MOSL: CYIENT (Buy)-Both engines firing… on track to achieving double-digit growth in FY18

​CYIENT: Both engines firing… on track to achieving double-digit growth in FY18

(CYL IN, Mkt Cap USD0.9b, CMP INR523, TP INR600, 15% Upside, Buy)

• Strength in Services and DLM: 4.2% QoQ growth in Services and 34% QoQ growth in Rangsons drove in-line revenue growth of 6.5% QoQ. Double-digit growth expectations for FY18 get validated by the performance so far, placing CYL strongly against peers. Robust revenue growth and improved operational efficiencies drove 160bp QoQ margin expansion to 14.6%, despite part wage hikes and a flat INR. Operational beat and higher-than-expected other income led to PAT of INR1.1b (+27.4% QoQ), a beat of 6%.
  
• Laggards expected to pick up in 2HFY18: Transportation, Communications and Medical (37% of revenue) drove ~70% of sequential and YoY growth for CYL. On the other hand, the Industrial, Semiconductor and Utilities & Geospatial verticals continued to drag overall performance. Aerospace, which accounts for 35% of revenue, will be a critical determinant of the path going forward. This vertical has seen its organic growth slowing down to 5% YoY in 2QFY18 from 10% in the year-ago period – this is attributed to a temporary slowdown in UTC, which should revive toward 4Q of this year.
  
• Order intake loses steam: Order intake of USD119m declined 18% YoY. However, on an LTM basis, growth stands at 14% YoY. Given its strong pipeline and order backlog, CYL maintained its guidance of double-digit growth in Services, 20% growth in Rangsons and 50bp margin expansion, all contributing to double-digit earnings growth. Despite the beat, our numbers remain largely unchanged due to lower other income (led by increased payout to 40%) and absence of share of CYL’s profit from IASI post its sale.