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S3 strategy expands the addressable market
Madhu Babu [email protected] | 91-22-66322300
Rating: BUY | CMP: Rs753 | TP: Rs880
Cyient (CYL IN)
Cyient
June 28, 2018 2
Contents
Page No.
Engineering Design Services on a sweet spot; poised for multi-year growth cycle ....................................................................................................... 4 Investment Thesis .............................................................................................. 9
Cyient enjoys marquee positioning in the Aerospace vertical ......................... 9 Cyient remains strongly entrenched in Rail Transport Vertical ..................... 13
Subscale positioning in Semiconductor, IE&R and Medical Equipment verticals ........................................................................................................ 14 Expansion in value chain by venturing into Manufacturing ........................... 16 Can DLM help Cyient tap Offset and Defense opportunities? ...................... 18 Services to Solution (S3 strategy) to enable address a larger market opportunity .................................................................................................... 20
Investment in “New Business Accelerator” aimed at increasing solution-led approach ...................................................................................................... 21 S3 Strategy would pit Cyient against a new set of competitors .................... 22 Cyient v/s LTTS: LTTS scores well on account of broader vertical mix ........ 22
Data Network and Operations seeing strong momentum ................................. 24 Acquisitions strategy aimed at expanding addressable market ........................ 27 Cyient’s growth and margins fare well among midcap peers ........................... 28 Financial Analysis ............................................................................................ 29
Broad-based growth across verticals to drive double-digit growth ................ 29 Investments and DLM weighing on EBITDA margin trajectory ..................... 30 Steady FCF generation aids strong payout ratios ......................................... 31
Valuation and View .......................................................................................... 32
Company Background ...................................................................................... 33
June 28, 2018 3
Rating: BUY| CMP: Rs753 | TP: Rs880
S3 strategy expands the addressable market
Cyient, a mid-sized IT vendor focusing on Engineering Design services and
Data Network Operations is well poised for scalability over FY18-FY21E led
by robust demand for core engineering design services in its focused
verticals (Aerospace and Rail Transport) as well as expansion of offerings to
target the entire value chain (S3 Strategy aims to focus on Services, Systems
and Solutions). With its Build, Operate and Maintain strategy, Cyient has
expanded its addressable market to US$1.65tn. Cyient’s client base include
large engineering conglomerates like UTC, Boeing, Bombardier each of which
have an R&D budget of ~US$3-5bn per year. Cyient also has presence in
Semiconductor, Off-highway, Industrial or Medical Equipment verticals
offering Engineering Services. Albeit, these verticals remain subscale and we
see a need for inorganic initiatives to scale up these verticals.
We also see strong potential for scalability in Data Network and Operations
vertical which predominantly caters to Network Design, Operations and
Maintenance services for large Utilities and Telecom Service provider clients.
While Cyient derives 90% of its revenues from the Services business, it gets
10% of its revenues from Manufacturing of Subsystems. Cyient’s foray into
Manufacturing was through its acquisition of Rangson in Q4FY15. Cyient
believes that Manufacturing business could position the company with end-
to-end offerings as well as potential to tap the offset business. However, DLM
business (Design Led Manufacturing) is currently operating at sub-optimal
EBITDA margins (~6% for Q4FY18) as well as burning cash. We expect
gradual improvement in the metrics in DLM business as company pivots to
value-led Manufacturing (v/s volume- led Manufacturing).
Overall, we expect Cyient’s USD revenues (Annual revenues at US$609mn for
FY18) to grow at 13.5% CAGR over FY18-FY20E. For FY19, we expect Cyient’s
USD revenues to grow at 13.5% YoY (led by 12% growth in Services business
and 27% growth in DLM business). Cyient’s margin trajectory has been a
pain-point as the company has seen a gradual drop in EBITDA margins over
FY13-FY18. EBITDA margins as on FY18 stood at 14% (v/s 18.2% in FY13).
Cyient’s initiatives to expand into Manufacturing as well as investments in
expanding the value chain have led to margin erosion. Select pieces of
business (Utilities, Communication) might also have higher onsite role ratio
and hence, lower margins at project levels. We estimate a gradual margin
expansion over FY18-FY20E led by improvement in profitability of DLM
business. We expect 15.5% earnings CAGR over FY18-FY20E. Stock trades at
15.5x FY20E EPS (L&T Technology Services trades at 22x FY20E EPS). Peer
LT Technologies trades at substantial premium to Cyient owing to larger
vertical footprint and diversified portfolio in Engineering Design Services. We
value Cyient at 18x FY20E EPS which yields a TP of Rs880/sh. Resume
coverage with “BUY”.
