MOSL: CYIENT (Buy)-Stellar broad-based services growth; encouraged more by quality rather than quantum

Cyient: Stellar broad-based services growth; encouraged more by quality rather than quantum

(CYL IN, Mkt Cap USD1.0b, CMP INR581, TP INR675, 16% Upside, Buy)

•  Strength despite seasonality: 4.2% QoQ growth in Services was a significant beat to our estimate of -0.7% QoQ, especially given the aggravated seasonal weakness CYL faces. A 23% QoQ decline in Rangsons to USD12m was led by an order getting pushed to 4Q, weighing upon overall growth, which at 1.3% QoQ was still above estimates. EBITDA margin at 14.6% was steady, as strong growth provided support. The operational beat resulted in PAT of INR1,086m, a beat of 20% to our estimate.
• Robust vertical performance: Growth was broad-based, with seven out of eight service units growing in double-digits YoY (11-44% YoY). With this momentum expected to continue into 4Q and no foreseeable threats to existing trajectory even in the next year, CYL should be able to clock 13% YoY growth in Services in both FY18 and FY19. This expectation gets further cemented by 17% YoY growth in the order book in 9MFY18. Although Rangsons saw a steep decline in 3Q, the guidance of 20% volume growth in FY18E was maintained, implying ~USD22m revenue in 4Q.
• Resilience demonstrated yet again: Despite the shift in aerospace demand from design to manufacturing, CYL has continued growing in double-digits, actively reconstituting its service offerings organically and via acquisitions. Even with its top customer exhibiting softness in spend in near term, it has been able to demonstrate overall strength aided by other accounts. The show of adjusting to long-term demand trends and successful mitigation of weak pockets leave us more confident about double-digit growth in FY19.