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  • Stock Recommendation | CYIENT LTD - BUY - Target price : 785

    Publish date: OCTOBER 22, 2018

    Cyient 2QFY19 revenue grew by 5.1% QoQ in USD term to USD 169mn ahead of our estimate of USD 166.4mn. Services grew by 2.3% QoQ and DLM revenue grew by ~27% sequentially in USD terms. EBITDA margin expanded 152bps QoQ to 13.7% (65bps beat) on INR depreciation and operating efficiencies.

    Cyient revenue grew by 5.1% sequentially in dollar terms v/s our estimate of 3.5%. Revenue from services grew by about 2.3% in USD terms sequentially and DLM grew by ~27% QoQ. Service revenue included revenue from AnSem acquired during the year which is expected to scale further its offerings and client base.


    Margins at 13.7% were about 65bps above our estimates. Margins were 152 bps higher QoQ but down 90 bps YoY, including the NBA (New Business Accelerator) impact. Services margins expansion was a function of currency benefits (+80bps), operating efficiency (+130bps), SGA optimization (+100bps) offsetting wage hike (-100bps). Cyient has revised its FY19 margin guidance by 50bps if the INR stays at Rs.72/USD for the rest of the year without any cross currency headwinds, but we build in flat margins for FY19 due to business investments (NBA) and seasonal weakness in 3Q.


    The total order intake during the quarter grew by ~65% YoY and stood at USD 196mn. Service order intake was at USD 157mn up 46% YoY and that for DLM was at USD 39mn up 233% YoY. Healthy order wins and growth in non Top 5 clients reaffirm strong growth momentum, in our view.


    We believe Cyient is well placed to address opportunities in ER&D over long term and expect a CAGR of ~11% revenue growth in USD terms and ~17.5% in earnings over FY18-20. We believe Cyient’s performance in FY19 will be better than that of its peers, and execution of its strategy of design plus manufacturing should be reflected in financials from FY19. We value stock at 15x FY20E earnings. We recommend BUY with a target price of Rs.785 (Rs.810 earlier).


    Cyient guided for double digit growth in its service business and 20% growth in DLM. Including the integration of acquired B&F, DLM business is expected to grow by 35%. DLM margins will improve slightly but are expected to remain in low single digit due to backlog of low margin business. Tax rate which was high at 29.8% during the quarter due to higher other income but is expected to be in range of 24.4-25.4 %. The higher other income during the quarter was due to incentives received by the company which are expected to continue in the future.


    Amongst verticals, aerospace and defense (38% of revenue) will grow in high single digits. Demand outlook remains strong though 3Q is expected to have its share of seasonal weakness. It will come back in 4Q. Growth in FY19 will be driven by large clients and strong growth in new accounts. Communication (21.5% of revenue) has huge opportunity driven by spending around fixed lines and wireless networks. Management expects double digit growth driven by momentum across geographies and opportunities around wireless networks. Utilities & Geospatical (12.3% of revenue) is expected to be flat YoY in FY19 though the company has managed to build some good offerings and propositions for the market. Transportation (10% of revenue) is on solid trajectory with rail transportation industry expected to witness strong growth driven by healthy momentum in rolling stock and signaling. For FY19, management remains positive on back of strong growth in focus segments of rolling stock and signaling and growth being driven by key clients, leading to expectation of double digit growth. Industrial & Energy (10% of revenue) is seeing good traction from Traditional engineering and IOT, connected devices capabilities driving good traction. Medical (3% of revenue) has found good offering in the market with M2M. Lastly Semi conductor (5% of revenue) growth is driven by demand for AI, IOT, 5G,AR/VR. Cyient has been gaining traction with new automotive clients and ramp up with existing clients. Overall growth is expected to be in double digits in FY19.


    Revenue performance during the quarter ended was well within the band of 3-4% as expected at the beginning of the year. Strong pipeline and order backlog give confidence that though 3Q will be a seasonally weak, 4Q should be quite strong.


    The JV with Bluebird Aero System, Israel won its first contract from the Indian army to supply SpyLite mini UAV systems for high altitude aerial surveillance. The company has identified a $190mn opportunity in this area.


    Other income was Rs.397mn higher QoQ due to benefits from incentives of Rs.234mn on merchandise and engineering and related services in DLM. This benefits from incentives would continue through H2 FY19 and FY20. Secondly there was unrealized gains on forex re statement of Rs.207mn during the quarter.


    Cyient added seven projects to the New Business Accelerator (NBA) program, taking the total to 19, and expects accelerated EPS growth from FY21 onwards.


    Reported tax was higher at 29.8% for the quarter. The tax rate is likely to be 24.4-25.4% for FY19 and down to 22-23% for FY20.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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