Sell Cyient Ltd For Target Rs.790 by Motilal Oswal Financial Services Ltd
Key takeaways from CYL Investor Day Lifecycle engineering and semi-conductor are seen as the two next big opportunities
We attended Cyient’s (CYL) Investor Day. The company highlighted strategies for all the three businesses and is seeing potential within lifecycle engineering for the DET business and the semi-conductor business as a whole. The company discussed TAM for each of these businesses and has based its own ambitious revenue growth and margin aspirations as it bets on these areas. CYL believes that continuous investments and R&D are needed to create an IP moat and solutions, which eventually lead to business value creation. Other topics of discussion included:
1) How the industry has changed from cost-led outsourcing to value-based partnerships
2) capital allocation across the three businesses
3) new addressable markets and regions
4) strategy for FY27 and FY28
5) aspirations for FY29 and FY31
6) M&A strategy. While we are excited with the new focus areas and addressable markets for lifecycle engineering and semiconductor, we will wait for better evidence and execution before we turn constructive. We reiterate our Sell rating with a TP of INR790 (based on 25x CY27E EPS).
Market value, aerospace, and M&A
* Strong portfolio alignment: CYL owns 74% of Kinetic Technologies with an option to increase its stake, while retaining ~52% of Cyient DLM and a majority position as DLM accesses independent capital.
* Significant embedded value: Management cited market values of ~INR30b for Cyient DLM, ~USD500m for Cyient Semiconductor, and ~INR95b for Cyient Ltd., highlighting the potential value of its portfolio businesses.
* Aerospace growth remains volume-led in the near term: With Boeing not expecting a new commercial aircraft design until 2030, near-term growth is expected from rising production volumes and servicing the existing aircraft ecosystem.
* Regional aircraft provides an incremental opportunity: Embraer and Bombardier are developing smaller-aircraft programs, in which CYL is participating.
* CYL intends to prioritize organic capability building first, with smaller bolt-on acquisitions focused on filling strategic gaps; larger deals are likely only after integration and capital replenishment.
* M&A will remain targeted and capability-led, with acquisitions used where they accelerate strategic priorities. Tower Digital is expected to be debt-funded at attractive rates and EPS-accretive, while organic investments remain focused on talent, technology, offerings, sales, and delivery capabilities.
Valuation and view
* We reiterate our Sell rating on CYL as the recovery continues to remain backended and we expect FY27 organic growth to remain broadly flat. While we are excited about the semiconductor opportunity, we will wait to see some proof of concept before giving a considerable valuation to the business.
* Based on our SoTP valuation, we continue to value the DET business at 9x FY28E EPS, reflecting gradual margin improvement, a muted organic growth outlook, and continued execution risk. We also continue to apply a holding company discount to the value of the DLM stake. Our SoTP-based TP of INR790 implies a 19% downside. We, therefore, reiterate our Sell rating.
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