EUR 120.00 For Business Accounts Only

MOSL: CYIENT (Downgrade to Neutral)-Foresee risks due to softer aspects

(CYL IN, Mkt Cap USD0.7b, CMP INR452, TP INR470, 4% Upside, Downgrade to Neutral)

Subdued growth and margin outlook; Downgrading to Neutral
** Commentary around headroom for margin expansion (250bp from FY20 level) is disappointing. This expansion should be largely led by the absence of restructuring costs in FY21, implying no material net benefits from cost rationalization. Also, the ongoing forced attrition may impact employee morale, posing further growth challenges (like in case of Cognizant).

** We cut our EPS estimate for FY20-22 by 3%. Given the subdued outlook on growth/margins and the potential risks because of softer aspects, we Downgrade to Neutral, valuing it at 11x one-year forward P/E.

A&D, Transportation and DLM drive revenue decline
** Revenue declined 6% YoY to USD155m, in line with our estimate. EBIT was down 28% YoY to INR1.1b, a beat of 6%. PAT grew 17% YoY to INR1.1b, a beat of ~15% due to higher-than-expected other income and lower ETR.

** Services revenue declined slightly QoQ (0.2%, USD). Overall revenue decline was largely led by the sharp reduction in DLM (~37% QoQ).

** Within services, key verticals like A&D (~5% QoQ, USD) and Transportation (~15% QoQ, USD) reported a sharp decline. The impact was partly offset by strength in Communications (~12% QoQ, USD) and E&U (~9% QoQ, USD).

** Benefits from cost optimization (~30 bps) in 3Q are disappointing. While mix change was a key margin tailwind (+110bp), the increase in direct costs (-120bp) and furloughs (-60bp) remained headwinds.

** The impact of cost optimization is reflected in the continued high voluntary (~20% v/s 18% in 2Q) and involuntary attrition (5.2% v/s 5.8% in 2Q).