Cyient - Shines in a Seasonally Weak Quarter; Result Update Q3FY15 :: Edelweiss, report

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Cyient`s Q3FY15 revenue of USD114.7mn, up 3.5% QoQ, surpassed Street`s 0.4% estimate and EBITDA margin at 16.3% too beat its 15.7% forecast. Softential propelled growth during the quarter; excluding which, revenue grew 0.2%. While data network & operations (DNO) jumped 12.4% QoQ, engineering (Engg) segment declined 2.0%. The company`s solid performance in a seasonally weak quarter is commendable; however, owing to advancement of revenue (USD2.5mn in Softential) in Q3FY15, it anticipates Q4FY15 to be soft. Taking cues from a strong Q3FY15 and improved deal pipeline, we maintain FY16 organic revenue growth estimate of 16.0% and forecast USD87mn revenue from Rangsons Electronics (Rangsons) acquisition; for FY17, we estimate 14% revenue surge.

Softential powers growth; demand momentum upbeat

Cyient`s robust growth of 3.5% QoQ was driven by DNO (12.4% including Softential and 4.3% excluding it). Engg segment declined 2.0%. The strong growth in a seasonally weak quarter and despite cross currency tailwinds is commendable. Growth across geographies stood in the 4-6% range on constant currency basis. While Q4FY15 is expected to be soft, Cyient is confident of 3-4% CQGR over the next few quarters.

Robust revenue momentum to propel margin

EBITDA margin expanded 20bps QoQ versus Street`s 40bps decline estimate. As revenue momentum continues, we expect margin to rise riding improvement in operational metrics. The company estimates margin to be ~200-250bps lower in FY15 (18.6% in FY14). However, offshoring of contracts and dip in sub-contracting cost (up 600bps over Q3FY14-Q3FY15) will boost margin in FY16. We estimate EBITDA margin of 17.2% and 18.1% for FY16E and FY17E, respectively.

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