Growth in top line mandatory for Cyient re-rating; FY20 outlook key

Management revised services revenue growth guidance to 7.5% for FY19 from 8.5-9.5% earlier

An indication of feeble top line growth for the second consecutive quarter in the March 2019 quarter led to a sharp downtick in Cyient's stock price on Tuesday. With about 11 per cent decline, the stock topped the BSE 500 losers chart even as the Nifty IT index was up 0.9 per cent. A reversal of the top line trend is a must if the stock is to recover from the current levels. This is why the FY20 growth outlook is key, says Harit Shah of Reliance Securities. IDBI Capital too believes that substantial re-rating in the stock would happen only after a pick-up in revenue growth.

The key concern for the street is the delayed orders. The company revised its top-line growth guidance for FY19 due to the delay and deferment of orders from DLM (digital-led manufacturing) and key segments (Aerospace & Defense and communication) of its services vertical. The management now expects Cyient’s DLM segment to grow by 24-25 per cent in FY19 against the earlier guidance of around 35 per cent. In case of services segment (90 per cent of revenues), there has been a downward revision twice. From double digits to 8.5-9.5 per cent post-December-2018 quarter results in January, the management now sees its services revenue rising by 7.5 per cent.

As per the management, there are programming adjustments by a large customer from Asia Pacific region which caused deferment in order execution for the communication segment (58 per cent of services revenues). Yet, support from Europe and North America regions would help to achieve double-digit growth in communication in FY19 in constant currency terms.

Further, the company is in the process of discontinuing its non-profitable business, which would further impact the top line growth. This would help the bottom line growth, which for FY19 is likely to remain flat. Analysts at IDBI Capital have lowered their consolidated revenue estimates for FY20 by 2.2 per cent and earnings estimates by around 5 per cent.

Positively, the issue is not structural and the company has not lost any orders or customers. The management believes FY20 will be a better year in terms of revenue growth and margins. The deferment/delay in orders in the March 2019 quarter is expected to spill over to FY20 boosting the top line. Also, cost efficiency measures are expected to improve margins.