Aug 06, 2019

Information Technology - IT Services Cyient Ltd

Company Update Cyient Ltd

Bloomberg Code: CYL IN

India Research - Stock Broking

BUY
Recovery to Take Longer than Expected Recommendation (Rs.)
CMP (as on Agu 05, 2019) 441
Cyient reported a soft quarter (Q1FY20) with consolidated revenue at USD 156.6 Mn
Target Price 637
(down by 5.2% sequentially and -2.6% on yearly basis). In INR terms, overall revenue
Previous Target Price 659
stood at Rs. 10,890 Mn, a flat yearly growth of 0.8% with a sequential de-growth of
Upside (%) 44
6.4%. The overall fresh order intake stood at USD 155 Mn, a reduction of 21% over
Q4FY19. A&D and Communications verticals (60% of the revenues) faced client Stock Information
specific issues in the quarter, but we expect these segments to rebound in the coming Mkt Cap (Rs.mn/US$ mn) 49148 / 696
quarters and drive topline growth by 5.4% over FY19-FY21E. 52-wk High/Low (Rs.) 821 / 428
3M Avg. daily value (Rs. mn) 112.9
Services business impacted, DLM business grew: Revenue from Services
Beta (x) 0.6
stood at USD 137.9 Mn, down by 6.1% on QoQ basis (-5.7% in cc terms). DLM
Sensex/Nifty 36700 / 10862
(Design-led Manufacturing) revenue was at USD 18.7 Mn, increase by 2.2% on
O/S Shares(mn) 111.1
quarterly basis. The fresh order intake in Services business was of USD 134 Mn
Face Value (Rs.) 5.0
vs. USD 185 Mn in Q4FY20, a decrease of 27.6% on QoQ basis. Services quarterly
revenue was impacted by de-growth in verticals including Communications (-10.7%), Shareholding Pattern (%)
Energy & Utilities (-5.7%), Portfolio (-10.0%) and Aerospace & Defense (0.1%). There Promoters 22.7

were client specific issues in 2 of Top 10 clients, 1 in A&D and 1 in Communications. FIIs 20.1

Client in Communication vertical has significant amount of restructuring related to DIIs 45.6

people being let go. Thus, there was delay in project roll-out. Management expects Others 11.5

good recovery in Q2FY20 on the back of strong order intake and backlog. DLM Stock Performance (%)
business had a deferment of USD 5.5 Mn in previous quarter which got realized in 1M 3M 6M 12M
this quarter thus its revenue grew. Absolute (18) (22) (28) (36)
Relative to Sensex (12) (18) (27) (34)
Valuation & Risks Source: Bloomberg
We believe there will be recovery in major verticals even though the past two quarters
have been sluggish to grow in terms of revenue. Since company has a good order Relative Performance*
120
conversion rate (80%), we believe the revenue to be back to normal sooner. We
believe projects related to NBA program will be revenue accretive in coming years. 100

Also, the cost optimization program will help improve efficiencies and margins in
80
coming quarters. Thus, we recommend a “BUY” rating for Cyient with a target price
of Rs.637, an upside potential of 44%, based on the 3-year historical average target 60
Mar-19
Aug-18

Nov-18
Dec-18

Jul-19
Aug-19
Oct-18

Apr-19
Jan-19

Jun-19
May-19
Feb-19
Sep-18

P/E of 13.5x to its FY21E EPS of Rs. 47.12. Slow recovery in Communications and
Aerospace & Defense verticals is a risk to our call. Cyient Ltd Sensex

Source: Bloomberg; *Index 100

Exhibit 1: Valuation Summary (Rs. Mn)

Earnings Revision (%)
YE Mar (Rs. Mn) FY17 FY18 FY19 FY20E FY21E
YE Mar FY20E FY21E
Net Sales 36065 39175 46175 47628 51271
Sales (%) LL (4.5) LL (6.1)
EBITDA 4772 5354 6328 6887 7414
EBITDA (%) LL (19.0) LL (20.4)
EBITDA Margin (%) 13.2 13.7 13.7 14.5 14.5
PAT (%) LL (3.9) LL (6.7)
Adj. Net Profit 3396 4031 4771 5060 5326
Source: Karvy Research
EPS (Rs.) 30.6 36.0 42.4 44.8 47.1
RoE (%) 17.3 17.7 19.4 18.7 17.7 Analysts Contact
PE (x)* 15.6 19.3 15.3 10.3 9.8 Konpal Pali
Source: Company, Karvy Research, *Represents multiples for FY17 - FY19 are based on historic market price 040- 3321 6690
Konpal.Pali@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures refer
to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Sarath Jutur
Thomson Publishers & Reuters sarath.jutur@karvy.com

