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Cyient Ltd>
  • CMP : 826.2 Chg : -0.05 (-0.01%)
  • Target : 1,000.0 (10.50%)
  • Target Period : 12-18 Month

26 Apr 2022

Guides 13-15% CC growth for FY23; acquires Citec

About The Stock

Cyient Ltd (Cyient) offers engineering & development services to aerospace & defence, transportation, E&U, communication and others.

  • Cyient has 300 customers across 14 countries
  • Net debt free and healthy cash flow with OCF/EBITDA ~80%

Cyient reported muted Q4FY22 results.

  • Services revenue grew 1.2% QoQ (0.4% in CC) while DLM revenues declined 9.4% QoQ. This led to overall revenue decline of 0.8% QoQ
  • Services EBIT margin came in at 15.4% while DLM margins came in at 9.8%, resulting in EBIT margins of 14.5%, up 59 bps QoQ
  • Cyient acquired Citec for EV of €94 mn, 1.2x price to 2021 sales
What should Investors do?

Cyient’s share price has grown by ~2.3x over the past five years (from ~₹ 408 in April 2017 to ~₹ 905 levels in April 2022).

  • We change our rating on the stock from BUY to HOLD
Target Price Valuation

We value Cyient at ₹ 1,000 i.e. 18x P/E on FY24E EPS

Key Triggers for future price performance
  • Improving outlook on aerospace vertical and utilities (with Citec acquisition)
  • Improved demand from large deals, healthy order book, rebound in DLM business and organisation restructuring to accelerate growth
  • Margins to improve led by improved revenue growth and SG&A rationalisation
Alternate Stock Ideas

Apart from Cyient, in our IT coverage we also like Infosys.

  • Strong revenue guidance prompts us to be positive
  • BUY with a target price of ₹ 2,000

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 4,617.5 4,427.4 4,132.4 4,534.4 4.7 5,269.4 5,954.5 14.6
EBITDA 644.3 596.0 610.7 821.9 11.1 943.2 1,036.1 12.3
EBITDA Margins (%) 14.0 13.5 14.8 18.1 - 17.9 17.4 -
Net Profit 478.5 342.5 363.8 522.3 8.7 560.3 610.2 8.1
EPS (|) 42.4 33.9 33.1 47.3 - 50.8 55.3 -
P/E 21.3 29.1 27.4 19.1 - 17.8 16.4 -
RoNW (%) 18.7 13.4 12.3 16.8 - 17.4 17.3 -
RoCE (%) 21.4 15.9 14.5 19.3 - 20.1 20.2 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Services revenues came in US$130.6 mn (up 1.2% QoQ, 1.6% QoQ in CC) while DLM business reported decline of 9.4% QoQ to US$26.1 mn. This resulted in a decline in overall revenues at the company level of 0.8% QoQ to US$156.7 mn (decline of 0.4% in CC). For FY22, services revenues grew 9.2%to US$503 mn while DLM revenues grew 9.5% to US$104.7 mn. Overall revenue at the company level grew 9.2% YoY (8.7% in CC terms) to US$608.2 mn
  • Overall EBIT margin at the company level improved 59 bps to 14.5%, services EBIT margin came in at 15.4%, down 23 bps QoQ while DLM margins came in at 9.8%, up 379 bps QoQ. For FY22, overall EBIT margin at the company level was at 13.9%, up 381 bps to 13.9%. Services EBIT margin was up 432 bps YoY to 15.3% while DLM margins came in at 7.2%, up 142 bps YoY
  • The company reported margins of 13.9% at the group level, which were down 14 bps QoQ while they were up 272 bps YoY
  • Guidance: The company guided for 13-15% CC revenue growth overall as a company while DLM is expected to grow in single digits in FY23 due to continued supply side challenges. The company expects the full year margins to be in the range of 13-14% at the company level. The company also guided for 27% ETR for FY23 due to 11 of their units coming out of some tax exemption provided in SEZ
  • In Q4FY22, it won seven large deals with total contract potential of ~US$134.9 million (six from services and one is composite B2S). for FY22, it won 23 large deals with total contract potential of US$308.6 million (19 from services, two from DLM and two are Composite B2S deals)
  • The company indicated that LTM attrition has come down for the quarter by 240 bps in Q4 to 26.9%. The company expects attrition in the range of 20-25% in the near term. While it will remain at the higher end in FY23, it expects it to taper down in the guided range in the medium term. The company also indicated that it had to let go 200 bps growth in FY22 due to high attrition as it did not have enough manpower for that project. The company also expects hiring to be at elevated level in FY23
  • Depreciation for FY22 has come down vs. FY21 due to leasing coming down due to consolidation of workplaces. However, the company expects depreciation to increase in FY23 due to capacity being built up to cater to the demand
  • The management indicated that revenue growth in FY23 would be broad based whereas communication, aerospace is expected to report strong growth in H1 while Rail & utilities would only pick up from H2 onwards. The management expects aerospace to be at pre-Covid level in FY23 as it has seen good recovery and growth in the segment is evenly spread now vs. a few accounts earlier. In communication, it won three major deals in Q4, one being from a key client in Canada to accelerate their broadband network. The management said de-growth in rail in H1FY23 pertains to consolidation of some of the major accounts of the company. The growth is likely to pick up only in H2FY23
  • The management indicated that in FY22 they witnessed wage inflation of 10-12% in offshore while that of 4% onsite. The company also indicated that salary hikes in FY23 would be higher than that of FY22
Key takeaways from Citec acquisitions call
  • Cyient announced acquisition of CITEC, Finland based company. The company has three businesses namely: plant engineering (60% of revenue mix), product engineering (25% of revenue mix), consulting & digital (15% revenue mix). The focus clients are energy, mining, marine, oil & gas, pharma, machine & equipment companies
  • Capabilities in A) Plant engineering includes pipeline layout & design, civil & structural design, process engineering, B) Product engineering includes product concept design, styling, analysis & testing, production support C) Digital solutions includes 3D modelling, robotic automation processing, content management, product data maintenance
  • The company has 1200 employees in six locations viz. Finland, Norway, Sweden, France, Germany, India, out of which 600 employees will join Cyient as a result of the acquisition
  • Valuation: The cost of acquisition: Enterprise value of €94 mn (at 1.2x price/sales and 6.3x of 2021 EBITDA. Indicative time of completion of said acquisition is on or before May 10, 2022
  • Rationale: a) it would help to accelerate the growth for the company since Cyient growth has been subpar in the last few years b) Currently, Cyient does not have a presence in Nordics region. Citec’s strong presence in Nordic region would help the company to have a strong delivery footprint there as well as help to build relationship with new clients in that region. c) This acquisition would also help Cyient to acquire new capabilities in plant design engineering, process engineering and technical publications
  • Financial impact: A) The company expects incremental revenues of US$83-87mn in FY23 (11 months’ consolidation) and US$98-102mn in FY24. This is over and above 13-15% growth guidance given for FY23. B) EBIT accretion from year 2 (acquired entity has EBIT margin of 14-16% vs Cyient consolidated EBIT margin guidance of 13-14%) since there would be EBIT margin impact of 30-50bps in FY23 due to one-time integration costs. EPS accretion of |2.5-3 per share (4-5%) and | 5-6 per share (8-10%) in FY24
  • We have not incorporated any impact of the acquisition in our financials

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