Cyient Ltd. share price target

Cyient reported better than expected results in Q1 FY21. Revenue declined by 12.5%QoQ in cc terms and stood at $130.6mn. Its services revenue stood at $112.2 mn declined 14.3% in CC terms.DLM business showed a strong growth of 8.5%QoQ and stood at $18.4mn.

Cyient Ltd (Cyient) reported a poor set of Q4FY20 numbers. Revenues declined 3.8% QoQ mainly led by 5.6% QOQ decline in services revenues. The decline in services revenues was led by 24.7% QoQ decline in E&U; vertical and 22.3% QoQ decline in semiconductor IoT and Analytics. Normalised margins fell 118 bps due to lower utilisation and pricing pressure. Reported PAT declined 58% QoQ. However, adjusting for one off...

Cyient Ltd (Cyient) reported overall sluggish growth in Q4 FY20. Revenue stood at Rs. 1073.6 crs down 9.7% YoY and 2.9% QoQ. Operating profit showed a de-growth of 23.4% YoY at Rs. 408 crs, while normalized operating margin declined by 232 bps at 9.2% due to pricing pressure and lower utilization.

CYL's Q4FY20 consolidated revenue was in-line with our forecast, however, EBIT margin and EPS was a miss. Consolidated revenue of US$149.2 mn declined by 3.9% QoQ mainly on account of a 5.6% QoQ decline in Services business (88.7% of revenue). Consolidated EBIT margin declined by 120bps QoQ at 8.4% vs. our forecast of 8.9%. Recurring EPS of Rs6.9, declined by 30%/59% QoQ/YoY. CYL expects both services and DLM business to see a sharp QoQ decline in Q1FY21 due to the impact of Covid-19. It expects Aerospace & Defense vertical to be impacted the most. However, it expects stability in Q2FY21....

Cyient Ltd (Cyient) hosted a conference call to highlight the business impact of Covid-19. The company acknowledges that while the revenue trajectory remains uncertain, Cyient would aggressively focus on cost rationalisation to keep margins under control. The company expects some impact of Covid19 in Q4 with full visible impact in FY21E. We believe more than 50% of Cyient's revenues would be impacted by Covid-19. The company's exposure to aerospace (~35%), transport (~12%), energy (~5%) and semiconductor (~5%) is expected to face headwinds due to Covid-19 related issues. In order to mitigate the headwinds, Cyient is focusing on cost...

The spread of Covid-19 has led to lockdowns in many countries globally and could have adverse economic implications. In addition, the recent fall in crude prices could also have an adverse impact of fiscal health of oil producing countries. As a result, IT companies, which have considerable exposure to verticals such as oil, energy & utilities; banking & capital markets; manufacturing and travel & transport could see an adverse impact from the ongoing crisis. Companies like Wipro, Infosys in large cap and MindTree, NIIT Tech, Sonata software, Cyient, Accelya Solutions among...

Revenues from core services fell marginally by 0.2% to US$155.2 million while DLM revenues dipped 36.8% QoQ to US$15.1 million. Weakness within core services was mainly due to drag in its largest vertical aerospace & defence (decline 5.1% QoQ) on account of a dip in spend in engineering design. Decline in transport (down 14.7% QoQ) vertical also contributed to the slowdown in core. On the positive side, communication recovered healthily with 2.3% QoQ growth. Going ahead, growth is expected to gradually recover in aerospace from Q4FY20E. Taking into account...

Cyient is struggling with issues such as (1) Stress in services portfolio, (2) Growth challenges in top accounts (3) Issues in core vertical (A&D), (4) Focus on lower margin DLM business and (5) Lower margins due to higher investments. There could be some recovery in performance (both revenue and margins) but concerns related to slowdown in decision making, trade war risks and higher mix of legacy services remain. Cash generation and collections have improved. We expect USD revenue growth of -3.7/+4.2/+7.2% and EBIT% of 10.0/11.5/12.1% for FY20/21/22E. The stock trades at reasonable valuation of 11.0x FY21E, which is at a steep ~60% discount to LTTS. Re-rating will only happen with growth visibility and better execution (margin). Risk to our thesis includes better US/Europe macro and INR depreciation. We maintain NEU on Cyient post weak 3Q. Services revenue was below estimate while margin performance was inline. Some margin improvement is expected in FY21E but growth in core verticals remains challenged. We have increased EPS est. by 1.0/0.8% for FY21/22E and our TP of Rs 490 is based on 11x Dec-21E EPS.

Also, the ongoing forced attrition may impact employee morale, posing further growth challenges (like in case of Cognizant). Given the subdued outlook on growth/margins and the potential risks because of softer aspects, we Downgrade to Neutral, valuing it at 11x one-year forward P/E. One-off investment associated with conversion of a project in Transportation (from T&M; to Risk-Reward) impacted growth and margins. In addition, the ongoing forced attrition may impact employee morale, posing further growth challenges (like in case of Cognizant). Given the subdued outlook on growth/margins and the potential risks because of softer aspects, we Downgrade to Neutral, valuing it at 11x one- Revenue decline in 3Q was mainly due to the lower number of working days, coupled with high onsite deployment in Aero & Defense vertical. The outlook on key verticals like Aerospace & Defense (~35% of revenue) In addition, the ongoing forced attrition may impact employee morale, posing further growth challenges (like in case of Cognizant).

CYL's Q3FY20 revenue was in-line with our forecast, however, EBIT margin and EPS were a beat. Consolidated revenue of US$155.2 mn declined by 5.5% QoQ mainly on account of sharp decline in DLM (US$15.1 mn vs. US$23.8 mn in Q2FY20). Services business (90.3% of revenue) saw a 0.5% QoQ decline in CC. Consolidated EBIT margin remained unchanged QoQ at 9.6% vs. our forecast of ~50bps QoQ decline. EPS of...