Cyient (CYL IN)
June 28, 2018
Company Initiation
Change in Estimates | Target | Reco
Change in Estimates
Current Previous FY19E FY20E FY19E FY20E
Rating BUY - Target Price 880 - Sales (Rs. m) 45,930 51,727 - -
% Chng. - -
EBITDA (Rs. m) 6,433 7,435 - - % Chng. - -
EPS (Rs.) 42.4 48.6 - -
% Chng. - -
Key Financials(Consolidated)
FY17 FY18 FY19E FY20E
Sales (Rs. m) 36,022 39,176 45,930 51,727
EBITDA (Rs. m) 4,825 5,493 6,433 7,435
Margin (%) 13.4 14.0 14.0 14.4
PAT (Rs. m) 3,442 4,090 4,773 5,477
EPS (Rs.) 30.6 36.3 42.4 48.6
Gr. (%) 4.7 18.8 16.7 14.7
DPS (Rs.) 10.4 13.1 14.8 17.0
Yield (%) 1.4 1.7 2.0 2.3
RoE (%) 17.4 18.3 19.2 19.7
RoCE (%) 16.7 17.5 18.0 18.6
EV/Sales (x) 2.1 1.9 1.6 1.4
EV/EBITDA (x) 15.9 13.9 11.7 9.8
PE (x) 24.6 20.7 17.8 15.5
P/BV (x) 4.0 3.6 3.2 2.9
Key Data CYIE.BO | CYL IN 52-W High / Low Rs. 887 / Rs. 474 Sensex / Nifty 35,217 / 10,671
Market Cap Rs. 85 / $ 1,241 Shares Outstanding 113m
3M Avg. Daily Value Rs. 692m
Shareholding Pattern (%)
Promoter’s 22.18
Foreign 40.42 Domestic Institution 27.44
Public & Others 9.96
Promoter Pledge (Rs bn) -
Stock Performance (%)
1M 6M 12M
Absolute (3.1) 32.3 47.9
Relative (3.9) 27.4 30.0
Madhu Babu [email protected] | 91-22-66322300
Cyient
June 28, 2018 4
Engineering Design Services on a sweet spot; poised for multi-year growth cycle
Engineering Design Services is still an underpenetrated segment which offers
strong potential for scalability for Indian IT vendors. While the overall Global ER&D
spend is pegged at ~US$1000bn, the addressable market for Indian service
providers is ~US$67bn (both for third-party service providers and in-house captives
of Global firms). As per a leading Consulting firm, ERD Services’ exports from India
stood at US$24bn as in FY17 and has grown at 13% CAGR over the past five years.
Global in-house centers have a strong presence in India and account to a major
share of ER&D exports (61% of ERD exports are from captives). Most of the large
global majors like Boeing, UTC, Airbus, Schlumberger, Siemens, Intel, Bosch have
large captives in India. Apart from their own captives, Engineering firms work
with an eco-system of third-party suppliers like HCL Tech, TCS, LT
Technologies, Tata Technologies, Quest Global and Cyient. Third-party
suppliers provide crucial functions which include better operational leverage
of resources and ability to scale up at short notices.
Global Engineering Design Services Market Size and addressable market for Indian vendors
Source: Company, PL
Cyient
June 28, 2018 5
The dynamics of Engineering Design Services differ from Traditional IT services
outsourcing. The touch point for selling offerings in Engineering Design Services is
traditionally the CTO’s of the organization (v/s CIO for traditional IT services). Sales
cycle to win a new account can remain long but client stickiness remains high from
thereon.
Comparison of Engineering Design v/s IT Services
Source: Company, PL
Vertical-wise addressable market in Engineering Design Services
We present the key verticals and ER&D budgets across the key verticals. Over the
past few years, Software product companies have become the largest R&D
spenders globally with Amazon and Google topping the charts. Amazon’s R&D
budget stood at a whopping US$23bn for CY17. The overall Engineering R&D
spends are further broken into Embedded and Mechanical services. Increasing
pace of Technology Refresh is driving demand for third-party suppliers which
provide a crucial support for Global Engineering majors.
Cyient
June 28, 2018 6
Vertical wise Addressable market for Engineering Design Services
Source: Company, PL
Within the value Chain, Cyient which is a mid-sized vendor has strong
entrenched positioning in Engineering Design Services with focus on
Aerospace and Rail transportation verticals. Cyient is also present in
Semiconductor, Medical Equipment, Industrial, Energy and Off highway verticals.
With combined Revenues of US$330mn from Engineering Design Services for
FY18 (Including all the verticals), we believe that Cyient has ample headroom for
scalability over a five-year period. Engineering Design Services account to 59%
of total revenues of Cyient as on Q4FY18.
Apart from Cyient, the other pure play vendors’ focus on Engineering Design
services based in India includes LT Technology Services, Quest Global and Tata
Technologies. HCL Tech has the strongest presence in Engineering Design
Services (EDS) among Tier I IT vendors and HCL Tech is also the fourth largest
vendor in Engineering Design Services Globally. The top three players in this space
globally, Altran, Akka and Alten, are based out of Europe.
