Cyient Laying The Groundwork For A Recovery Ahead

Information Technology   

REDUCE

TARGET PRICE (Rs) : 1,700

Cyient management hosted a follow-up call post-Q3FY25 earnings call after the stock fell 23% on Friday. Key takeaways: i) Karthikeyan Natarajan, the outgoing CEO, will continue as an employee and advisor at least till the end of Q4FY25, and aid in the transition process. ii) Krishna Bodanapu will be at the helm only till a new candidate is onboarded, latest by the declaration of Q4FY25 results. iii) From a business perspective, the operating metrics are strong – deal wins in Q3FY25 (also large deals) and robust pipeline are both at an all-time high. This, coupled with improving client spends, should support medium-term growth. iv) Q4 should see moderate growth (in CC terms), with FY26 expected to see growth on both, the revenue and margin fronts. We await further improvement in operational execution and clarity on the management change before turning positive on the stock. We retain REDUCE.

On a steady footing operationally

In Q3FY25, Cyient reported its highest-ever order intake of USD312.3mn, including 13 large deals. Pipeline was also at an all-time high. Going ahead, focus remains on: i) proposition clarity and differentiation, ii) move from relationship-based selling to value-based selling, and iii) rewarding incremental revenue growth (rather than status quo), with a strong performance management system. Also, the company now has a strong large-deal team. Coupled with improving client spends, the company should report an improved performance in FY26. Cyient has also made significant investments in technology over the last few years which it endeavors to translate into revenue.

Pickup in revenue and margins in FY26

The management expects moderate sequential growth in Q4 (in CC), impacted by currency headwinds. However, orders won in Q3FY25 will not fully execute in Q4, thus limiting an upside. FY26 should see revenue growth after a decline in FY25, coupled with margin expansion. Such growth will be spread through the year, unlike in FY25, where growth was more back-ended. Margin expansion will be led by three key factors: i) revenue growth, ii) second phase of a comprehensive cost optimization plan (Phase 1 in FY24), which can aid a 100-150bps margin expansion; operating costs and SG&A can be optimized, and iii) enhanced offshoring.

Transition process under way

After resignation of Karthikeyan Natarajan, the Board is evaluating both, internal and external candidates, for the position of CEO, for which a large job consultancy firm has been appointed. This process should be completed mostly by the end of Q4FY25 (certainly by the declaration of Q4FY25 results). During this interim period, Krishna Bodanapu will remain in-charge of the company, with the outgoing CEO aiding in this transition. The appointment of the new CEO should not result in any wholesale changes, but build on top of the existing base that has been established over years.