Anubhav SahuMoneycontrol Research
Cyient reported a decent set of operating numbers for the September quarter even as the IT sector continues to be buffeted by strong headwinds. The company’s biggest revenue segment — aerospace — is going through a lean patch, but strengths in other segments like transportation, communication and healthcare have helped make up for the shortfall.
Q2 2018 result update
Cyient’s quarterly sales rose 5.7 percent year-on-year helped by traction in both services (89 percent of Q2 2018 sales) and design-led manufacturing (11 percent of sales) businesses.
The services business clocked a 9.2 percent sales growth YoY in dollar terms led by transportation (+30.6 percent YoY) and communication (+16.3 percent) segments. This helped offset the weakness in aerospace (+3 percent), industrial (+1 percent) and utilities & geospatial (+3.7 percent) segments.
Weakness in the biggest segment — aerospace — (31 percent of Q1 2018 Sales), seems temporary as its key client UTC is focused on an M&A deal it completed recently. The Cyient management is confident that things will return to normal by the end of this year.
Geography wise, EMEA and APAC region exhibited double-digit growth but Americas had a subdued 0.7 percent growth.
EBITDA margins improved by 55 bps YoY on higher revenue productivity (+7 percent YoY), higher offshore revenue and improved onshore margins. Wage hikes (70bps for Q2 FY18) were a drag, but much of it now behind.
Higher conviction in the growth outlook
We are positive about the robust performance of the DLM unit which is now on track to break even operationally by the end of FY18. Given the traction so far, the company is inching towards a double-digit earnings growth. The management has maintained its growth outlook despite headwinds in the aerospace division. Order intake was lower in the first half of this fiscal, but this is expected to improve in the second half.
The management expects a 50 basis point-improvement in operating margins on higher utilization and increased offshore business.
Structural sweet spot
As we mentioned in our earlier note, Cyient has a large exposure (about 54 percent) to relatively under-penetrated engineering services, with leadership in aerospace and transportation verticals and some very strong client relationships. In communication (20 percent of revenue), there are opportunities in the new network roll-out or upgradation. In the utilities and geospatial segments, Cyient’s business has been growing in advanced metering infrastructure, smart grid, smart meters and analytics. Each of these segments are relatively immune to the difficult transition that the traditional IT companies are undergoing.
Key clients undergoing M&A
Key concern for the company is that a few of its top clients are undergoing M&A (Siemens/Alstom, UTC/Rockwell) and the resultant uncertainty can impact order flows from those spaces.
The stock currently trades at 12.82 times 2019 earnings which is attractive in our view, given the above industry growth prospects.
As some of the key accounts are performing well, operational efficiency is on track and the management is optimistic about better traction in order intake in rest of the year, Cyient deserves investors’ attention, in our view.
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