Cyient
June 28, 2018 7
Cyient well-positioned to tap the value chain in ER&D
Cyient enjoys strong positioning in select verticals and competencies within
Engineering Design Services. The company has strong positioning in Aerospace
Engineering Design services among mid-sized IT vendors (Quest Global which is
an unlisted company is the other large vendor providing Engineering Services for
Aerospace vertical). Cyient’s Aerospace vertical has annual revenue of US$190mn
for FY18 and is comparable in scale with other Indian peers (Quest Global, HCL
Tech are the other large players in Aerospace). Marquee clients for Cyient include
Pratt and Whitney, Boeing, Airbus, Vaugh Aircraft, Bell Helicopters etc.
Apart from Aerospace, the company also enjoys strong positioning in Rail Transport
vertical with annual revenues at US$66mn for FY18. Marquee clients in Rail include
Bombardier, Alstom–Siemens, Thales etc. Cyient also has presence in
Semiconductor, Off-highway equipment, Industrial, Energy and Medical Equipment
verticals. However, the company is subscale in these three verticals.
Semiconductor vertical has Annual revenues of US$22mn for FY18 and Medical
vertical has annual revenues of US$11mn for FY18. Industrial, Energy and
Resources vertical (IER) has combined annual revenues of US$47mn as on FY18.
Vertical mix of IT Services revenues as on Q4FY18 (%)
Source: Company, PL
Vertical Mix of Cyient (%)
3QFY17 4QFY17 2QFY18 3QFY18 4QFY18
Aerospace and Defense 35.6 35.7 34.7 34.7 33.4
Transportation 9.4 9.7 11.2 11.7 11.6 I&ER( Industrial Energy and Natural Resource
9.3 8.6 8.6 8.6 8.3
Semiconductor 3.9 4.2 4.1 3.7 3.9
Medical & Healthcare 1.9 1.9 2.2 2.0 1.9
Utilities and Geospatial 17.2 18.5 15.9 16.6 16.2
Communications 22.7 21.4 23.3 22.7 24.7
Source: Company, PL
Aerospace and Defense33.4%
Transporation (Railw ays)
11.6%I&ENR8.3%
Semiconductor3.9%
Medical & Healthcare
1.9%
Utilities and Geospatial
16.2%
Communications24.7%
Cyient
June 28, 2018 8
Cyient derives ~60% of revenues from Engineering Design Services, with the
remaining 40% from Data, Network and Operations. Within Data, Network and
Operations (Geospatial), Cyient has marquee positioning in two verticals (Utilities
and Telecom). Within Utilities, marquee clients include Southern Edison, Ausgrid
etc. Within Telecom, marquee clients include Telstra, Airtel, NBN Broadband,
Telenet etc. Cyient also provides Geospatial and Mapping Services to TomTom
(Map provider) which is also a long standing client of the company and is among
the Top 5 clients.
Cyient
June 28, 2018 9
Investment Thesis
Cyient enjoys marquee positioning in the Aerospace vertical
Cyient has a strong competency in Engineering Design Services catering to the
Aerospace vertical. This vertical accounts to 33.5% of total revenues as on
Q4FY18. Marquee clients of Cyient in Aerospace includes UTC group companies
(Pratt and Whitney America, Pratt and Whitney Canada, UTAS), Airbus, Boeing,
Vaugh Craft, Bell Helicopters etc.
Cyient has over two decades of experience in Aerospace and is well positioned to
transform the Aerospace &Defense product lifecycle for aero engines, structures,
avionics, systems, and interiors. Cyient’s aerospace solutions cater to Design to
Certification, Manufacturing, Aftermarket, and Digital Transformation using
Analytics. Cyient aims to expand its offerings as a preferred supplier of aerospace
solutions right from Design-Build-Maintain partner which includes taking solution
ownership across the value chain.
Cyient’s Presence across the Aerospace Value Chain
Source: Company, PL
Cyient has a marquee client base in Aerospace vertical, with UTC group being the
largest client in vertical. UTC group is also the largest client of Cyient and
accounted for 20% of total revenues of the company (UTC group’s annual
revenues were at US$120mn) for FY18. Cyient has a long standing relationship
with Pratt and Whitney (UTC group company) and has been working with the Aero
Engine marker for the past 17 years. Cyient entered into MSA with UTC group in
CY2000 and has since then scaled-up gradually in the account.
Cyient
June 28, 2018 10
As on FY18, Cyient has ~1700 employees working in projects of the UTC group.
Over the years, Cyient has worked on marquee projects with Pratt and Whitney
(UTC group company) which include PurePlay 1000@G Geared Turbofan Engine.
