Cyient's Q2FY18 results (Neutral) - Strong quarter; muted guidance for Q3
Q2FY18 result highlights
- Strong overall beat: Revenues grew by 6.8% qoq to US$150.1m (IDFCe/Cons.: US$149m/US$148.3m) led by strong growth in both Services (4.2% qoq) and Product (33% qoq), while EBITDA margin expanded by 181bp qoq to 14.6% (IDFCe/Cons: 13.6%), driven by turnaround in Product business and operational efficiency in Services business. PAT grew 27% qoq to Rs1,114m (IDFCe: Rs990m, Cons.: Rs976) aided by 302bp lower tax-rate qoq to 28.1%.
- FY18 guidance retained, Q3 to be impacted by seasonality: Management retained double digit growth guidance in services business along with at least 20%+ growth in DLM business in FY18. We believe low-teen growth could be at risk on account of (i) Weak deal wins – deal wins declined by 26% qoq (Services: -18%, Product: -61% qoq) for H1FY18 it declined by 5% yoy. Management was confident of improving deal win in H2FY18. (ii) Challgens with top client UTC in near term. (iii) Q3FY18 is likely to be impacted by seasonality (headwind of ~5% qoq).
- Margin trajectory striking ahead of expectation: Management retained their FY18 margin outlook of 50bp improvement in cc terms led by operational efficiency (+390bp) offset by wage hike (-180bp), investments (-100bp), and pricing pressure (-60bp). The company delivered stronger margin despite wage hike. We expect steady improvement in margin and a possibility of delivering margin ahead of guidance.
Key positives: Revenue and margin outlook re-iterated
Key negatives: Soft outlook for Q3 and weakness in UTC.
Impact on financials: No change in FY18-19E earnings estimate.
Valuations & view
Cyient reported a strong operating performance, but weak deal wins, soft Q3 outlook, and challenges with one of top clients (UTC) would restrict significant upgrade in revenue growth. We are factoring in low-double digit revenue growth (11% CAGR over FY17-19) with margin improvement yielding mid-teen earnings growth. However, we see revenue and earnings volatility as key risk to multiple re-rating. Maintain Neutral with target price of Rs515 (based on 13x FY19E EPS).
Cyient Limited, formerly Infotech Enterprises Limited, is engaged in providing software-enabled engineering and geographic information system (GIS) services. The Company's segments include Data & Network Operations (DNO); Engineering, Manufacturing, Industrial Products (EMI), and Product Realisation (PR). DNO vertical services industries, such as power, gas, telecom, transportation and local government, and offers data conversion, data maintenance, photogrammetry and information technology (IT) services to the DNO vertical. EMI vertical services customers in industries, such as aerospace, automotive, off-highway transportation and industrial and commercial products, engineering design, embedded software, IT Solutions, manufacturing support, technical publications and other strategic customers. PR vertical services is engaged in providing electronic manufacturing solutions in the fields of medical, industrial, automotive, telecommunications, defense and aerospace applications.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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