Buy Cyient; target of Rs 575: SPA Research

SPA Research's research report on CyientCyient Ltd reported another quarter of below par numbers with 24% decline in net profit QoQ led by lower margin and oneoffs. Adjusted for one-offs, net profit declined QoQ by ~3%. Revenue growth of 1.9% QoQ was in line with our scaled down expectations while margin declined by 107bps due to higher onsite effort, change in business mix and higher SG&A expense. In Q4FY16, the company has laid out a new organizational structure (eight new units) to improve focus and more importantly to align business units with revenue growth and margin improvement. This we believe should help in countering revenue volatility by reducing incidence of growth in one business unit being compensated by another. Factoring in slower organic growth and lower contribution from high margin Softential business, we expect revenue and net profit to grow at a CAGR of 11.5% and 15% over FY16-18E. After recent correction, we upgrade our rating to BUY with TP of INR575 (15x FY18E EPS). FY16 was a disappointing year for Cyient with everything that can go wrong, going wrong. Core business suffered due to issues with 3 of its top 5 clients and acquisitions did not perform according to expectation. On the operating margin front, the company delivered in 1HFY16 and it was on track to deliver on its guidance of improving margin by ~100bps in FY16, but lower revenue in Softential and change in product mix in 2HFY16, led to 127bps decline in operating margin for FY16. We believe that through directed acquisitions and investments, Cyient has emerged as a true full-stack integrated engineering services provider in core engineering verticals. Rangsons acquisition has further equipped Cyient with end-to-end capabilities to deliver design to build solutions to customers. We believe this change in positioning can help drive new higher-value annuity revenue for Rangsons and places Cyient in an attractive position with long-term growth potential. According to Zinnov, Indian Engineering R&D service market is expected to grow at a CAGR of ~14% between FY15-20 to ~$15bn from $7.8bn. After recent correction, we upgrade our rating to BUY with TP of INR575 (15x FY18E EPS).

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