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Strong 3Q deal wins positive for FY25E growth

-      Cyient (CYL) reported 3QFY24 DET business revenue growth of 1.1% QoQ in CC, above our estimate of flattish growth. 3Q growth was led by Sustainability, up 8.2% QoQ in CC, while Transportation and New Growth Areas were weak, down 2.2% and 3.4%, respectively. The normalized EBIT margin for the DET business came in at 16.0%, 20bp below our estimates. Management lowered its FY24 CC revenue growth guidance to 13.0-13.5% (from 15.0% earlier), which was in line with our expectations, given the steep ask rate for 4Q. CYL also narrowed its guidance for EBIT margin, which is guided to improve by 200-250bp now (vs. 150-250bp earlier). This was also in line with our expectation.

-      The service order intake was strong at USD297.3m, growing 13% YoY (including acquired entities). The company signed eight large deals in 3Q, with a total contract potential of USD136.8m, which was at an all-time high. 

-      While the lowering of topline guidance was disappointing, it was on expected lines given the tough macro environment. This was also indicated by the management, especially the adverse impact on decision-making, and execution cycles. The company also expects its FY25 growth to be back-ended, with expectation of a macro recovery to aid growth. Considering the investments in restructuring and cost rationalization initiatives, management was confident of delivering sustainable double-digit growth even over the long term.  

-      On EBIT margin front, the 3Q performance missed our estimates by 20bp QoQ. Despite the miss, the current margin run-rate suggests a comfortable path to the top end of its guidance band of 200-250bp YoY improvement. Given that the company has overachieved its guidance in 3Q itself, the risk on margin guidance remains on the upside. We expect the company to deliver an FY24 EBIT margin of 16.1% (+240bp YoY). This should help DET deliver an FY23-25 INR PAT CAGR of 30%, which we see as attractive.

-      On an SOTP basis, we are valuing its stake in DLM at market valuation with a holding company discount of 25%. We roll forward our P/E-based valuation to FY26E EPS, valuing the DET business at 23x. We broadly keep our FY25/ FY26 consolidated PAT estimates unchanged. Reiterate BUY. Our SOTP-based TP of INR2,400 implies a potential upside of 19%.

Beat on revenue; guidance trimmed

-      DET revenue was at USD 179.2m, up 1.1% QoQ in CC and 0.4% QoQ in USD, well above our estimates of 0.3% QoQ CC.

-      Sustainability led the overall growth up 8.2% CC, while Connectivity was flat; Transportation and New Growth Areas were weak, down 2.2% and 3.4%, respectively.

-      DET margin was at 16.0% (-50bp QoQ/+210bp YoY), a tad below our estimate of 16.2%.

-      The order intake was at an all-time high of USD297.3m (+61.7% QoQ/ +21.9% YoY). CYL won eight large deals in the service business in 3Q, with a total contract potential of USD136.8m.

-      Adjusted PAT, at INR1,727m, was flat QoQ and up 17.3% YoY.

-      Reported PAT (DET) was at INR1,341m, down 4.6% YoY due to settlement of the civil class action antitrust lawsuit for an amount of USD7.4m. CYL would utilize the insurance amount towards this settlement.

Key highlights from the management commentary

-      Management continues to see macro challenges due to the economic slowdown in key geographies led by higher interest rates and elevated inflation that are making its customers more cautious towards spending, although in selected verticals.

-      CYL is also seeing some green shoots in a few verticals. The company expects that some of the spending patterns should return (by the latter half of FY25), as the interest rates start coming down, and inflation already showing signs of a recovery.

-      Despite this fact, CYL was quite confident to grow in double digits (10-20%) in the coming years. It also remains confident in its ability to sustain margin at the current level.

-      The company made a provision of USD6m towards the lawsuit, which is more than sufficient to meet the future costs for settlement. Additionally, it believes that the lawsuit will not have any adverse impact on the operating performance of CYL.

Valuation and Outlook

-      CYL’s Service segment was hit by near-term challenges, while the long-term prospects still remain constructive. Additionally, the macro recovery should contribute incrementally to its overall growth in FY25E/FY26E.

-      On an SOTP basis, we are valuing its stake in DLM at market valuation with a holding company discount of 25%. We value the DET business at 23x our FY26E earnings.

-      We broadly keep our FY25/FY26 consolidated PAT estimates unchanged. We maintain our BUY rating on the stock on attractive valuations. Our SOTP-based TP of INR2,400 implies an upside potential of 19%.

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