Cyient Ltd

IT - Software Services

Little Masters

Rs. 1050.40
April 06, 2023

Stock Info

IT - Software Services
Face Value (Rs)
Equity Capital (Rs cr)
Mkt Cap (Rs cr)
52w H/L (Rs)
1064.30 - 720.00
Avg Daily Vol (BSE+NSE)

Shareholding Pattern

(as on 31-Dec)
Public & Others
Source: Ace equity, StockAxis Research

Price performance

Return (%)
Source: Ace equity, StockAxis Research

Indexed Stock Performance

Cyient Ltd Sensex
Cyient Ltd
Source: Ace equity, StockAxis Research

Multiple Levers To Aid Group Margin Expansion

Cyient Ltd. was incorporated in 1991, as a private limited company under the name of Infotech Enterprises Ltd. by Mr. BVR Mohan Reddy, executive chairman. Further, in 1995, Cyient reconstituted itself as a public company and made its IPO listing in 1997.

The company is engaged in providing information systems, engineering services, and design & integration. The company operates through eight strategic units: aerospace and defence; transportation; industrial, energy, and natural resources; semiconductor, internet of things, and analytics; medical and healthcare; utilities and geospatial; communications; and design-led manufacturing.  Cyient DLM (earlier Rangsons) provides design integration and production facilities for designs created in the engineering stage, thus enabling Cyient to provide design-to-production solutions to its clients. The company has operations across the globe.

Investment Rationale

·        Recovery in business verticals

Within verticals, Aerospace continues to be on a strong recovery path; 5G, wireless and fiber deployment are driving demand in Telecom; Energy transition toward sustainable energy is driving growth in Energy & Utilities; and investments in building capabilities around Auto & Mobility are yielding results. Management believes it is on track to achieve the USD1bn revenue run rate in FY24.

·        Multiple levers to aid group margin expansion

Key levers include rate increases, de-focussing on lower-margin business, consolidation of facilities, employee pyramid rationalisation, and SG&A leverage. Management is confident about achieving its FY23 Ebit margin guidance of 13-14% for the organic business.

·        DLM hive-off

Cyient’s service business and DLM’s product business work in different dynamics in terms of business economics, revenue flows, cash usage, and margin profile. Hence, the Board has decided to spin-off the DLM unit from its service unit to unlock shareholders’ value. This spin-off will provide greater flexibility to scale up that particular business.

Financial Analysis

The company’s five-year Revenue & PAT CAGR is at 4.69% & 9.8% respectively. Currently, the ROCE and ROE of the company are at 20.4% and 17.2%.  In FY22 the revenue of the company stood at Rs 4534 crores an increase of 10% on a YoY basis. EBITDA of the company was at Rs 818 crores, an increase of 42% on a YoY basis with an EBITDA margin of 18%, an increase of 400 bps on a YoY basis. PAT for the year was at Rs 522 crores, an increase of 43% on a YoY basis.

Q3 FY23 Analysis

Revenue for the quarter stood at Rs 1618 crores, an increase of 37% on a YoY basis. EBITDA for the quarter stood at Rs 283 crores, an increase of 33.4% on a YoY basis. EBITDA margins of the company were at 18%, with no change in margins on a YoY basis. PAT for the quarter was at Rs 156 crores, an increase of 18% on a YoY basis.

Risk & Concerns

·        Slower-than-expected recovery in the Aerospace & Defence Industry

In FY22 Cyient derived about 33% of its revenue from the aerospace and defence industries. If the ramp up in volumes from Aerospace and Rail segments gets delayed, the company’s topline growth will be affected severely going forward.

·        Execution challenges

Growing macro uncertainties increase execution challenges for the company.

Outlook & Valuation

We believe challenges under the Aerospace and Communications segment, which is nearly half of the services revenue, have bottomed out and these segments may increase overall organic growth. Cyient's subsidiary Cyient DLM received the go-ahead from the Securities and Exchange Board of India (SEBI) to launch its initial public offering (IPO). This reorganisation of the company into two separate operating entities will foster their individual growth momentum. Its focus on large deals and deeper relationships with clients helps Cyient to drive sustainable growth. Easing the supply side combined with improvement in productivity will improve margins.  At a CMP of Rs 1040, the stock is trading at 14x its FY25E earnings.  We recommend a 'BUY' rating for the stock.

Consolidated Financial Statements