Cyient: Improving consistency and predictability

11 Dec 2023 , 10:12 AM

Recommendation; Buy; Target price: Rs 2,000

 

At its Investor Day in Hyderabad, Cyient (CYL) highlighted how the management’s efforts over the last three years have helped CYL achieve a balanced vertical exposure. A well-diversified portfolio has helped CYL reduce the impact of macro risks and deliver more predictable and sustainable growth. Within the Services business, CYL expects the growth to be driven by Aerospace, Energy and Automotive verticals. CYL’s key moats include long-standing client relationships, domain knowledge and integrated offering of design plus manufacturing. Sales team transition continues with a higher focus on large deals and key accounts — leading to an increasing number of strategic client relationships. Despite the sharp margin improvement in H1FY24 (+350bps YoY), CYL continues to see room for further improvement in margins over the medium term. Analysts of IIFL Capital Services mark-to-market Cyient DLM in their SOTP; maintain their BUY rating on the stock with a 12-month TP of Rs2,000 (was Rs1,920). 

Aerospace, Energy and Auto to drive growth: 

CYL continues to see strong demand momentum from Aerospace (increasing Aircraft order backlogs, need for reducing emissions and increasing MRO), Energy (new energy transition) and Auto (Semi-conductor designing for Software Defined Vehicles) verticals. The strong growth in its order book/pipeline provides visibility for growth over the next 12-18 months. 

Margins have further upside potential: 

CYL Services Ebit margins have risen by 350bps YoY in H1 to 16.3%, driven by levers like increasing efficiency, productivity, automation and rate hikes. However, management continues to see room for further margin expansion over the medium term through levers like increasing offshoring; aspires to reach ~18% Ebit margin over the medium term. For FY24, management continues to expect 150-250bps Services Ebit margin improvement. 

Despite re-rating, valuation at a steep discount to peers: 

Despite the stock price going up 2.5x YTD, CYL trades at 23x FY25 P/E, — 20% discount to the average mid-cap IT peers and 44% discount to the average ER&D peers. Analysts of IIFL Capital Services forecast CYL’s Services business to deliver USD revenue growth of 14% Cagr over FY23-26. Maintain BUY with a 12-month TP of Rs2,000 (was Rs1,920). Key risks: M&A integration, client concentration.