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Recovery gaining traction

Better 2Q execution lifts confidence, but broad-based growth yet to be seen

* Cyient’s (CYL) DET business reported 2QFY27 revenue of USD174m, up 7.5% QoQ in constant currency (CC) terms, above our estimate of 4.3% QoQ CC. Transportation & Mobility grew 4.5% QoQ CC, Network & Infrastructure remained flat, and Strategic Units declined 1.5% QoQ CC. Adj. EBIT margin of DET business at 14.2% was above our estimate of 13.2%. DET adj. PAT was up 8.7% QoQ/12% YoY at INR1,536m (est. INR1,618m).

* For 1HFY27, DET revenue/adj. EBIT grew 13.2%/28.5% YoY, while adj. PAT fell 1.8% YoY. In 2HFY27, we expect DET revenue/EBIT/adj. PAT to grow by 25.5%/40.3%/33.2% YoY. We reiterate our Sell rating with our SoTP-based TP of INR1,020, implying an 11% potential downside

Our view: We turn incrementally positive; organic growth still a key monitorable

* We are turning incrementally positive on the business; organic growth remains the key monitorable: DET revenue grew 1.6% QoQ CC organically, ahead of our estimate of 0.5% (reported growth of 7.5% includes TAO Digital). Customers resumed work that had been paused following the Middle East conflict faster than expected, while in-quarter execution and book-and-bill were also better than anticipated.

* DET order intake grew 21% YoY to USD158m, with net-new deals accounting for 34-37% of intake. While management is confident of organic growth in 2HFY27, we would like to see this translate into a more broadbased recovery in revenue.

* Margins ahead of estimates; cost actions to offset wage hikes: DET EBIT margin improved 107bp QoQ to 14.2%, ahead of our estimate of 13.2%, supported by better execution and cost optimization. Management expects wage hikes to be implemented in two phases across 3Q and 4Q, with cost optimization expected to largely offset the impact.

* Transportation remains the key growth driver; recovery in other verticals is gradual: Transportation & Mobility grew 4.5% QoQ CC, supported by aerospace aftermarket and lifecycle services, along with continued strength in automotive and mobility. Network & Infrastructure was broadly flat, with project completions and weakness in utilities weighing on growth.

* Strategic Units declined 1.5% QoQ, with management indicating that the business is near the bottom and could see a recovery. Overall, growth remains concentrated in Transportation, while recovery in other verticals is still evolving.

* Order intake and TAO expand growth visibility, but conversion remains key: DET reported a record order intake of USD158m. A framework agreement with a global consumer products company offers additional potential but is not included in order intake until individual statements of work are signed. Some ramp-up is expected in 2HFY27, though full potential could take 1-2 years to materialize.

* TAO Digital adds capabilities in data engineering, platform software and AI, with management expecting the acquired business to generate revenue of USD100- 110m over the next 12 months. We believe these factors provide incremental growth opportunities, but organic growth and conversion of order wins into revenue remain the key monitorables.

Valuation and changes to our estimates

* We turn incrementally positive on CYL following the better-than-expected revenue and margin performance, along with healthy order intake. We increase our FY27/FY28 EPS estimates by 1.9%/2.6%, factoring in the 2Q beat and a better outlook, while organic growth remains the key monitorable.

* We increase our DET valuation multiple to 12x FY28E EPS from 10x earlier, factoring in improving execution, better margin performance and a potential recovery in organic growth in 2HFY27. However, we would like to see this translate into more broad-based revenue growth. Our SoTP-based TP stands at INR1,020, implying an 11% downside.

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