Cyient Ltd. reported steady results in terms of top line and weak results on operating margins front in Q2FY20. Cyient posted revenue growth of 6.4% on QoQ basis and decline 2.4% on YoY basis in constant currency (CC) terms for the period of Q2FY20 at Rs.11, 589 mn. Operating margins in Q2 FY20 stood at 9.6% improved marginally by 69 bps and decline by 169 bps on YoY basis owing to headwinds like weak revenue momentum, wage increase and cross currency headwinds. The revenue was lower than our expectation due to delay in execution of services. This may impact near term top line growth momentum. The delay in the execution of the some key projects will likely to push executions in second half of the FY20 or may be in FY21. That may impact revenue growth momentum in shorter period of time. However the management is confident in gaining the momentum in the second half of the FY20. The management is also expecting the EBIT margin to grow in double digits by the end of FY20. We assign 10x P/E multiple to its FY21E earnings of Rs. 50.2 per share which gives a target price of Rs. 500 per share, an upside of 23%.
Cyient continues to face revenue headwinds owing to moving parts in its business, while constant ‘one-time cost’ undermines efforts for steady-state margin expansion. We had mentioned in our last quarter earnings update that it would be rather an upheaval task for the IT firm to achieve double- digit EBIT growth given services revenue decline and cost headwinds. Now, we factor in 11% YoY decline in FY20 EBIT post underwhelming 2Q performance. Issues in key verticals like AERO and COMM persist, with which hopes of 2Q recovery have proven to be premature. With several issues dogging the business, and too many moving parts to boot, we believe our view on the business requires a re-look. Slashing our EPS estimate by 11% post factoring in 40-90bps margin cut, and reducing our target PE multiple to 10x (from 12.5x earlier), we downgrade our recommendation on the stock to HOLD from BUY with a revised Target Price of Rs462 (from Rs610 earlier), and valuing it at average of FY21E and FY22E EPS.
We maintain NEU on Cyient post in-line revenue and margin miss in 2QFY20. Growth challenges remain in core verticals and margin recovery is slow. We have lowered EPS est. by 1.2/1.4% for FY20/21E and our TP of Rs 485 is based on 11x Sep-21E EPS.
The slowdown in the key business vertical may impact upcoming quarters in the near terms. Near term pressure and lack of guidance we recommend HOLD on the stock. We assign 11.3x P/E multiple to its FY21E earnings of Rs. 44.2 per share which gives a target price of Rs. 500 per share, an upside of 8%.
We retain our positive stance on Cyient anchored by strong demand for ER&D services and its cut-price valuations. That said, we are cutting FY20/FY21E EPS by 14.5%/10% factoring in persistent challenges for revenue growth in a few verticals. The stock is trading at an attractive 11.9x FY20E EPS. Retain ‘BUY/SP’ with a revised target price of INR632 (14x Q3FY21E EPS, INR688 earlier).
We had upgraded our rating in CYL last quarter on favorable risk-reward due to:  acceleration of YoY growth from 2QFY20,  upside risk to our margin estimates from the ongoing cost-optimization exercise,  attractive FCF yield at 8%+ and  potentially higher payout, as management will assess a buyback every two years over and above the normal dividend of ~30%. While other factors remain, the first factor gets pushed further out, given the low base of 1QFY20 revenue. Our revised price target of INR650 discounts forward earnings by 13x, instead of 14x, lower due to tepid revenue expectations in the foreseeable future, implying an upside of 19%. Maintain Buy.
We have lowered our estimates to reflect weak Q1FY20 performance and now expect Cyient to report an EPS of Rs.45.1/share (earlier Rs.47.3) in FY20E and an EPS of Rs. 47.5/share (earlier Rs.50.5) in FY21E. We value stock at 12.6x FY21E earnings (i.e. 30% discount to its peers). We recommend ADD on Cyient with a revised target price of Rs. 600.
Cyient continues to face revenue headwinds owing to moving parts in its business. The performance this quarter marks a poor start to FY20. Even as we factor in revenue and margin improvement from 2QFY20E onwards, we believe it will be rather an uphill task for Cyient to achieve double-digit EBIT growth with lower services revenue and major cost headwinds. Issues in its key verticals like AERO and COMM persist, even as we expect recovery in 2QFY20E. The stock has corrected by 22% over the past year, which we believe factors in all negatives, with valuation at 11.1x FY21E EPS fairly reasonable. Hence, reducing our EPS estimates by 13-15% for FY20E/FY21E and cutting our target PE multiple to 12.5x (from 14x earlier), we maintain our BUY recommendation on the stock with a revised Target Price of Rs610 (from Rs780 earlier).
We believe that the risk- reward is favorable due to (1) acceleration of YoY growth from 2QFY20, (2) upside risk to our margin estimates from the ongoing cost optimization exercise, (3) attractive FCF yield at 8%+ with INR3.7b FCF in FY19, expected to grow at 10% CAGR, against an EV of INR54b, and (4) potentially higher payout as management will assess a buyback every two years over and above the normal dividend of ~30%. Our price target of INR730 discounts forward earnings by 14x, lower than peers due to increased contribution of non-operating income to earnings (from hedge gains and tax incentives on export of services). This implies an upside of 26%. Maintain Buy.
Management believes that its ability to address end to end value chain through its enhanced capabilities will be the key differentiator and help the company scaling in this new evolving environment. Cyient has missed either revenue guidance or margin guidance over past 4-5 years. Cyient’s margin trajectory has remained weak and is likely to remain at the lower end among mid-sized IT peers. Cyient expects services business to grow in high single digit (cc terms) and 15% YoY growth in DLM. We expect Cyient to deliver 8.1% USD revenue growth for FY20E (7.3% growth in Services business and 14% growth in DLM business). We remain watchful on margin trajectory & expect margins to remain flat inFY20E-21E. We value Cyient at 13x FY21E EPS & arrive at an unchanged target price of Rs.621. Maintain Accumulate.