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 Aug 06, 2019
Cyient Ltd

Margins impacted by certain headwinds: Consolidated EBIT was at Rs. 1004

Mn, a decrease of 33% over previous quarter. EBIT margin stood at 9.2% down by 358
bps on a quarterly basis. EBIT was negatively impacted by certain headwinds such as
one time impact of lower efficiencies (-160 bps), lower SG&A absorption (-142 bps)
and increased investments (-58 bps) totaling to 360 bps. It was also negatively affected
by forex impact (35 bps), hike impact (85 bps) which got offset by cost optimization
program (130 bps) and lease reclassification impact (170 bps). We expect the margins
to face some pressure due to lower volume which partially would be negated by cost
optimization program.

PAT hit by lower EBIT and other income: In Q1FY20, PAT was at Rs. 904 Mn,
down by 48.8% sequentially. It was due to lower EBIT (Rs. 1004 Mn) and low other
income (Rs. 282 Mn). Other income came down by Rs. 507 Mn (-64% QoQ) due to
lower treasury income (down by Rs. 27 Mn) and lower unrealized gains (down by
Rs. 102 Mn), which was offset by realized favorable forward contract gains (up by
Rs. 114 Mn). In Q4FY19, there were certain one-offs which included export incentives
(Rs. 280 Mn), reversal of DLM put option (Rs. 135 Mn) and certain earn out provision
reversal (Rs. 69 Mn). Thus, other income was higher in Q4FY19. In addition, during
Q1FY20, effective tax rate (ETR) was higher by 670 bps at 22.0% on QoQ basis.

Significant developments in Q1FY20

yyReorganization of Business Units: The Company combined ‘Energy and Natural
resources business’ in Industrial, Energy and Natural Resources (IENR) BU and
the ‘Utilities business’ in Utilities & Geospatial (U&G) BU into a new business unit,
Energy & Utilities (E&U) with an intent to leverage, synergize and build capabilities
across energy value chain. Also, Geospatial business in U&G and the Industrial
business in IENR are now part of a new business unit, Portfolio, with an intent to
execute strong focus on solutions.

yyNew Business Accelerator program: Company spent 1-1.5% of revenue as

investments into this program.

yyCost Optimization Program: The Company embarked on a program to achieve

cost optimization and profitability improvement. Company has been doing this
special exercise since past four quarters. Some of the initiatives have been done
in Q1 whose benefits have also been realized in this quarter. Going forward,
management expects significant momentum and more benefits in coming quarter
as well. This resulted in savings of USD 3 Mn (net of cost about USD 1.5 Mn). The
full benefit of it will be coming in from Q1FY21.

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 Aug 06, 2019
Cyient Ltd

Exhibit 2: Q1FY20 Financials

(Rs. Mn) Q1FY20 Q4FY19 QoQ % Q1FY19 YoY %
Turnover 10890 11629 (6.4) 10800 0.8
Expenditure 9444 9878 (4.4) 9483 (0.4)
EBITDA 1446 1751 (17.4) 1317 9.8
Depreciation 442 261 69.3 285 55.1
EBIT 1004 1490 (32.6) 1032 (2.7)
Finance Costs 134 87 54.0 82 63.4
Other Income 282 789 (64.3) 170 65.9
Exceptional items 0 112 (100.0) 0 NA
PBT 1152 2080 (44.6) 1120 2.9
Tax 254 318 (20.1) 304 (16.4)
Share of profits 0 7 (100.0) 1 (100.0)
Minority interest 6 0 NA 9 (33.3)
PAT 904 1769 (48.9) 826 9.4
EBITDA Margin (%) 13.3 15.1 (178) bps 12.2 108 bps
EBIT Margin (%) 9.2 12.8 (359) bps 9.6 (34) bps
Net Profit Margin (%) 8.3 15.2 (691) bps 7.6 65 bps
Source: Company, Karvy Research

