Q3FY24 Review: Cyient: Right shifting of demand leads to guidance cut

29 Jan 2024 , 11:25 AM

Cyient’s (CYL) Q3 Services revenues grew 1.1% cc QoQ broadly in line with IIFLe. Within verticals, strong performance in Sustainability (+8.2% cc QoQ) was partly offset by weakness in Transportation (-2.2%) and New Growth Areas (-3.4%). DLM grew at a robust +8.5% QoQ is USD. Services Ebit margins decreased 50bps QoQ to 16.0% — in line with IIFLe. Services order intake was up 13% YoY (adj. for acquisitions) to a record USD297mn. CYL won eight large Services deals with USD137mn potential. However, CYL cut its FY24 revenue growth guidance to 13-13.5% cc YoY (was lower end of 15-20%), due to right shifting of certain projects amid macro uncertainty. This implies a ~1-3% cc QoQ revenue growth for Q4. FY24 Services Ebit margin guidance was narrowed up to 200-250bps YoY (was 150-250bps) improvement. Analysts of IIFL Capital Services reduce FY24-26 EPS estimates by up to 4% and their SoTP based 12- month TP reduces to Rs2,250 (from 2,400), valuing Services at 23x (was 24x) and DLM at CMP. The stock is trading at 26x FY25ii P/E, at a ~20% discount to mid-cap peers. Maintain ADD. 

Sustainability drives growth: 

Services revenue grew 1.1% cc QoQ, driven by Sustainability, while Connectivity was flat after two quarters of sharp sequential decline. Given the macro uncertainties in certain pockets, CYL cut its FY24 revenue growth guidance more than analysts of IIFL Capital Services expectation to 13-13.5% cc YoY (was lower end of 15-20% cc YoY). However, given the strong order book and its well-balanced diversified portfolio, the company is confident of delivering predictable and sustainable growth over the medium term. 

Margins dip modestly, in line with expectations: 

Services Ebit margins decreased 50bps QoQ to 16%, due to impact of wage hikes, seasonal furloughs and investments. CYL narrowed up its FY24 Services Ebit margin to improve by 200-250bps YoY (was 150-250bps). Management expects to continue its margin improvement trajectory, but at the same time invest for growth. 

Valuation full, longer-term delivery required for further re-rating: 

After the ~3x stock price rally in CY23, CYL is now trading at 26x FY25 P/E, at a ~20% discount to mid-cap peers. Analysts of IIFL Capital Services believe longer-term delivery would be required for further re-rating of the stock. Analysts of IIFL Capital Services arrive at their SOTP based 12-month TP of Rs2,250 (was Rs2,400), valuing the Services business at 23x 2YF P/E and Cyient DLM at CMP. Key risks: Fx