Cyient’s strength lies in its ability to provide end-to-end services throughout the
aerospace engine lifecycle. This includes concept-to-certification engineering for
system-level design solutions regarding internal flow, lube, thermal management
systems, propulsion systems as well as rotor dynamics and loads. Cyient has
developed processes, tools and technologies to shorten engine design, validation,
and development cycle time. Cyient also manages aftermarket value streams, such
as engine performance monitoring, technical support, repair engineering, technical
publications.
We note that UTC Group has an R&D budget of US$3.9bn as on CY17 which offers
strong headroom for scalability of mid-sized vendor like Cyient. UTC group also
works with other major vendors which include TCS, HCL Tech, LT Technologies
Quest Global, Belcan etc. Apart from that, UTC group also has a large captive
operation in India. While this account has remained stagnant in FY18 and is
likely to remain soft in FY19 as well, we see strong headroom for scalability
over longer term owing to Cyient’s strong track record and broad-based
positioning in the account.
UTC Group Revenues and R&D spends
Fig in USD bn CY13 CY14 CY115 CY16 CY17
Net Sales 56.6 57.9 56.6 57.4 60.2
R&D spends 4.1 4.5 3.9 3.7 3.9
R&D as a % of Sales 7.2% 7.8% 6.9% 6.4% 6.5%
Source: Company, PL
Does recent stake sale by UTC remain a worry? UTC group had 18% stake in
Cyient since FY02 and has been holding this stake for the past 15 years. UTC group
has gradually exited its stake with a major chunk (~12.2% of stake) sold over June
2017- September 2017. Post the last sale in September 2017, UTC group has
completely exited Cyient. Management guided that despite stake sale, Cyient
continues to remain in the preferred vendor status for UTC. We believe that UTC
group exiting the company is a positive this will also aid Cyient in tapping
larger opportunities from competitors of UTC group (like Rolls Royce, GE etc)
which have till date maintained limited relationship with Cyient.
Cyient also works with other large Aerospace companies which have a large
addressable R&D budget. We believe that Cyient’s Aerospace revenues which
currently are at US$189mn as on FY18 can comfortably scale up to US$251mn by
FY21E representing 10% CAGR. Excluding UTC group revenues in Aerospace,
Cyient derives a modest US$70mn revenues from all the other clients
combined in the Aerospace vertical. Hence, we see ample scope for scaling
Cyient’s Aerospace vertical over FY18-FY20E.
Cyient
June 28, 2018 11
R&D budgets of large Aerospace companies in CY17
Fig in USDbn R&D spends
Airbus 3.4
Boeing 4.6
Rolls Royce ( Aero engine) 1.3
Source: Company, PL
Case Study of Cyient’s offering in Aerospace vertical
Client: Diehl Aircabin, as part of the corporate division of Diehl Aerosystems, is a Tier 1 supplier of cabin modules, crew rest compartments and air ducting for large aircraft manufacturers.
Offerings: Cyient’s collaboration with Diehl Aircabin goes back to 2009, when Cyient delivered extensive length of design, engineering, and manufacturing services for them. Cyient’s engagement format has continuously expanded and evolved over time. The partnership started with some minor projects; but as the delivered performance met customer expectations, Cyient was entrusted with more complex projects across multiple areas. Currently, Cyient is involved in several cabin interior domains. As the collaboration continued, the majority of the work has been undertaken offshore, ranging from 3D modeling and installation drawings of all the aircraft interior structure, through interface management, to technical publications.
Source: Company, PL
Cyient aims to expand across the Aerospace value chain from Design, Build to
Manufacture which will enable the company address larger market opportunities.
Cyient’s presence across the value chain
Source: Company, PL
Cyient
June 28, 2018 12
“The design in commercial aerospace has come moderated a bit because a lot of
programs that have been designed over the last 10 years, be it the 787, the 350,
the 320neo, the 737 MAX, all those programs, the C Series from Bombardier, the
ERJ from Embraer, etc., those programs whose design is done are now going into
manufacturing. So from a commercial aerospace perspective, design in commercial
aerospace has been coming down for the last few years and it is stabilized, but it
would not increase at least for the foreseeable future. The opportunity lies in the
actual physical manufacturing, but there are a number of tasks that have to be
performed, which are engineering related, which I need to support manufacturing
that is why there is a huge opportunity.
Similarly, once they have been manufactured they start flying there are lot of things
that have to be done to support the after markets, the repairs and MRO, all that
good stuff. Again there is a lot of engineering task. So my point was the new design
and new products in commercial aerospace is come down, which has happened
over the last few years and that is sort of something, which just have to deal with,
but the support are of manufacturing and after markets has gone up significantly”
Cyient Managing Director and CEO in Q3FY18 concall.