Performance Highlights
Exhibit 3: Quarterly Trend - Revenue & PAT (Rs. Mn) Exhibit 4: Quarterly Margins Trend (%)
12000 2000 17%
10000 15%
1500
8000 13%
6000 1000
11%
4000
500 9%
2000
7%
0 0
Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20
Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Revenue PAT EBIT margin PAT margin

Source: Company, Karvy Research Source: Company, Karvy Research

Exhibit 5: Q1FY20 Vertical Mix Exhibit 6: Q4FY19 Vertical Mix

Medical and Portfolio Medical and Portfolio
Cons. 9.2% Cons. 11.3%
Electronics Communications Electronics
3.6% 19.1% 3.4% Communications
20.2%
Semiconductor
4.9% Semiconductor
5.0%
Energy & Aerospace and Aerospace and
Utilities defence Energy & Utilities defence
13.2% 38.8% 11.6% 36.7%

Transportation Transportation
11.3% 10.9%
Source: Company, Karvy Research Source: Company, Karvy Research

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 Aug 06, 2019
Cyient Ltd

Exhibit 7: Quarterly Order Intake ($ Mn) Exhibit 8: Revenue by Geography Q1FY20

280 APAC (incl.
240 EMEA India)
28.1%

255
200 16.4%
241
160

187

185
120

157
153

134
130

80

39
107
30

21
19

19
17
12

11
40
4

0 Americas
Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20
55.5%

Cyient Services DLM Total Intake

Source: Company, Karvy Research Source: Company, Karvy Research

Exhibit 9: Change in Earnings Estimates

YE Mar FY20E FY21E
Comments
Standalone (Rs. Mn) Old New % Change Old New % Change
Due to de-growth in verticals like Aerospace &
Net Sales 49855 47628 (4.5) 54584 51271 (6.1) Defence and Communications, the recovery
might take some time.
EBITDA can get affected due to higher employee
EBITDA 8505 6887 (19.0) 9312 7414 (20.4)
costs to match supply and demand mix.
EBITDA Margin (%) 17.1 14.5 (3) bps 17.1 14.5 (3) bps Optimization program will improve the margins.
PAT got affected due to lower other income as
Adj. PAT 5266 5060 (3.9) 5712.0 5326 (6.7)
one-offs are not recurring in nature.
EPS (Rs.) 46.6 44.8 (4.0) 50.5 47.1 (6.7) EPS expected to be lower due to lower PAT.
Source: Karvy Research

Exhibit 10: 5 Year PE Band for Cyient Ltd

90

70

50

30

10
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

1 Yr Forward PE Average P/E 1SD -1SD

Source: Bloomberg, Karvy Research

Exhibit 11: 5 Year PE Band for NSE IT

20000

15000

10000

5000
Nov-14

Nov-15

Nov-16

Nov-17

Nov-18
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
May-15

May-16

May-17

May-18

May-19
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Price (Rs.) 22.3x 20.4x 18.5x 16.6x 14.7x

Source: Bloomberg, Karvy Research

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 Aug 06, 2019
Cyient Ltd

Financials

Exhibit 12: Income Statement

YE Mar (Rs. Mn) FY17 FY18 FY19 FY20E FY21E
Revenues 36065 39175 46175 47628 51271
Growth (%) 16.3 8.6 17.9 3.1 7.6
Operating Expenses 31293 33821 39847 40741 43857
EBITDA 4772 5354 6328 6887 7414
Growth (%) 15.2 12.2 18.2 8.8 7.6
Depreciation & Amortization 953 1052 1114 1203 1289
EBIT 3819 4302 5214 5684 6125
Interest Expenses 172 204 326 522 621
Other Income 932 1519 1340 1353 1353
Exceptional item (Net) 261 50 35 35 35
PBT 4579 5617 6228 6515 6857
Share of (loss)/profit in associate
123 (156) 5 5 5
company and JV
Non-controlling interest 54 54 54 54 54
Tax 1045 1380 1427 1426 1501
Adjusted PAT 3396 4031 4771 5060 5326
Growth (%) 6.1 18.7 18.4 6.1 5.3
Source: Company, Karvy Research

