Reduce Cyient Ltd for the Target Rs 900 by Emkay Global Financial Services Ltd
Cyient’s 1Q operating performance was a mixed bag. The company’s DET revenue was down 0.6% qoq (-0.5% CC) at $162.5mn, missing expectations, while DET EBITM expanded by 80bps qoq to 13.2%, beating expectations. Semiconductor revenue grew 148.6% qoq, aided by the Kinetic acquisition (organic: 4.2%), with operational loss of Rs284mn. The management has deferred its earlier DET EBITM target of 15% to 1HFY28 (4QFY27, earlier), citing a slower-than-planned revenue ramp-up even as investments remain on track. Cyient expects growth to return in 2Q and see further acceleration in 2H. The TAO Digital acquisition remains on track, to be complete by Aug-26, and is expected to add $40-50mn revenue in FY27. Management expects the semiconductor business to see breakeven by FY28, given the planned investments in high-power ASSP and amortization charges pertaining to the Kinetic acquisition. The pipeline of the custom ASIC business exceeds $100mn. Cyient’s DLM segment closed 1Q with the highest-ever order book and book-tobill of >1.5x. Factoring in the 1Q performance and change in margin guidance, we cut FY27-29E EPS by 4.1-6.8%; retain REDUCE and TP of Rs900, valuing the DET business at 12x Jun-28E PER and DLM business at 20% discount to its CMP.
Results summary
Cyient’s DET revenue was down 0.6% qoq (-0.5% CC) to $162.5mn, owing to contraction in its energy business. DET EBITM expanded by 80bps qoq, at 13.2%, above our expectation of 12.9%, driven by cost optimization and currency gains. Semiconductor revenue grew 148.6% qoq (organic: 4.2%) to $17.9mn, aided by $10.4mn contribution from the Kinetic acquisition, while losses were down at Rs284mn. Net profit was hit by a one-off M&A expense of Rs140mn in the DET segment. Transportation & Mobility and Networks & Infrastructure grew 3% and 0.3% qoq CC, while Strategic Units declined 8.2%. Order intake for DET grew 5.3% yoy, coming in at $168.2mn. Cyient won 5 large deals in 1Q. Total headcount was down ~3% qoq at 14,175. Attrition declined by 10bps qoq to 14.4%. What we like: Margin beat; continued momentum in Transportation & Mobility. What we do not like: Revenue miss; steep decline in Strategic Units
Earnings call key takeaways
1) Q1 was weighed down by geopolitical uncertainties, evolving demand patterns, and global supply chain disruptions, including the West Asia crisis.
2) Transportation & Mobility growth was broad-based across aerospace, rail, and automotive. Management remains watchful of risks to flying hours due to macro and geopolitical uncertainties as it would affect industry revenue and may lead to spending pressure in Aero.
3) N&I rebounded despite delayed program starts.
4) The strategic-units weakness was concentrated in energy, where a single large project that had driven prior strength has now fully rolled off. The management anticipates the energy business would need one to two more quarters for growth to rebound.
5) TAO Digital acquisition adds data and software-engineering depth across North America, India, Taiwan, and parts of Europe.
6) Capex was higher in 1Q due to a cyclical IT system refresh and project ramp-up.
7) Kinetic-related D&A of ~$12mn on an annualized basis is expected to weigh on Semiconductor breakeven until FY28.
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