IGI Logo

Steady operating performance; ambitious growth ahead

Cyient logged a steady operating performance in DET, in Q2. DET revenue grew 1.0% QoQ (0.5% CC) to USD164.4mn. DET EBITM expanded by 16bps QoQ to 12.2%. The management focuses on a cost optimization program for negating the impact of investments in sales and wage hikes, and expects margin recovery with revenue acceleration. Given such anchors, Cyient continues to target 15% EBITM by Q4FY27. Semiconductor revenue was up 12% QoQ in Q2 and posted operational loss of USD2.7mn, primarily due to weak revenue and significant investment in sales and R&D to build IP. The burn is expected to stabilize next quarter, with the business projected to reach breakeven in FY27. The mgmt expects H2 to be stronger than H1 on both, the revenue and margin fronts, with margin improvement expected to come with revenue uptick, cost optimization, and absence of one-offs. We cut FY26-28E EPS by 1%-5%, factoring in the Q2 results. We maintain REDUCE on Cyient, with TP of Rs1,150, valuing the DET business at 15x Sep-27E and the DLM business at 20% discount to its CMP.

Results summary

Cyient’s DET revenue increased 1.0% QoQ (0.5% QoQ CC) to USD164.4mn and Semiconductor revenue came in at USD6.2mn. DET EBITM grew by 16bps QoQ to 12.2%, despite the second tranche of wage hikes being offset by a cost optimization program. Margin was also impacted by a couple of one-off items – headwind from restructuring cost (200bps) partially offset by insurance reimbursement for legal expenses. Transportation and Mobility grew 3.9% QoQ CC and Networks and Infra grew 3.6%, driven by focused account mining and sales effort, while Strategic Units revenue fell 7.2% owing to holiday season impact in Europe and ramp down of a large program. Total headcount was flat QoQ at 13,634. Attrition inched up by 10bps to 16.8%. The company declared interim dividend of Rs16/share. What we liked: Revenue beat with 2 of the 3 BUs growing. What we did not like: EBITM miss, softness in Americas revenue.

Earnings call KTAs

1) The management believes that although the macro environment is not strong, it has improved vs Q1, as customers have a better understanding of and adapted to the uncertainties seen in that quarter. The management believes that it has entered a phase of stabilization from the macro uncertainties seen in the recent past. 2) The recently carved-out semiconductor subsidiary will deliver intelligent, efficient, and secure end-toend silicon solutions for next-generation systems like data centers, humanoids, industrial automation, and electric mobility, supported by a robust global supply chain. 3) In the semiconductor business, order intake has rebounded to last year’s levels, with ASIC forming 66% of the business and a USD100mn-plus pipeline for the year. 4) Key nearterm milestones for the semiconductor business include consistent revenue growth over the next 4–5 quarters, reaching a USD50mn revenue run-rate and achieving EBIT neutrality in FY27 with a maximum organic investment of USD15mn. 5) The company has strengthened its semiconductor ecosystem through strategic partnerships with GlobalFoundries, Anora, and MIPS, and has onboarded seasoned industry leaders, enhancing their design-to-manufacturing capabilities and supply-chain resilience. 6) Order intake remains strong, with the quality of the order book improving and new business as a share of total rising from 21% to 27% QoQ. Order book growth is also notable from a technology perspective, and includes Digital and AI. 7) Cyient won a major digital transformation project for an aircraft OEM's manufacturing plant, beating several tier-1 IT competitors. 8) The company has appointed a new Head of Corporate Development and Strategy, to ensure alignment between strategy and inorganic investments. 9) The company implemented merit-based salary increases for 90% of associates over the last two quarters, with the remaining employees to be covered in the current quarter. 10) In the semiconductor business, over half of the BU leaders have joined their roles in the last 6 months, with several new C-level executives having joined recently. 11) Aero and Transport is still mainly MRO, with limited design work for small jets, while digital and tech integration offer cross-selling opportunities. 12) The company added seven new logos of strategic importance across the industry. 13) The Strategic Units cluster saw a planned decline due to Europe’s holiday season and the ramp-down of a large program, partly continuing into Q3. 14) Cyient’s core strength remains fiber design and rollout – a stable business with healthy investments. The real growth focus is on wireless network automation and autonomy, leveraging Celfinet’s capabilities and the VISMON AI platform to help carriers advance toward higher levels of network autonomy. 15) Transportation is expected to sustain consistent and significant growth over the next 4– 6 quarters. For Network and Infrastructure, the primary goal continues to be to shift the service mix from wireline to wireless while driving overall growth, with strong confidence in the transportation segment. 16) The company’s transformation agenda rests on three pillars— marketplace impact, accelerated adoption of digital and AI technologies, and organizational effectiveness—with initiatives like focused sales, streamlined responsibilities, and key account mining already showing early positive results. 17) The company’s key accounts continue to show strong revenue growth, rising 3% QoQ and 11% YoY, driven by focused account mining.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354