Q1FY24 Review: Cyient: Margin guidance raised on superior execution

26 Jul 2023 , 11:43 AM

Cyient’s (CYL) Q1FY24 Services revenues grew 0.3% cc QoQ — tad below IIFLe. Within verticals, growth was led by Sustainability (+4.5% cc QoQ) and Transportation (+3.2%) segments. DLM was impacted by seasonality with revenues declining 23% QoQ in USD. Ebit margins expanded by 50bps QoQ to 14.7% (Services Ebit margins expanded 100bps to a 9yr high of 16.1%) — tad above IIFLe of 14.5%. Services order intake was up 18% TTM YoY at USD193mn. CYL won 6 large services deals with potential of USD49mn. CYL reiterated FY24 Services revenue growth guidance of 15-20% cc YoY, implying a Cqgr of 2%-4.5% over Q2-Q4. FY24 Services Ebit margins are now expected to improve by 150-250bps (was 100-200bps). Analysts of IIFL Capital Services raise FY24-26 Ebit estimates by ~2%, on higher margins and move to SoTP-based 12-month TP of Rs1,650 (from 1,600), valuing Services at 18x and DLM at 40x 2Y P/E. Stock is trading at 17.5x FY25 P/E, at a ~22% discount to mid-cap peers. Hence, analysts of IIFL Capital Services reiterate their BUY rating and believe consistent delivery will continue to drive the rerating in the stock.

Sustainability and Transportation lead growth: 

Services revenue grew 0.3% cc QoQ, aided by continued momentum in Sustainability and Transportation verticals. Services order wins were at USD193mn (+18% TTM YoY). DLM revenues declined 23% QoQ in USD due to seasonality. CYL reiterated its FY24 revenue growth guidance of 15-20% cc YoY, driven by the strong order book, healthy large deal pipeline and growth in key accounts.

Margins at 9yr high; guidance raised: 

Normalised Ebit margins expanded 50bps QoQ to 14.7% as impact of partial wage was offset by full benefit from cost cutting initiatives. CYL raised FY24 Services Ebit margin guidance to an improvement to 150-250bps YoY (was 100-200bps), given the strong execution in Q1 and the potential levers through the year.

Risk reward attractive; maintain BUY: 

Led by healthy margins and recovery in revenues, analysts of IIFL Capital Services forecast 26% normalised EPS Cagr over FY23- 25. CYL trades at 17.5x FY25 P/E, at ~22% discount to mid-cap peers. Despite the stock being up 80% YTD, they believe the re-rating still has legs if CYL is able to deliver consistently on growth and margins. Risks: FX.