Cyient: Rich valuations unsustainable

Highly volatile nature of revenues and margins on account of Rangsons acquisition is another concern

Cyient’s dismal show in the September 2015 quarter led analysts to downgrade their earnings estimates for the company by three-four per cent for FY16 and FY17. As a result, the Cyient scrip tanked as much as 16 per cent in Friday’s trade to a day-low of Rs 526. However, part of this fall can also be attributed to some profit-booking, given the stock had scaled to its all-time intra-day high of Rs 641 on Thursday (closed at Rs 625.65), amidst hopes of a strong show similar to that of peers such as Mindtree. Does the scrip appear attractive after Friday’s fall? Not quite, given some concerns.

Although the management remains confident on the road ahead, citing strong deal pipeline in aero, transportation and utilities verticals even as energy and natural resources remain under pressure, few analysts seem to buy into this confidence. Increasing stress in a couple of major customers is the key reason behind this. Higher volatility in revenues and margins of its acquisitions namely Rangsons and Softential will reduce earnings predictability and visibility going forward. After the September quarter results, analysts on an average expect the company’s FY16 revenues and net profit to grow at 17 per cent and seven per cent, respectively, much lower than the growth witnessed in earlier years. Further, despite Friday’s fall, the Cyient scrip trades at 15 times its FY17 estimated earnings, which is much higher than its historical average one-year forward price to earnings ratio of nine times.

For the September 2015 quarter, Cyient’s revenues grew 6.2 per cent sequentially to Rs 772 crore. The constant currency revenue growth of 4.2 per cent was lower than analysts’ expectations of 6-6.5 per cent. This was on account of flattish core business (90 per cent of revenues) which struggled with client specific issues in Aerospace and weakness in semiconductor and utilities businesses. Most of the topline growth was led by its Rangsons Electronics and Softential acquisitions. Fall in pricing at a key client was another factor impacting topline in the quarter.

Going forward, analysts at Spark Capital expect Cyient’s core business to grow seven per cent in constant currency terms and Rangsons & GSE Asia to contribute $56 million and $12 million, respectively, in FY16. Revenues from these two acquisitions are likely to form 14 per cent of Cyient’s topline in FY16.

Weaker rupee versus the dollar, higher margins at Rangsons along with improved utilisation led to a strong 244 basis points sequential expansion in earnings before interest, taxes, depreciation and amortisation (Ebitda) margin to 15.1 per cent. Ebitda margins for FY16 are estimated at around 15 per cent, showing minor uptick over FY15. Healthy margin expansion coupled with a steep fall in tax rate (down 519 basis points sequentially to 23.5 per cent) elevated net profit growth to 31.7 per cent at Rs 99 crore in the quarter.