Cyient - Q4FY18 Results Update - Good Performance, Healthy Business Outlook

Cyient posted a healthy 8.3% QoQ USD revenue growth in 4QFY18 led by DLM business (+81% QoQ), while core services business grew by 2% QoQ. From vertical perspective, Semiconductor (+7.5% QoQ) and Communications (+11%) that saw robust growth. With 1.8% QoQ decline in USD revenue, Aerospace remained subdued. Within the core services business, while DNO revenue surged by 5% QoQ in USD terms, ENGG revenue remained flattish. A positive is a healthy outlook for FY19E, with the Management guiding for double-digit revenue growth in core services business (in-line with FY18 growth), 20% growth in DLM (35% growth including B&F acquisition) and flattish EBITDA margin, implying healthy double-digit growth in absolute EBITDA. Tax rate is likely to be much lower by 200-300bps, implying an effective tax rate of 22-23%, which is likely to translate into healthy double-digit earnings growth, in our view. 

DLM Drives Growth

Cyient’s revenue grew by 8.3% QoQ to US$164.6mn owing to robust DLM business (+81% QoQ) led by strong orders on the back of strong seasonality. On YoY basis, DLM grew 37%, with the strong 4Q performance aiding to the company to clock double-digit growth of 13.4% in FY18 in USD terms. Cyient has also acquired a US-based firm, B&F Design, in-line with its strategy of focusing on end-to-end solutions, from design to manufacturing and after-market services. From a core services business, growth was led by Semiconductor and Communications verticals (+7.5% and +11% QoQ, respectively). Cyient’s largest customer, UTC continues to face headwinds, which is reflected in top-5 client revenue (1.1% QoQ revenue decline), which is expected to continue in the near-term. The Management expects this account to return to growth from 1QFY19 onwards. On margin front, EBITDA margin came in lower by 49bps QoQ owing to investments made in the business. Nonetheless, its adjusted PAT grew by 7.1% QoQ led by healthy revenue growth and higher other income. 

Outlook & Valuation

At CMP, the stock trades at a PE of 15.1x/12.9x FY19E/FY20E EPS, respectively, which we believe is reasonable given improving core business metrics, strong traction in most verticals, newer strategic business initiatives, client relationships, quality balance sheet and healthy adjusted EPS growth (14.9% CAGR) over FY18-FY20E. We are enthused by the strong traction Cyient is witnessing in its business and believe the company should command a higher multiple in light of better growth. Our target PE multiple to 15x (14x) FY20E EPS to factor in improving growth trajectory, we maintain our BUY recommendation on the stock with a revised Target Price of Rs755 
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