Cyient is rated in the top quartile by a leading Consulting firm in the Aerospace
vertical. The other contenders include Quest global (Indian vendor based in
Bangalore), Altran (France based Engineering Design major), ALTEN (French
based vendor).
Zinnov Rating of major vendors in Aerospace
Source: Company, PL
Cyient
June 28, 2018 13
Overall, we believe Cyient is well positioned to capture the multiple opportunities
emanating from the Aerospace value chain. The company also aims to expand into
Defense which currently accounts to only 5% of the Aerospace vertical revenues.
We expect the Aerospace vertical Revenues to grow at 10% CAGR over FY18-
FY21E led by traction in emerging accounts.
Aerospace Vertical Revenues of Cyient
Fig in USD mn FY17 FY18 FY19E FY20E FY21E
Aerospace Revenues 177.2 188.2 207.0 227.7 250.5
Growth (%) 10% 6.2% 10.0% 10.0% 10.0%
As a % of Total Revenues 32.9% 31.0% 30.0% 29.1% 28.2%
Source: Company, PL
Cyient remains strongly entrenched in Rail Transport Vertical
With a domain experience of more than 15 years, Cyient has delivered engineering
services to Rolling stock, Signalling OEMs and Rail operators. Cyient’s offerings
include designing next-generation trains, enabling complex signalling upgrades or
improving efficiency through predictive maintenance. Cyient has 1,700 engineers
working on projects in the Railways verticals. Marquee clients in Railways vertical
include Bombardier, Alstom – Siemens, Thales etc. Cyient works with seven of the
top ten global rail OEMs and have delivered over 200 major global projects across
areas such as rolling stock and signalling for various metros, high-speed trains, light
rail, freight, and locomotive programs.
Cyient’s offerings in Rail Transportation vertical
Source: Company, PL
Cyient
June 28, 2018 14
Case Study: The London
Underground (LU), a public metro
system is the world’s oldest
underground railway system, spread
across 402Kms with 270 stations and
11 different lines. The JNUP is involved
in designing, procuring and installing
transmission-based train control
(TBTC) system and was implemented
by Thales, in partnership with Cyient.
Cyient Solution: With a 300+ strong
signaling team and 200+ IRSE-
certified engineers, Cyient was able to
address this challenge of Thales,
supporting the complex upgrade
project with the right resources. To
ensure the upgrade was carried out
with minimal disruption to train
operations, the testing and installation
works for JNUP were carried out
during the night, weekends and
Christmas closures.
Some of the key marquee engagements in which Cyient was involved include
a) Hyderabad Metro (CBTC technology)
b) Network Rail (East London, Lincoln, Waterton, Reading, Thameslink)
c)LUL (London Underground Ltd.), Metropolitan, District and Victoria line
d) Melbourne Metro, Australia
e) Singapore Downtown Line (CBTC Technology)
We expect the Railways vertical (accounts to 11.6% of Total Revenues) to grow at
16.5% CAGR over FY18-FY21E.
Revenues from Railways Vertical
Fig in USD mn FY17 FY18 FY19E FY20E FY21E
Transport Vertical 46.8 61.4 73.68 84.7 97.4
Growth (%) 5.2% 31.2% 20.0% 15.0% 15.0%
As a % of Total Revenues 8.7% 10.1% 10.7% 10.8% 11.0%
Source: Company, PL
Subscale positioning in Semiconductor, IE&R and Medical Equipment verticals
Apart from Aerospace and Railways, Cyient also has presence in Semiconductor, ,
Energy, Industrial and Medical Equipment verticals; however, most of these
verticals are subscale. Cyient is aiming to scale up the Semiconductor vertical
through acquisitions and recent acquisition of AnSem is a part of this initiative.
Marquee clients in these verticals include Caterpillar, Schlumberger, John Deere,
Broadcom, Qualcomm, Rio Tinto, WestingHouse etc.
Cyient has also been offering services in various verticals involving new
technologies. In the next paragraph, we are presenting a case study of Cyient’s
offering in Industrial vertical which also involves new technologies.
Cyient
June 28, 2018 15
Cyient’s Solution for Elevator Industry: Cyient entered into a long-term
agreement with Thyssenkrupp Elevator, a global market leader in passenger
transportation systems to support its MAX platform. Cyient’s advanced analytics
services will be integrated into MAX to help deliver predictive maintenance
solutions. The solution, developed with Microsoft and using its Azure cloud platform
and Azure IoT Suite, will incorporate Cyient’s expertise in creating predictive
analytics solutions. Cyient will develop algorithms and integrated solutions to
leverage data from elevators and enhance Thyssenkrupp’s ability to diagnose
potential problems and deliver superior service.
