Buy Cyient DLM Ltd For Target Rs. 960 By JM Financial Services
Cyient DLM Limited (CDLM) 2QFY25 quarterly numbers vs. JM est. saw inline performance. Rev at INR 3.9bn, up 33% yoy and 51% qoq. As % of sales: Aerospace was 20% vs. 22% yoy, defence was 66% vs 49% yoy and industrials was 7% vs. 20% yoy. GP margin at 20.6%, down 18bps yoy and 467bps qoq. EBITDA at INR 316mn, up 34% yoy and 58% qoq. OPM at 8.1% flat yoy and up 37bps qoq. Other income (as % of sales) at 1.8% vs 3.2% yoy vs. 3.4% qoq. PAT at INR 155mn, up 5% yoy and 46% qoq. PAT margin at 4% down 105bps yoy and 14bps qoq.
* Strong growth in Defence while industrial declined significantly: On YoY basis, Aerospace grew 21%, Defence grew 80%, Medtech 15% and Industrial de-grew 53% - due to over-inventorisation issue by one key client (will need 2 more quarters for recovery and order book to pick up). Overall, volumes improved. EBITDA margins impacted due to execution of large low margin orders. In Q2, supply chain challenges continued (both inward and outward) led by Middle East conflict – Delay and scheduling is having a bigger impact than cost. NWC days at 127 days vs. 111 days yoy and 171 days qoq. Debt: Borrowed funds for M&A requirements.
* Acquisition of Altek Electronics: An EMS company with focus on industrial (46%), medical (50%) and defence (2%). CY23: Revenue of USD 37.2mn and EBITDA Margin at 10.5%. Basis of acq: (1) Access to International Traffic in Arms Regulations (ITAR) work for US Defense (2) Increased B2S capabilities (3) Access to multiple fortune 500 clients and (4) assist in diversification by industry type. Will add revenues from Q3FY25 and will be EPS accretive from FY26 - We are factoring revenue from FY26.
* Order book at INR 19bn: Mix: 60% export and 40% domestic. Order inflow at INR 2.4bn up 207% yoy while order book down by 13.5% YoY. Expect positive trend from H2FY25. Added 2 Global new Logos in Q2: (1) Premier defense PSU in India - specializing in missile systems and allied defense equipment (2) Global oilfield services company. Order pipeline is healthy.
* Guidance: One time acquisition cost to be reported in Q3FY25. Expect order book to increase in H2FY25. In FY25 – (1) expect minimum flat yoy EBITDA margin (2) c.30% CAGR organic growth over 3-5 years. and (3) NWC – 90/100 days (customer advances to reduce). From FY26, mix of rev shall change. Sustainable domestic share to be c.30%. Looking for acquisition in North America (NAM) and the Europe, Middle East, and Africa (EMEA).
* Maintain BUY with TP of INR 960: 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) diversifying revenue via inorganic expansion. Based on these factors, we expect Revenue/EBITDA/PAT CAGR of 44%/54%/66% over FY24-26E with OPM of 9.7%/10.6% in FY25/26E and revised earnings YoY growth of 38%/101% in FY25/26E. We maintain BUY rating with a target of INR 960 (unchanged) at 45x (unchanged) on FY26 EPS
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