce NWC days to 90 from 100 in FY25, by managing its inventory holding period, despite declining capital advances going ahead led by a lower order backlog from BEL (USD55m as of Mar’24 vs. USD95m as of Mar’23).

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, aided by its strong core competencies and high technical capabilities.

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

* We estimate CYIENTDL to report a revenue/EBITDA/Adj. PAT CAGR of 33%/49%/68% over FY24-26.

* We broadly maintain our FY25/FY26 EPS estimates. Reiterate BUY with a TP of INR840 (premised on 38x FY26 EPS).

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