Cyient’s Predictive Solution for Thyssenkrupp
Source: Company, PL
Cyient’s annual revenues from these verticals (IE&R, Semiconductor) remain
modest with few anchor clients accounting for most of the revenues in each of these
practices. We believe while some of these segments could gradually fizzle out,
Cyient might aim in scaling-up only select segments. We believe that
Semiconductor and Medical Equipment have better scope for scalability within
these sub-verticals. We expect the combined vertical revenues to grow from
US$80mn in FY18 to US$113mn in FY21E which represents a 12.4% CAGR.
Cyient Revenues from verticals
Fig in USD mn FY17 FY18 FY19E FY20E FY21E
Semiconductor 19.8 22.1 27 30 35
Growth (%) (7%) 11.6% 20.0% 15.0% 15.0%
As a % of Total Revenues 3.7% 3.6% 3.8% 3.9% 3.9% IE&R (Industrial, Energy and Resource 45.1 46.4 48.3 50.2 52.2
Growth (%) (6%) 2.9% 4.0% 4.0% 4.0%
As a % of Total Revenues 8.4% 7.6% 7.0% 6.4% 5.9%
Medical 9.1 11 14.3 18.5 24.1
Growth (%) 40% 20.9% 30.0% 30.0% 30.0%
As a % of Total Revenues 1.7% 1.8% 2.1% 2.4% 2.7%
Source: Company, PL
Cyient
June 28, 2018 16
Expansion in value chain by venturing into Manufacturing
Apart from offering Services, Cyient has aimed to expand into Manufacturing post
the acquisition of Rangson in Q4FY15. Cyient aims to tap the end-to-end value
chain in the Engineering Design Services as well as Production with the Rangson
acquisition.
With its DLM business, Cyient handles all aspects of design and manufacturing
such as Software design and development, Hardware design and development,
Mechanical design and development, Test engineering, Verification and validation,
Certification, Quick-turn prototypes, Electronic manufacturing, Mechanical
manufacturing, Product manufacturing.
Cyients offerings in Manufacturing
Electronic manufacturing facilities: • PC board assemblies • Complex wire and cable harnesses • Product assemblies (box build) Various methods of soldering
Mechanical Manufacturing Cyient offer high-precision machining and castings, creating complex mechanical components and assemblies. Cyient range of manufacturing equipment includes: • CNC milling and turning • Jig boring • Precision grinding/polishing • Advanced metrology labs • 3D printing (metal and plastic) • EDM (wire and plunge)
Source: Company, PL
Rangson Facility in Mysore
Source: Company, PL
Cyient
June 28, 2018 17
Value chain in Product Realisation
Source: Company, PL
Some of the Products built-in DLM business includes
Developing a vending machine from the conceptual stage for a global FMCG
company.
Designing and developing a home health care device for India’s leading
hospital chain.
Conducting tear down analysis and a cost reduction program for an industrial
printer.
Cyient’s DLM business performance over past few quarters
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18
DLM (Revenues (USD mn) 9.44 13.4 14.84 16.03 11.8 15.8 12.2 21.9
Fig in Rs mn
Revenue 632.5 901.5 1,002 1,069 763 1,017 785 1,418
Direct Salaries and Related Costs 53.3 34.4 30 43 53.4 39 37 114
Salaries as a of Revenues 7% 7% 7% 7% 7% 7% 7% 7%
Material and Mfg. Cost 547.5 761.7 861 921 625.66 881 653 1116
Material Costs/Sales 86.6% 84.5% 85.9% 86.2% 82% 82% 82% 82%
Gross Profit 31.7 105.4 111 105 83.9 97 95 188
SG&A 80.7 87.4 92 108 53.41 89 86 90
SG&A as a % of sales 12.8% 9.7% 9.2% 10.1% 7% 7% 7% 7%
Operating Profit (EBITDA) -49 18 19 -3 30.5 8 9 98
EBITDA margin -7.7% 2.0% 1.9% -0.3% 4.0% 0.8% 1.1% 6.9%
Source: Company, PL
Management has cited that it aims to pivot the DLM business by increasing
focus on high margin products and capturing the entire value chain (DLM).
This is in comparison to the current business which is predominantly low
margin but high in volumes. This transition in the model should enable improve
profitability of the DLM business over the next three years.
Cyient
June 28, 2018 18
“I mean 10% is what we have stated as the steady state margin and that would
happen in the next two to three years at an operating level, but very quickly while
that in isolation is 10%, there is a big dependency on design because the whole
idea of DLM has design led manufacturing, so the design margins would be much
better. Once the design margins which will be more than 20% are added to the
manufacturing margins, the margins tend to increase to 12-13% at the operating
level.” Cyient CEO in Q3FY18 concall.
Cyient DLM revenues
Fig in USD mn FY15 FY16 FY17 FY18 FY19E FY20E FY21E
DLM revenues 9.2 39 54 62 78 97 116.4
Growth (%) 323.9% 37.9% 14.6% 26.6% 24.4% 20%
As a % of Total Revenues 2.1% 8.3% 10.0% 10.1% 11.3% 12.4% 13.1%
Source: Company, PL
Can DLM help Cyient tap Offset and Defense opportunities?