We believe Cyient is well placed to address opportunities in ER&D over long term. The company expects high single digit growth for services segment in CC backed by a strong pipeline and order backlog and DLM business is expected to grow by ~15% in CC in FY20. We have introduced FY21E earnings and expect Cyient to report an EPS of Rs.46.9/share in FY20E and an EPS of Rs. 50.5/share in FY21E. We value stock at 14x FY21E earnings. We maintain BUY on Cyient with a revised target price of Rs. 684 (earlier Rs.719).
We lower revenue estimate by 2.4% for FY20E and 4.0% for FY21E anticipating slow growth in UTC. We increase our EBITDA by 4.0% for FY20E and lower by 2.3% for FY21E, due to a change in lease accounting. We reiterate Accumulate with a new TP of INR 660 from INR 690 on 14x (from 15x) FY20E P/E as we cut the target multiple, given lower confidence on execution.
Cyient’s Q4FY19 revenue at USD165.2mn was flat (in line with Street’s estimate) owing to deferment of contracts. However, EBITDA margin rose 40bps QoQ to 15.1% surpassing estimate. Citing short-term challenges in its key aerospace & defence (A&D) vertical, specifically Boeing, management has guided for muted FY20 revenue growth for its services business—high single digit in constant currency. Hence, we revise down FY20/FY21E EPS 3.9%/2.4%. However, we remain sanguine on A&D’slong-term prospects and expect Cyient to capitalise on demand when it revives. Maintain ‘BUY’ with revised TP of INR688 (INR716 earlier) given attractive valuation of 12.4x FY20E EPS.
While our earnings estimates for FY20/21 are higher by 6.4%/4.1%, this is mainly on the back of higher other income from export incentives and a favourable hedge book at prevailing currencies. CYL trades at ~12x / 11x FY20/21E earnings. We believe that the risk-reward is favourable due to:  likely acceleration of YoY growth from 2QFY20,  upside risk to our margin estimate from the ongoing cost-optimization exercise,  attractive FCF yield at 8%+ with INR3.7b FCF in FY19, expected to grow at 10% CAGR, against an EV of INR54b and  potentially higher payout as management will assess a buyback every two years over and above the normal dividend of ~30%. Our TP of INR730 discounts forward earnings by 14x, instead of 15x – lower due to the increased contribution of non-operating income to earnings (from hedge gains and tax incentives on export of services). This implies an upside of 24%. Therefore, we are upgrading our rating on the stock to Buy.
We maintain BUY on Cyient based on in-line 4QFY19. Given the single digit growth in services business, we cut P/E multiple to 14x vs. 16x earlier. Our TP Rs 725 is based on 14x FY21E EPS. Cyient’s growth engine is challenged given client specific issues. Large verticals, Aerospace and Communications are taking longer than expected to recover. Further margins expansion will be difficult considering investments required in the business and tight labour market. We expect USD revenue growth of 7.8/9.3% and EBITDA% of 14.0/14.2% for FY20/21E. The buyback of Rs 2bn is completed at an average price of Rs 640/share. Net Cash stands at Rs 7bn (~10% of Mcap). The stock trades at reasonable valuation of 12.4x FY20E which is ~49% discount to LTTS. Risks to our thesis include prolonged issue with top clients and slowdown in DLM.
While Cyient continues to face revenue headwinds owing to several business disruptions, we are encouraged by its margin performance and outlook for FY20E. We believe the company is being conservative with regard to revenue guidance given slippages seen in FY19 on more than one occasion. While the growth could be slower in 1QFY20E led by issues in key verticals like AERO (Boeing and UTC), we expect 2QFY20E to be the critical quarter for revenue acceleration aided by decent order book (up 12.7% in FY19 to US$750mn). The stock has corrected by a steep 23% over the past year, which we believe has discounted the potential negatives. We expect Cyient to record 11%/15%/14% revenue/EBIT/PAT CAGR over FY19-FY21E, while valuation at 12x/10.5x FY20E/FY21E EPS seems to be fairly reasonable. Marginally increasing our EPS estimates, we maintain our BUY recommendation on the stock with a revised Target Price of Rs780 (from Rs765 earlier).
Cyient (CYL IN) has missed revenue guidance for the design-led- manufacturing (DLM) segment from FY16 when it had acquired Rangsons and set itself an ambitious USD 80mn+ target for the segment in FY16 (vs USD 66mn in FY14). While the extent of earnings impact is not as high as the stock price correction on 2 April (~10-11%), the cut in services guidance has led to derating of the stock, which may not revive in the near term without continued strong execution to revive faith among investors. At a CMP of INR 580, Cyient is trading at a 55% discount to L&T Technology Services (LTTS IN< Accumulate, CMP: INR 1,632, TP: INR 1,650) on our revised estimates, which we believe is a bit extreme considering long-term secular factors that will aid India engineering services outsourcing firms.
Cyient Ltd is well positioned in the ER&D industry owing to its well established infrastructure and highly skilled human resources, substantial market share and growth in demand for the automation across geographies. We estimate the company Revenues to grow at a CAGR of 12% and Earnings at CAGR of 12% over FY18-FY21E. Successful buyback of 2.54% of total paid up equity will enhance FY20E EPS. (We have not included this in our assumptions and remains a key upside risk to our estimates). We value Cyient Ltd at 15.6x FY21E to arrive at price target of Rs 803 giving an upside of 23%