Cyient extends rally on strong Q4 results; stock zooms 52% so far in CY23

Shares of Cyient hit a new high of Rs 1,230, as they rallied 6 per cent on the BSE in Monday’s intra-day trade in an otherwise subdued market after the IT firm reported strong March quarter (Q4FY23) earnings. In comparison, the S&P BSE Sensex was flat or up 0.01 per cent at 59,656 at 10:08 AM.

Thus far in the calendar year 2023 (CY23), the stock price of Cyient has zoomed 52 per cent, as against 2.4 per cent decline in the benchmark index.

Cyient offers engineering & development services to aerospace & defence, transportation, E&U, communication and others.
For Q4FY23, the company's consolidated revenue from operations rose 48.3 per cent year-on-year (YoY) and 8.2 per cent quarter-on-quarter (QoQ) to Rs 1,751 crore, aided by a strong services deal pipeline.

The company, at the group level, reported earnings before interest and tax (EBIT) margin of 13.3 per cent while core services normalised EBIT came in at 16.1 per cent, up ~100 bps QoQ. The company indicated that the margin improvement was due to the tailwinds of improved realisations of +130 bps, cost efficiency due to increase in volume +90 bps, favourable revenue mix +40 bps & currency benefits +30 bps mitigated by the tailwind of increase in SG&A expenses -100 bps &  decline in utilisation -90 bps.

The company reported order intake of $212.7 million, down 10.3 per cent QoQ and also mentioned that it won five large deals with total contract potential of $185.1 million. Cyient further mentioned that the large deals won were across the four business units.

On guidance for FY24, the company indicated that on the back of strong demand for its services, robust order book with large deal wins and expected double digit growth across its large verticals of transportation, connectivity and sustainability, it is guiding for consolidated services revenue growth of 15-20 per cent.

The company, in FY24, is guiding for consolidated services EBIT margin improvement of 100-200 bps i.e. 14.7-15.7 per cent. Cyient indicated the levers for margin improvement will be improved realisation, improving productivity by automation & managing costs.

Overall, from a macro standpoint, the business outlook remained strong with no material impact on the BUs, except for few sub-segments. All growth engines are firing well for the company. Aerospace, Communication, Mining and Auto are expected to deliver double-digit growth, while other segments are on the verge of recovery and should incrementally contribute to its overall growth in FY24E, Motilal Oswal Financial Services said.

Cyient’s service segment is shaping up quite well, with positive momentum in post of its growth engines (excluding Rail, Consulting and Utility). Conversely, other segments are on the verge of recovery and should incrementally contribute to its overall growth in FY24E. Current valuations at 14x/12x FY24E/FY25E EPS of Rs 73.9/Rs 85.3 appear attractive, giving us more comfort to maintain our BUY rating with a target price of Rs 1,360 per share, the brokerage firm said in its result update.

However, the recent stock run-up largely captures growth momentum; expensive valuation limits upside, analysts at ICICI Securities said. The stock was trading above brokerage firm’s target price of Rs 1,210 per share.

The recovery in transportation vertical, continued order book & large deals will likely help in achieving growth guidance of 15-20 per cent for FY24 in services. Organisation restructuring and subsequent management re-alignment will likely help in value unlocking for both services & DLM and strategic buyout a multi-year arrangement with an auto major are key triggers for future price performance, the brokerage firm said.