”The new relationship will help Cyient expand its core business while deepening
partnerships with OEM customers. The acquisition will also help Cyient position
itself as a strong offset partner. Further, integrated end-to-end capabilities would
strengthen the company’s contribution to the ‘Make in India’ program announced
recently by the union government” Cyient CEO January 2015 at the time of
Rangson acquisition.
While Cyient acquired Rangson in FY15 with an aim to expand into subcomponent
manufacturing, the performance of the company remained challenging for the next
two years (FY16-FY17). While Rangson had annual revenues of US$66mn at the
time of acquisition with EBITDA margin of 10%, Cyient paid US$50mn for acquiring
Rangson. However, Rangson revenues have almost halved in FY16. However , the
business has gradually recovered in FY17/FY18.
The DLM business has been consuming working capital as well as operating
at tepid margins and hence, dragging ROE of the overall company.
Management expects both margins and free cash flow to start improving over
next two years.
EBIDTA margin of DLM Business
2%
4% 4%5%
-8%
2% 2%
0%
4%
1% 1%
7%
-10%-8%-6%-4%-2%0%2%4%6%8%
1Q
FY
16
2Q
FY
16
3Q
FY
16
4Q
FY
16
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
EBIDTA margin of DLM
Source: Company, PL
Cyient
June 28, 2018 19
Working Capital Cycle of DLM business
Working Capital Cycle 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18
DSO 96 85 80 73 86 80 77 83 102 92 98 92
Inventory Days 137 95 129 160 140 90 83 162 115 123 91 137
Payable Days 107 53 60 99 89 69 66 102 162 90 124 97
Customer Advance days 68 29 30 22 20 23 18 7 7 35 34 28
Working Capital Cycle 58 98 119 112 117 78 76 136 48 90 31 104
Source: Company, PL
While Cyient has time and again cited scope for Offset business to drive growth,
the traction has been very modest. We believe that tapping the offset opportunity
might require Cyient to have strategic JVs or step-up further investments. We also
note that larger corporate houses have formed JV with large global conglomerates
to tap Defense offsets. Select Indian listed companies like Centum Electronics
and Dynamite Technologies have entered into partnerships with global firms.
Major JV’s in India
Source: Company, PL
A major portion of Cyient’s business in DLM is from Aerospace and Defenses and
also has large exposure to Israel. We would watch out for traction in offset
opportunity in FY19/FY20E.
Cyient
June 28, 2018 20
Services to Solution (S3 strategy) to enable address a larger market opportunity
Cyient has gradually expanded its offerings in the value chain and is now poised to
address a much larger pie. While Cyient started as a company focused on GIS, it
gradually moved into Engineering Services establishing a strong presence in
Aerospace segment. Over the past three years, Cyient expanded its strategy to
focus on Build Operate and Maintain as well as DLM which has substantially
increased the market potential.
Cyient Transition in Business model
Source: Company, PL
Cyient’s addressable market
Source: Company, PL
Company has also gradually pursued strategic acquisitions to boost its presence in
the Design Build and Maintain Value chain.
Cyient
June 28, 2018 21
Cyient’s acquisition strategy
Source: Company, PL
Investment in “New Business Accelerator” aimed at increasing solution-led approach
Apart from Engineering Design Services, Cyient is also well poised to tap the new
Digital opportunities which include IoT, Augmented reality, 3D printing etc. In a bid
to enhance innovation, Cyient has started NBA (New Business Accelerator)
program with focus on developing new Products and Services to provide Cyient
with competitive advantage. A dedicated unit has been established, providing
access to the ecosystem to promote entrepreneurship and innovation. The
objectives of NBA include
Creating a ‘Product’ environment within Cyient, with talent drawn from within
and outside of the organisation
Partnerships with key players have been established for faster-go-to-market
Opportunities have been identified in the areas of IoT, healthcare, Aerospace
& Defense and Semiconductor
Solution development in majority of the identified projects have started and
each will have a development cycle of 1 to 2 years
Cyient
June 28, 2018 22
S3 Strategy would pit Cyient against a new set of competitors
Cyient has expanded from engineering design to offering solutions across the value
chain. Hence, Cyient has expanded its base and now competes with various
companies across the value chain. Within specialists, Cyient competes with Quest
Global and LT Technologies which focus on Engineering Design Services. Apart
from this, the company also competes with Tier 1 IT vendors like HCL Tech and
TCS which have a large presence in Engineering Design Services. Cyient also
competes with large global firms like Altran, AKKA and Alten which have strong
local presence and marquee relationship with major engineering service providers.
