MOSL: CYIENT (Buy)-Broad-based traction dragged by DLM-Services growth robust

​Cyient: Broad-based traction dragged by DLM; Services growth robust

(CYL IN, Mkt Cap USD0.9b, CMP INR515, TP INR600, 17% Upside, Buy)

• Performance dragged by DLM: Rangsons (DLM) dragged 1QFY18 performance vis-à-vis expectations on both revenues (3% impact) and margins (60bp impact) front. Having started the year at USD12m, CYL maintained DLM outlook of 20% growth, citing healthy visibility to reach USD65m for the full year (we estimate 12% growth). Operating loss of INR53m in DLM also dragged the EBITDA margin by 50bp QoQ to 12.8% v/s our estimate of 13.2% (ex-DLM margin was 13.3%). PAT of INR878m (+18.6% QoQ) came in below our estimate of INR955m, led by operational miss. Also, the reported tax rate during the quarter was 31%, but 27% excluding one-offs.
  
• Broad-based YoY traction is a positive: Communications continued to run the show at CYL, growing 35.2% YoY. However, growth was far from lop-sided, as six out of the eight segments grew in double-digits YoY, with the exception of Aerospace & Defense (A&D; 2% YoY) and IENR (-4.9% YoY). CYL expects to struggle only in IENR for the year, citing ample opportunities in A&D in the manufacturing and after-market segments.
  
• Estimates pruned on higher tax rates: Our earnings estimates for FY18/19 are down by 3/2% owing to higher effective tax rates of 26-28% v/s 24% earlier. Barring that, growth and margin estimates are largely unchanged, despite the 1Q miss, as we expect catch-up in DLM in the remaining quarters to compensate for the same.