Cyient -Earnings yet to catch up with valuations… :: ICICI Securities, report

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Earnings yet to catch up with valuations…
• Q3 earnings were significantly above our estimates led by higher
than anticipated Softential contribution
• US$ revenues grew 3.5% QoQ to $114.7 million, above our 1% QoQ
growth and $111.9 million estimate while | revenue came in at
| 711.8 crore (5.9% QoQ), above our | 693.2 crore estimate (3.1%)
• EBITDA margins improved 19 bps QoQ to 16.3% (13 bps, 16.2%
estimate) led by revenue growth and operational efficiencies
• Reported PAT of | 100.8 crore was above our | 91.7 crore estimate
led by revenue beat
Demand trends across business units…
Generally, demand trends across a majority of business units are healthy.
Segregating further across industries: 1) Aerospace – traction in the US
led by shift in spends from design services to aftermarket, manufacturing
and analytics while Europe is challenged with limited visibility. 2) Rail
transportation – steady demand across the US and Europe. Revenue
could be impacted by continued delay in existing signalling project. 3) Off
highways – good momentum across US, India led by analytics projects. 4)
Medical and electronics – demand for new product development,
localisation and cost optimisation services. Larger opportunities could
emerge post Rangsons integration. 5) Semiconductor – good traction in
APAC, Europe but client specific issues may impact the US. 6) Utilities –
continued momentum led by ramp-up in one US customer and RFP’s in
APAC. 7. Communication – positive outlook both in Europe and APAC. 8)
Energy – muted spending led by commodity price weakness.
Adjusting estimates to accommodate Rangsons…
We now expect FY15E dollar revenues to grow 24.3% to $451 million vs.
23.3%, $447.9 million earlier primarily led by two-month contribution of
Rangsons in Q4FY15 offset by weakness in Softential. Further, FY16E
revenues rose to $597 million (32.4% YoY growth) vs. $533 million (19%)
growth earlier. That said, we cut our FY15E, FY16E EBITDA margin
assumption to 15.7%, 16% vs. 17%, 18% earlier, respectively, primarily
led by acquisition integration.
Margin improvement trajectory lags commentary…
EBITDA margins rose 19 bps QoQ to 16.3% in Q3 vs. 16.1% in Q2 and
14.1% in Q1 and 13 bps improvement and 16.2% estimate. Margins were
aided by revenue mix, growth and improved utilisation. Recall, Q1
margins had declined 397 bps QoQ to 14.1% led by wage hikes, transition
cost associated with large US utilities deal and were significantly below its
FY09-14 average of 18.6%. The 9MFY15 margin improvement trajectory
has lagged commentary and that FY15E margins could decline 250-300
bps YoY vs. 100-150 bps decline earlier. Note, this is a second straight
quarter of lower margin guidance. We model 16.5% margins in Q4, which
translates to ~290 bps YoY decline in FY15E margins to 15.7%.
Raising target price but downgrading to HOLD as valuations appear full
We estimate Cyient will report rupee revenue, earnings CAGR of 27%,
29% over FY14-16E (average 15.9% EBITDA margins in FY15-16E), vs.
20%, 24% reported during FY09-14 (average 18.6%), respectively, driven
by acceleration in a majority of BUs and Rangsons contribution. Though
we ascribe higher PE (14x vs. 13x earlier) multiple to account for strong
revenue growth and raise our target price, we are downgrading the stock
to HOLD as valuations appear full given inconsistent margin performance
led by acquisition integration.

LINK

http://content.icicidirect.com/mailimages/IDirect_Cyient_Q3FY15.pdf