Reduce Cyient Ltd for the Target Rs.1,230 by Emkay Global Financial Services Ltd
Cyient reported weak operating performance in DET in Q1. DET revenue degrew 0.9% QoQ (-1.5% QoQ CC) to USD162.7mn. DET EBITM declined by 63bps QoQ to 12%, primarily due to volume impact and the first tranche of wage hikes. The management is focused on a cost optimization program to negate the impact of investments in sales and wage hikes and expects margin recovery with revenue acceleration. With these anchors, it continues to target 15% EBITM in the medium term. The carve-out process for Cyient Semiconductors is now complete and this business is now a fully owned but independently operated subsidiary, with its own leadership, management team, and organizational structure. Semiconductor revenue declined 37% QoQ in Q1 and posted operational loss of Rs182mn. The management expects revenue to rebound to ~USD10mn quarterly run rate, with margins returning to DET levels (~12%) by Q3. Given the new structure, our estimates are not comparable with the Q1 reported numbers. We cut FY26-28E EPS estimates by 5%-9%, given Q1 miss. We maintain REDUCE, cutting our TP by ~7.5% to Rs1,230, valuing the DET business at 16x Jun-27E and the DLM business at 20% discount to its CMP.
Results summary Cyient’s DET revenue increased 0.9% QoQ (-1.5% QoQ CC) to USD162.7mn and Semiconductor revenue came in at USD5.5mn. DET EBITM contracted by 63bps QoQ to 12% owing to volume impact and first tranche of wage hike. Except Transportation and Mobility (1.2% QoQ CC), both the other verticals posted a sequential fall in revenue. Networks and Infra and Strategic Units revenue de-grew 5.2% and 2.3% QoQ CC respectively. Total headcount declined by 1.1% QoQ to 13,623. Attrition inched up by 40bps to 16.9% (vs. 16.5% in Q4). What we liked: Transportation and Mobility revenue growth, Healthy deal pipeline. What we did not like: Operating performance miss.
Earnings call KTAs 1) Customer decision-making was slower in Mar/Apr due to increased uncertainty but improved in May/Jun. 2) The business is now organized into three segments: i) Transportation and Mobility, combining the former aerospace and rail business with automotive and mobility; ii) Networks and Infrastructure, comprising the previous connectivity, utilities, and geospatial businesses; and iii) Strategic Units, which include healthcare and life sciences, mining and minerals, and energy. 3) The company added 14 new logos in Q1, across all industries, and has a strong pipeline of opportunities. It has 36 key accounts, which grew by 4% QoQ and 11% YoY in Q1. 4) It is witnessing strong momentum in new deal wins, with non-renewal business playing a vital role in overall order intake. 5) Network and infrastructure segments are expected to take a few quarters to stabilize before entering a growth phase. 6) Two of the three strategic business units reported growth; one achieved double-digit growth…(contd)…
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