Cyient All-Round Miss; Guidance Also Sees Sharp Cut

Information Technology   

Result Update   

July 26, 2024

TARGET PRICE (Rs) : 2,300

ADD

Cyient logged a weak set of results in Q1, widely missing consensus/our estimate. DET revenue fell 5.4% QoQ (-5% cc) – much lower than our estimate of 1.6% QoQ decline. DET EBITM also, fell by 250bps QoQ to 13.5%, missing our estimate. The mgmt attributed this weakness to longer than anticipated delays, right shift in project execution in Connectivity, and persisting challenges in Rail. Also, guidance was sharply cut to flattish YoY growth in FY25 (implying 3.2% CQGR over Q2-Q4) from high single-digit growth earlier, with H2 expected to be better than H1. We cut FY25E-27E EPS by 5%-13%, factoring-in the Q1 miss, sharp guidance cut, and gradual recovery in DET margin. We cut target multiple to 25x (from 27x), given the sharp guidance cut within only a Quarter raising concerns on growth predictability. A big earnings miss will weigh on the near-term stock performance, but valuations remain fairly undemanding. We retain BUY on Cyient, pulling down our TP to Rs2,300/sh (valuing the DET business at 25x Jun-26E, and the DLM business at 20% discount to the CMP).

Result summary

Cyient DET revenue declined 5.6% QoQ (5% drop in cc terms) to US$169.6mn, well below our estimate of US$176.4mn. All verticals posted a QoQ decline in revenue, with Transportation, Connectivity, Sustainability, and New Growth Areas falling 7%, 7.6%, 2.8%, and 1.6% QoQ CC, respectively. Among geographies, Americas saw an uptick of 1.7% QoQ, while EMEA and Asia Pacific sharply declined 14.3% and 5.4%, respectively. Revenue for Top-5 and Top-10 clients declined 3.3% and 2.5% QoQ, respectively. DET adjusted margin fell by 250bps QoQ to 13.5%, considerably lower than our estimate of 15.6%, impacted by sequential revenue dip and continued investments in sales and technology. Order intake was US$182.7mn in Q1. Cyient also signed 5 large deals with total contract potential of US$52.4mn in Q1. Total headcount declined 2.4% QoQ to 15,083. What we liked: Double-digit growth in the order book (YoY). What we did not like: Weak operating performance; sharp cut in FY25 DET guidance.