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MOSL: CYIENT (Buy)-Disappoints with broad-based revenue weakness

Cyient: Disappoints with broad-based revenue weakness

(CYL IN, Mkt Cap USD0.9b, CMP INR544, TP INR650, 19% Upside, Buy)

 

• Sequential revenue decline in all but smallest vertical: CYL's 1QFY20 revenue declined 2.6% YoY to USD157m (6% miss), EBIT was down 2.5% YoY to INR1.0b (margin of 9.2%, 200bp miss) and PAT increased 9.5% YoY to INR0.9b (our estimate: INR1.3b). Services revenue declined 6.1% QoQ (our estimate: -0.3%) to USD138m, while DLM revenue of USD18.7m was lower than our estimate of USD20m. Sequentially, revenue declined in all but the smallest vertical in Services segment - the decline was particularly pronounced in Communications (-9% QoQ) and E&U (-12% QoQ).
• 1Q revenue was a far cry from April's guidance: CYL had guided for Services revenue growth in high-single-digits and DLM revenue growth of 15% in FY20. On the Services front, it now needs a CQGR of 3.3% to get even to flat revenue YoY. Without providing any revenue guidance, CYL cited that it will revisit the outlook post the 2Q results. It expects EBIT to grow in double-digits, which too is a stretch now, despite the cost-rationalization efforts.
• Misread the recovery in A&D/Communications: While 1Q was expected to be a weak quarter, CYL misread the recovery in A&D and Communications, its two largest verticals (57% of revenues) that were expected to offset the anticipated weakness in other segments. However, the recovery is now expected to be more robust, giving confidence of 5%+ QoQ growth for 2QFY20.
• Valuation view: Owing to a significantly weak start to FY20, our revenue estimates for FY20/21 are revised downward by 7%/9%. While revenue growth is expected to return in 2Q, the odds are against the company growing Services revenues in FY20, given the required math. Our earnings estimate for FY20 is lower by 8%, while that for FY21 is lower by only 4%, given the expected uptick in margins from cost rationalization. We had upgraded our rating in CYL last quarter on favorable risk-reward 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%+ and [4] 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.