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Cyient DLM Limited (CDLM) 1QFY25 quarterly numbers vs. JM est. saw inline revenue but positive surprise on margins. Rev at INR 2.6bn, up 19% yoy and down 29% qoq. Gross Profit margin at 25.3%, up 24bps yoy and 139bps qoq. EBITDA at INR 200mn, flat yoy and down 47% qoq. OPM at 7.8% down 145bps yoy and 276bps qoq ( JM est.: 6.3% at INR 164mn). Employee cost (as % of sales) was 12.7% vs 11.3% yoy vs 9.9% qoq. EBIT at INR 222mn, up 38% yoy and down 45% qoq. Other income (as % of sales) at 3.4% vs 0.4% yoy vs. 2.3% qoq. PAT at INR 106mn, up 98% yoy and down 53% qoq. PAT margin at 4.1% up 164bps yoy and down 218bps qoq (JM est. 2.5% at INR 65mn).

* Strong growth in A&D while industrial declined significantly: As % of sales: Aerospace was 26% vs. 18% yoy, defence was 57% vs 38% yoy and industrials was 5% vs 30% yoy - due to over-inventorization issue by one key client – expect it normalize by H2FY25. Overall, revenue growth slowed down mainly due to (1) temporary supply chain challenges - constraints in procuring raw materials from Israel and (2) Some deliverables shifting to Q2. Medical seg. – has upside potential from new logo added in Q4 + leverage from existing client relationship. Industrial seg. - has one key win that can be its top 3rd or 4th client in the coming years.

* Strategies for Cyient DLM: (1) Focused on the Indian defence segment by expanding sales team (2) expanding manufacturing capacity in Mysore (3) add western based clients (4) building the International Traffic in Arms Regulations (ITAR) capability to expand into the US defense segment (5) key investments in B2S capabilities and (6) exploring new industries – electric vehicle, infra related opportunity or enery, etc.

* Order book at INR 21.3bn: Order book down by c.15% YoY and 2% QoQ, Large deals in pipeline at advanced stage and except order backlog to be build up in H2FY25. Added 4 Global new Logos in Q1: (1) Global semiconductor company, providing electronic manufacturing (2) Won a transfer project from a global Defense OEM (3) Med-tech company with focus on building diagnostic equipment for global market and (4) Large Defense and Aerospace company.

* Guidance: Expect order book to increase in H2FY25. In FY25 – (1) B2S will constitute <5% of rev. (2) FCF is expected to breakeven (3) NWC – 100 days (4) Revenue growth of c.30% CAGR over FY25-28 (5) EBITDA margins to be c.10-11%. In FY26 – expect margin expansion due to revision of low margin defence orders.

* Maintain BUY with TP of INR 910: We remain positive on stock mainly due to (1) revenue being positively impacted by - addition of new logos, global tailwinds and increased offering of value added services (2) margin expansion led by change in mix – increasing share from higher margin segment and customers and higher share of export (3) inorganic expansion on cards – yet to utilise IPO proceeds. Based on these factors, we expect Revenue/EBITDA/PAT CAGR of 30%/45%/62% over FY24-26E with OPM of 10.7%/11.5% in FY25/26E and revised earnings YoY growth of 57%/67% in FY25/26E. We maintain BUY rating with a target of INR 910 (earlier INR 887) at 45x (unchanged) on FY26 EPS.

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