Q2FY24 Review: Cyient: Resilient performance to drive further re-rating

20 Oct 2023 , 11:55 AM

Cyient’s (CYL) Q2 Services revenues grew 1% cc QoQ — tad above IIFLe of 0.6%. Within verticals, strong performance in New growth areas (+5.7% cc QoQ), Sustainability (+4.9%) and Transportation (+2.7%) was offset by softness in Connectivity (-8.1%). Growing at 29% QoQ in USD, DLM rebounded. Services Ebit margins expanded 50bps to an 11yr high of 16.5% — in line with IIFLe. Services order intake was up 25% TTM YoY at USD183mn. CYL won five large Services deals with the potential of USD51mn. CYL now expects FY24 Services revenue growth to be at the lower end of the previously guided 15-20% cc YoY, implying a Cqgr of at least 2.8% over Q3-Q4. FY24 Services Ebit margins improvement of 150- 250bps YoY was reiterated. Analysts of IIFL Capital Services raise FY24-26 EPS estimates by ~1-2%; their SoTP based 12-month TP increases to Rs1,920 (from 1,800), valuing Services at 19x (was 18x) and DLM at 40x (unchanged) 2Y P/E. The stock is trading at 20.5x FY25 P/E, at a ~20% discount to mid-cap peers. Hence, analysts of IIFL Capital Services reiterate BUY and believe that consistent delivery will continue to drive the re-rating. 

Healthy quarter (ex-Connectivity): 

Services revenue grew 1% cc QoQ, driven by Transportation, Sustainability and Auto; while Connectivity was weak. Growing 29% QoQ in USD, DLM revenues rebounded. In line with analysts of IIFL Capital Services expectations, CYL narrowed down FY24 revenue growth guidance and now expects Services growth to be at the lower end of the 15-20% cc YoY range. The strong order book (OB), demand momentum in Aerospace and gradual recovery in Connectivity, gives them confidence in achieving the guidance. 

Margins at an 11yr high; guidance maintained: 

Services Ebit margins expanded 50bps QoQ to 16.5%, as the impact of partial wage hike was offset by productivity improvement. CYL continues to expect FY24 Services Ebit margin to improve by 150-250bps YoY, given the strong execution in H1 and potential acceleration of growth in H2. 

More positives than negatives, further re-rating likely: 

Despite a sharp decline in the Connectivity vertical, benefits of CYL’s diversified portfolio are visible and it continues to execute on margins. CYL trades at 20.5x FY25 P/E, at ~20% discount to mid-cap peers. Despite the stock being up ~110% YTD, analysts of IIFL Capital Services believe the re-rating still has legs if CYL is able to deliver consistently on growth and margins. Risks: FX.