Cyient reported healthy set of Q2FY22 numbers. The company saw a recovery in Aerospace vertical (up 4.0% QoQ) and it looks like the vertical has bottomed out, stated IDBI Capital Equity Research.

"We expect Aerospace segment to witness gradual recovery in revenues over the coming quarter. The company has also won 6 large deals with total contract potential of ~USD 63.5 million (4 from services, 1 from DLM and 1 composite B2S deal) which represent healthy growth in coming quarters. This coupled with company’s guidance of double-digit growth for next 2 years, improving margin trajectory (14% in near term and 15.5% in medium term) coupled with investment in leadership to drive growth bodes well for the company. Hence, we upgrade the stock from ‘Hold’ to ‘Buy’ with a target price of Rs 1,345/share (valuing at 23x FY23 EPS)," it added.

Key highlights and investment rationale

Better than expected Q2FY22

Consolidated revenue grew by 4.6%/11.2% QoQ/YoY in USD and +5.6% in CC, was better than our forecast. EBIT margin of 14%, +90bps QoQ, primarily led by expansion in the IT services revenue. DLM business (16.6% of revenue) grew by 5.4%/22.3% QoQ/YoY to US$25.5mn, Services business also grew by 4.5% /9.2%  QoQ/YoY in USD and 5.5% QoQ in CC. Utilities vertical (9.9% of revenue) reported a healthy growth of +27.4%/47.4% QoQ/YoY, also Portfolio business (32.8% of revenue) grew by +11.7%/17.7% QoQ/YoY. For FY22, CYL reiterated its guidance for a double digit revenue growth in CC in services business, 20%+ growth for DLM and ~250bps YoY improvement in consolidated EBIT margin.

EBIT margin to sustain despite headwinds

The company plans to invest in leadership, selective wage hikes, add more employees which will act as a headwind to margins. This coupled with resumption of travel and other discretionary spend will impact margins. However, the company plans to offset the same by higher offshoring, operational efficiencies and revenue growth. Hence the company expects EBIT margin for services at 15.5% in near term and 17% in medium term. This will lead to overall margins of 14% in near term and 15.5% in medium term.

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