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Cyient locked in lower circuit on weak guidance; HDFC Sec downgrades stock

Cyient's revenue stood at $149.2 million, down 3.9/9.7 percent QoQ/YoY against HDFC Securities' estimates of $153 million, while constant currency revenue degrowth was 3.7 percent QoQ.

May 08, 2020 / 03:20 PM IST
 
 
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Shares of Cyient, the global engineering and technology solutions company, were locked in a 10 percent lower circuit on May 8 on weak revenue growth guidance for Q1FY21. HDFC Securities downgraded its rating to reduce.

The stock lost 58 percent of its value in last three months. It was quoting at Rs 208.55, down 9.99 percent on the BSE at 14:33 hours IST.

HDFC Securities downgraded its rating on Cyient to reduce from add post a weak performance and bleak growth outlook.

"Services growth and margin performance in Q4 were disappointing. Growth in the first half of FY21 will be severely impacted due to a structural problem in A&D and supply-side (COVID-related) issues in Communication and Transportation verticals. Cyient's higher mix of mechanical services and elevated exposure to stressed verticals has magnified the COVID-19 impact versus its peers," the brokerage said.

It has reduced its EPS estimates by 16.4/13.8 percent for FY21/22. Its price target on the stock stood Rs 240, based on 9x FY22E EPS, which is at around 30 percent discount to 5-year average 1-year-forward P/E multiple.

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Cyient's revenue stood at $149.2 million, down 3.9/9.7 percent QoQ/YoY against HDFC Securities' estimates of $153 million, while constant currency revenue degrowth was 3.7 percent QoQ.

Its revenue was down 4 percent YoY in constant currency (CC) terms versus growth of 12.8/1.8 percent YoY CC growth for HCL/Wipro ER&D division.

Management has indicated of a steep fall of around 15-20 percent QoQ in Q1FY21.

EBIT margin contracted 118 bps QoQ to 8.4 percent (lowest ever). Services margin stood at 9.6 percent down 100bps QoQ.

"The margin recovery will be linked to growth and Q4FY21 exit will be similar to Q4FY20. Cyient’s higher mix of mechanical engineering (legacy) services explains the poor growth metrics and the lower margin structure compared to ER&D peers," said HDFC Securities.

The brokerage further said Cyient was struggling with issues such as (1) stress in services portfolio, (2) stress in top accounts (3) Issues in core vertical (aerospace and defence), (4) focus on lower margin DLM business and (5) lower margins structure due to investments and muted growth.

"Concerns related to slowdown in decision making, COVID-19 related uncertainty and higher mix of legacy services remain," it added.

HDFC Securities expects USD revenue growth of down 20/up 7.8 percent and EBIT percent of 7.8/8.8 percent for FY21/22.

Motilal Oswal also feels Cyient's Q4FY20 revenue and adjusted EBIT margins were disappointing. The brokerage has a neutral call on the stock.

"Sharper disruption versus peers (e.g. HCL Tech's ER&D portfolio) is also a reflection of the company's weak execution capabilities. We anticipate a material slowdown in key verticals like A&D, Transportation and E&U (contributing around 60 percent of revenue) over the next 12-18 months," it said.

"While Communications (around 23 percent of revenue) may not be heavily impacted by COVID-19, the liquidity crunch would mean low emphasis on ER&D spends. Supply-side issues in ER&D are more pronounced than in IT services given the reluctance of clients to enable Work from Home (WFH) due to concerns around plagiarism/IP theft," it added.

Hence, the brokerage cut its EPS estimates for FY20-22 by 31-33 percent due to the worse-than-expected results and commentary.

"Given the continued execution challenges at the company, dented visibility on earnings recovery and the one-off trail, hope of a re-rating may be too optimistic. Target price of Rs 260 is based on around 10x FY22E EPS," Motilal Oswal said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: May 8, 2020 03:20 pm

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