Exhibit 13: Balance Sheet

YE Mar (Rs. Mn) FY17 FY18 FY19 FY20E FY21E
Cash & cash equivalents 8570 9603 9072 11135 12982
Receivables 6496 6913 8137 8351 8990
Inventory 935 1312 1833 2200 2640
Loans & Advances 2865 3654 4542 5239 6044
Investments 1957 1428 545 903 1841
Net Block 4232 4426 4523 4364 4119
Miscellaneous 6309 6990 10240 13365 14601
Total Assets 31364 34326 38892 45556 51217
Current Liabilities & Provisions 8291 8621 9895 12266 13697
Debt 492 630 1116 2120 2799
Other Liabilities 1382 1633 2259 2674 3199
Total Liabilities 10165 10884 13270 17060 19695
Shareholders Equity 563 563 552 552 552
Reserves & Surplus 20610 22876 25089 27963 30988
Total Networth 21173 23439 25641 28515 31540
Minority Interest 26 3 (19) (19) (19)
Total Networth & Liabilities 31364 34326 38892 45556 51217
Source: Company, Karvy Research

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 Aug 06, 2019
Cyient Ltd

Exhibit 14: Cash Flow Statement

YE Mar (Rs. Mn) FY17 FY18 FY19 FY20E FY21E
PAT 3396 4031 4771 5060 5326
Depreciation 953 1052 1114 1203 1289
Interest 172 204 326 522 621
Tax Paid 1045 1380 1427 1426 1501
Inc/dec in Net WC 366 (1659) (1710) 382 (417)
Other non cash items (1733) (2045) (2092) (1426) (1501)
Cash flow from operating activities 4199 2963 3836 7167 6819
Inc/dec in capital expenditure (1080) (1474) (1512) (68) (17)
Inc/dec in investments (2243) (3355) 6110 (278) (834)
Others 1520 3960 4606 (112) (137)
Cash flow from investing activities (1803) (869) 9204 (457) (989)
Inc/dec in borrowings (29) 718 919 (1966) (988)
Dividend paid (746) (1894) (1261) (2186) (2301)
Interest paid (174) (192) (303) (522) (621)
Proceeds from issue of equity shares 15 9 22 0 0
Cash flow from financing activities (934) (1359) (623) (4674) (3910)
Net change in cash 1462 735 12417 2036 1920
Source: Company, Karvy Research

Exhibit 15: Key Ratios

YE Mar FY17 FY18 FY19 FY20E FY21E
EBITDA Margin (%) 13.2 13.7 13.7 14.5 14.5
EBIT Margin (%) 13.2 13.7 13.7 14.5 14.5
Net Profit Margin (%) 9.5 10.1 10.3 10.6 10.4
Dividend Payout Ratio (%) 21.7 48.0 36.0 36.0 36.0
Net Debt/Equity (x) 0.1 0.1 0.1 0.2 0.2
RoE (%) 17.3 17.7 19.4 18.7 17.7
RoCE (%) 13.4 13.3 14.7 14.2 13.4
Source: Company, Karvy Research

Exhibit 16: Valuation Parameters

YE Mar FY17 FY18 FY19 FY20E FY21E
EPS (Rs.) 30.6 36.0 42.4 44.8 47.1
DPS (Rs.) 10.5 13.0 15.0 15.9 16.7
BVPS (Rs.) 187.6 207.5 226.7 252.2 278.9
PE (x) 15.6 19.3 15.3 10.3 9.8
P/BV (x) 2.5 3.3 2.9 1.8 1.7
EV/EBITDA (x) 9.5 13.0 10.6 6.3 5.6
EV/Sales (x) 1.3 1.8 1.5 0.9 0.8
Source: Company, Karvy Research; *Represents multiples for FY17 - FY19 are based on historic market price

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 Aug 06, 2019
Cyient Ltd

Stock Ratings Absolute Returns

Buy : > 15%
Hold : 5-15%
Sell : < 5%

Connect & Discuss More at

1800 419 8283 (Toll Free) research@karvy.com Live Chat f in
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Tube

Disclaimer
yy Analyst certification: The following analyst(s), Konpal Pali, Sarath Jutur who is (are) primarily responsible for this report and whose name(s) is/are
mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s)
and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this
research report.
yy Disclaimer: Karvy Stock Broking Limited [KSBL] is registered as a research analyst with SEBI (Registration No INH200003265). KSBL is also a SEBI
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