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All-round miss; guidance also sees sharp cut

Cyient logged a weak set of results in Q1, widely missing consensus/our estimate. DET revenue fell 5.4% QoQ (-5% cc) – much lower than our estimate of 1.6% QoQ decline. DET EBITM also, fell by 250bps QoQ to 13.5%, missing our estimate. The mgmt attributed this weakness to longer than anticipated delays, right shift in project execution in Connectivity, and persisting challenges in Rail. Also, guidance was sharply cut to flattish YoY growth in FY25 (implying 3.2% CQGR over Q2-Q4) from high single-digit growth earlier, with H2 expected to be better than H1. We cut FY25E-27E EPS by 5%-13%, factoring-in the Q1 miss, sharp guidance cut, and gradual recovery in DET margin. We cut target multiple to 25x (from 27x), given the sharp guidance cut within only a Quarter raising concerns on growth predictability. A big earnings miss will weigh on the near-term stock performance, but valuations remain fairly undemanding. We retain BUY on Cyient, pulling down our TP to Rs2,300/sh (valuing the DET business at 25x Jun-26E, and the DLM business at 20% discount to the CMP).

Result summary

Cyient DET revenue declined 5.6% QoQ (5% drop in cc terms) to US$169.6mn, well below our estimate of US$176.4mn. All verticals posted a QoQ decline in revenue, with Transportation, Connectivity, Sustainability, and New Growth Areas falling 7%, 7.6%, 2.8%, and 1.6% QoQ CC, respectively. Among geographies, Americas saw an uptick of 1.7% QoQ, while EMEA and Asia Pacific sharply declined 14.3% and 5.4%, respectively. Revenue for Top-5 and Top-10 clients declined 3.3% and 2.5% QoQ, respectively. DET adjusted margin fell by 250bps QoQ to 13.5%, considerably lower than our estimate of 15.6%, impacted by sequential revenue dip and continued investments in sales and technology. Order intake was US$182.7mn in Q1. Cyient also signed 5 large deals with total contract potential of US$52.4mn in Q1. Total headcount declined 2.4% QoQ to 15,083. What we liked: Double-digit growth in the order book (YoY). What we did not like: Weak operating performance; sharp cut in FY25 DET guidance.

Earnings call KTAs

i) Q1 saw a significant number of operational challenges resulting in operational performance clocking weaker than the management’s expectation. However, it is confident of a robust recovery starting Q2 which is expected to continue through the year, aided by double-digit YoY growth in order backlog, top-10 clients seeing doubledigit growth YoY, and strong outlook on core segments. ii) The management expects H2 to be better than H1. iii) Considering near-term growth challenges, the company will come up with revised EBITM guidance for FY25 in Q3, but it is confident of reaching ~16% by Q4. iv) Connectivity declined 7.6% CC QoQ, although Cyient expects strong recovery on the back of robust order intake. v) Sustainability declined 2.8% CC QoQ, and Cyient expects growth to return in coming quarters. vi) New Growth Areas declined 1.6% CC QoQ, with expectations of double-digit growth by FY25-end on the back of highest-ever order book. vii) It closed 5 large deals with total contract potential of US$52mn (2 each from connectivity and sustainability, and 1 from Aero). viii) Cyient has made significant progress on GenAI and won >15 projects in Q1, covering various elements of product data management, engineering, information management, AI assisted PMO, customer experience, customer support, product support. ix) Wage hike is wef Q2. x) Cyient has set up a subsidiary to focus on the ASIC turnkey design and manufacturing, through a fabless model for analog mixed signal chips.

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