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Broad-based miss on revenue and profitability

Decent vertical exposure undermined by execution challenges

* CYL reported a broad-based decline in revenues across verticals in 1QFY25. DET business revenue declined 5.0% QoQ in CC vs. our estimate of a 1.5% fall. EBIT margin of the DET business declined 20% QoQ/19% YoY to 13.5%, below our estimates. Service order intake was muted at USD182.7m, down 5.5% YoY. PAT declined 19% QoQ/17% YoY to INR1410m (est. INR1,860m).

* CYL’s underperformance in the recent past is surprising, considering that its portfolio, which has been assiduously realigned by the current management in the past three years, stands to benefit from several sectoral tailwinds. Its presence in high-growth areas (such as aerospace, defense and sustainability) and its investments in new growth areas (such as autos) should ideally have led to a much smoother revenue runway. While the remainder of the year implies a CQGR of 3%+,

we believe a flat YoY revenue growth trajectory is disappointing.

* We expect weak 1Q results to weigh on CYL’s performance, but we believe that if CYL can fix execution issues, it is aligned to the right vertical exposures and has potential to grow in high-single digits in FY26.

* EBIT margin missed our estimate as it was affected by the revenue decline. We expect the company to now be slow in ramping up its margins from the current levels. This should help DET deliver a CAGR of 30% in INR PAT over FY23-25, which we see as attractive.

* Based on SOTP, we value the company’s stake in DLM at a market valuation with a holding company discount of 20%. In our P/E-based valuation, we value the DET business at 22x FY26E EPS. We lower our DET PAT estimates for FY25/FY26 by 15%/5%.

* We maintain our BUY rating on the stock, mainly owing to undemanding valuations and exposure to structurally strong verticals such as aerospace and sustainability. Our SOTP-based target price of INR2070 implies an upside of 10%. Beat on revenue growth, guidance trimmed

* DET revenue stood at USD169m, down 5.0% QoQ CC vs. our estimate of a 1.5% decline.

* Sustainability revenue declined 2.8% CC, while Connectivity revenue was down 7.6% QoQ in CC terms.

Transportation (down 7%) and new growth areas (down 1.6%) were also weak.

* DET margins came in at 13.5% (est. 16.4%), down 250bp QoQ/250bp YoY.

* The order intake was muted at USD182.7mn, down 5.5% YoY.

* PAT declined 19% QoQ/17% YoY to INR1410m (est. INR1,860m).

Key highlights from the management commentary

* Revenue and Project Delays: DET revenue declined by 5.0% QoQ and 3.6% YoY in constant currency due to project delays in the Connectivity segment and ongoing sectoral challenges in Rail.

* Outlook: The company anticipates a strong recovery in 2Q and expects EBIT margins to reach 16% by 4Q. Revenue growth for FY25 is expected to be flat YoY.

* Deals and Order Book: Won five large deals worth USD52.4m in Q1, with a strong order backlog, particularly in Connectivity and new growth areas.

* Vertical Performance: Transportation segment saw a 7.0% QoQ decline, mainly due to Rail challenges, while Aerospace showed robust demand. Connectivity and Sustainability segments are expected to recover strongly.

* Operational and Hiring Updates: Broad-based headcount additions across verticals; operational challenges addressed; and 15+ projects in the GenAI segment. New semiconductor subsidiary under DLM and DET businesses is expected to start operations by year-end.

Valuation and view

Based on SOTP, we value the company’s stake in DLM at market valuation with a holding company discount of 20%. In our P/E-based valuation, we value the DET business at 22x FY26E EPS. We lower our DET PAT estimates for FY25/FY26 by 15%/5%. We maintain our BUY rating on the stock, mainly owing to undemanding valuations and favorable vertical exposures. Our SOTP-based target price of INR2,070 implies an upside of 10%.

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