Sunday, October 26, 2014

>Cyient Ltd: Impressive growth, but recent re-rating limits upside

Cyient reported revenue growth significantly ahead of our expectations with strong growth both onsite and offshore. Organic growth at 5.3% QoQ and 20.7% YoY (in USD terms) was impressive. Margins recovered partially helped by utilisation and offshore ratio both of which improved for Data Transformation, Network and Operations (DNO). The temporary increase in sub-contracting costs onsite for a DNO project continued this quarter as well. We increase revenue estimates, cut margin estimates on higher sub-contracting expenses and maintain Hold with a new TP of Rs530 based on 11xSep-16E EPS.

 ⇒ Good revenue growth even excluding Softential: Cyient’s revenue was much ahead of our expectations as onsite revenue proportion remained high in DNO (though down 100bpsQoQ). DNO onsite revenues increased through Softential’s contribution while offshore grew at an impressive 12.7% QoQ in USD terms showing the potential of the utilities contract that is still ramping up. Engineering also showed good growth at 4.5% QoQ in USD terms led by Aero & Defence, Semiconductor and Off-Highway while Medical & Consumer Electronics (an area that is not considered a strategic priority anymore by Cyient) declined.

Margin recovery only partial with sub-contracting and utilisation drags: DNO continues to see some onsite work that has become a larger component of revenue than expected. While DNO utilisations have begun to normalise this quarter, Engineering utilisation declined 160bps QoQ. A pleasant surprise was the 3.3% QoQ improvement in engineering realisation. We expect margins to continue to recover through 2HFY15E helped by utilisation improvements in Engineering and DNO as well as slightly lower sub-contracting costs and good control on operating expenses. We still expect FY15E margins to be soft expecting a nearly three-fold increase YoY in sub-contracting expenses.

To read full report: CYIENT LIMITED