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Q3 beat but with macro-led uncertainty

Q3 beat led by robust large deal wins

Cyient (CYL IN) posted better-than-expected Q3, with 1.1% QoQ CC growth versus our estimates of 0.2%. This was led by solid growth in sustainability business. On consolidated basis (DET+DLM business), it reported less-than-expected performance on both revenue and margins. This was due to lower-than-expected performance in DLM business (10% QoQ growth versus our estimates of 15% QoQ growth). CYL has won eight large deals in DET, with TCV of USD 136.8mn in Q3, which continues to vouch for demand.     

Growth guidance trimmed, implying 0.7-2.9% growth for Q4   

CYL has cut DET FY24 revenue guidance to 13-13.5% YoY in CC terms from earlier guidance of 15-20% YoY CC, especially due to weakness in Semiconductors/Hitech, and Communications. This guidance implies Q4 growth in the range of 0.7-2.9% QoQ. 

Margin guidance improves for FY24, implying resilient execution

CYL increased its operating margin guidance by 50bps to 200-250bps for FY24. In Q3, its consolidated margin contracted by 30bps at 14.3% versus our and street expectations of 14.9% each. Margin declined 50bps sequentially due to seasonal weakness, wage hikes adjustment and investment for future growth levers. CYL added 237 employees in Q3, in line with other ER&D peers.

Valuations: Reiterate BUY; new TP INR 2,430  

The management indicated robust growth to continue in Sustainability with steady growth in Transportation. Expect revival of demand in Communications and Semiconductors from Q2FY25, but automotive spend may ramp-up from Q1FY25. After factoring in Q3 and near-term soft demand commentary, we trim our EPS estimates by 3.8%/3.6% for FY25E/26E. However, we continue with BUY with a trim to TP, to INR 2,430 (earlier INR 2,450), on Dec-25E EPS of INR 99. In FY23-26E, expect USD revenue/EBIT/EPS CAGRs of ~11%/21%/20%. Key risks are limited success in realizing acquisition-based synergies and demand slowdown in FY25 for Aerospace.

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