MOSL: CYIENT (Buy)-Investing for the future-without deterring profitability

Cyient: Investing for the future; without deterring profitability

(CYL IN, Mkt Cap USD1.1b, CMP INR648, TP INR750, 16% Upside, Buy)

• Upward momentum…: In-line growth of 8.3% QoQ was a function of 2% growth in Services and 80% growth in Rangsons. Strong double-digit growth in four of CYL's seven business units led to 13% YoY growth in Services in FY18, despite challenges in top customer and a few verticals. Back-ended delivery in Rangsons led it to achieve the 15% growth guidance for the year.
• …bodes well for the next year: Heading into the next year, CYL has guided for growth similar to that achieved in FY18, driven by (i) stability in the top customer, (ii) a recovery in the slower verticals of Industrial and Utilities and (iii) continued momentum in key drivers. This, coupled with the 20% guidance for Rangsons and incremental revenue from the recently acquired B&F, drives our 16% USD revenue growth estimate (4% higher than earlier).
• Stable margin guidance: A 50bp EBITDA margin contraction to 14.1%, attributed to higher margins in Rangsons (7% in 4Q v/s 1% in 3Q), cushioned the impact of the mix change (80% incremental revenue from DLM). Adjusted PAT at INR1.2b was up 16% YoY. Guidance of flat margins for the next year, despite investments toward development of new products and services, was encouraging. These efforts are aimed at opening new market opportunities and driving innovation to provide a competitive advantage.