Cyient share price up 18% on strong Q3 FY21, highlights HDFC Securities

HDFC Securities maintains ADD rating on Cyient, based on improving growth outlook in the services business and strong margin recovery in DLM (design-led manufacturing). The services segment (82% of revenue) was up 0.3% QoQ CC, led by ENU (+13.9% QoQ) and Communication (+5.2% QoQ), offset by Aerospace & Defense (-5.7% QoQ) and Transportation (-2.5% QoQ). The aerospace vertical (27% of rev) has been under stress due to the pandemic and gradual recovery is expected in FY22E. The focus is on growing services business by winning large deals (won 5 deals with TCV of USD 106mn) and mining Top-30 clients.
 
The growth outlook for Transportation, Medical, and Communication are positive while A&D will stabilise in Q4 of FY21. Services margin contracted only 90bps QoQ despite wage hike and furlough impact, offset by offshoring benefit and lower sub-con. DLM (+24.9% QoQ) is driving growth and reported a margin of 10.5% (+597bps QoQ), which is sustainable. The FCF generation is strong (FCF/EBITDA at 113%), led by higher collections and net cash stands at Rs 7.7bn (~18% of Mcap). Based on better margin performance, we increase our EPS estimate by +2.7/6.7% for FY22/23E.
 

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HDFC Securities target price stands at Rs 600, based on 14x Dec-22E EPS, 8% premium to 5Y average 1Y-fwd P/E multiple. The stock trades at 15.5/13.5x FY21/22E, a discount of 50% to LTTS.
 
Q3 FY21 highlights:
 
(1)   USD revenue grew 4.7% QoQ vs. expectation of 2.0% QoQ
(2)   Services EBIT margin declined 90 bps QoQ to 11.3% (estimate 9.5%) due to wage hike (-150 bps), furlough (-90 bps) offset by cost optimization (+150 bps
(3)   DLM margin was at 10.5% vs. 0.3% YoY. (4) Management indicated a recovery in deal activity and growth in DLM to continue.
 
Outlook:
 
HDFC Securities have factored in -11.7/+9.2% USD revenue growth for FY21/22E respectively; FY21E implies -16.6/+24.6% growth in Services /DLM. EBIT margin in 4Q will be better than 3Q. We have factored in 9.8/10.8% EBIT margin for FY21/22E resulting in EPS CAGR of 9.4% over FY20-23E.