With foray into Manufacturing (DLM), Cyient could also be competing with
companies like Esterline, AMETEK etc. in the future (though these companies have
a much stronger and scale presence in Manufacturing). Apart from this, all the major
Engineering companies have large captive operations in India and hence, Cyient
competes with captives as well.
Competition for Cyient in Engineering Design Services
Indian IT firms Global firms Manufacturing Firms Captives
Quest Global Altran Esterline All major Engineering firms have
LT Technologies Akka AMETEK Captive presence in India
HCL Tech Alten
TCS Belcan
Source: Company, PL
Cyient v/s LTTS: LTTS scores well on account of broader vertical mix
While Cyient is predominantly strong in Aerospace and Railways, it remains
subscale in other verticals (Semiconductor, Medical Equipment, Energy, Industrial).
On the contrary, LTTS has a larger vertical footprint with presence across verticals
which enables the company tap larger opportunities. LTTS’ annual revenues from
Engineering Services stood at ~US$580mn for FY18 which is 1.7x larger than
Cyient. LTTS’ headcount stands at 12,300 employees as on FY18 (v/s Cyient
Headcount in Engineering Design stands at ~6000 employees as per our view).
Revenues of LT Technologies for FY18
LTTS (Fig in USD mn) Annual revenues
Transportation ( Aerospace, Automotive) 185.0
Industrial products 132.0
Telecom & Hi-tech ( Includes Semiconductor) 149.0
Process Industry 75.0
Medical Devices 38.6
Total Revenues in FY18 579.6
Source: Company, PL
Cyient
June 28, 2018 23
Revenues of Cyient in verticals for FY18
Cyient (Fig in USD mn) Annualized Revenues
Aerospace 190.5
Railways 66.2
Semiconductor 22.0
IER ( Industrial , Energy and Resources) 47.0
Medical 10.8
Total Revenues in FY18 from Engineering 336.0
Source: Company, PL
Quest Global (Unlisted) is another large firm operating in the Engineering Design
Services space with a headcount of ~10,000 employees. Since its inception in
1997, Quest Global (backed by PE firms) has scaled rapidly over the years and
boasts of marquee clients which include Rolls Royce, GE, Pratt and Whitney,
Airbus, BMW and Daimler. Quest has done over 12 acquisitions since inception
and now has annual revenue of ~US$500mn and hence, surpassing Cyient.
Cyient
June 28, 2018 24
Data Network and Operations seeing strong momentum
Apart from Engineering Design Services, Cyient has strong offerings for Data
Network and Operations catering to the Telecom and Utilities verticals. This
business accounts to remaining 41% of revenues as on Q4FY18.
Cyient offers services like network planning, design, GIS, inventory solutions,
business operations management, telecom infrastructure life-cycle management
etc. The company’s client base includes some of the CSP behemoths, multiple-
system operators (MSO), infrastructure service providers, utilities, transportation
companies and a range of small- and mid-sized businesses with communication
networks. Marquee clients include Telstra, AT&T, Liberty Global NBN Broadband,
Airtel, Southern Edison etc. Some of the projects done by Cyient include
Cyient’s plan and design solutions aid Communication Service providers
expand their FTTx network quickly. For eg: Cyient helped achieve network
connectivity for 300,000 homes in 22 cities in Netherlands and saved 40% of
deployment cost. Cyient has consolidated the network inventory management
on a single platform for the African continent for an Indian communication
service provider.
Cyient’s Telecom Vertical competence
Source: Company, PL
Cyient
June 28, 2018 25
Cyient’s offering in Telecom Vertical
Source: Company, PL
Case Studies: Cyient’s offering in Telecom vertical
Cyient’s unified network data of 17 countries on a single platform for one of the
largest operators across 17 countries in Africa, providing voice as well as data
services. We present the case study below: The Challenge:
No central management of network inventory and manual reporting
Disparate tools to manage inventory and data
The Solution
Delivered physical network inventory solution
Enabled automated report generation
Ideated a new web browser interface
The Result
Improved coverage planning process
“Communications obviously has been our star performer; this has been driven by a
lot of initiatives that are currently being rolled out, be it the CAF-II initiative, the
Connect America fund in the US or the National Broadband Company in Australia
and many other things” Cyient CEO in Q4FY17 Concall.
Cyient
June 28, 2018 26
Apart from Communication, Cyient also has strong presence in Utilities verticals.
Cyient offerings include Smart Grid Solutions, Disaster Operation Management etc.
Cyient’s offering in the Utilities vertical
Source: Company, PL
Communication and Utilities are large verticals of Cyient accounting to 25% and
16% of total revenues as on Q4FY18, respectively. We expect robust growth in both
these verticals aided by strong new deal wins and ramp of engagements with
existing accounts.
Cyient’s Revenues from Utilities and Communication verticals
FY17 FY18 FY19E FY20E FY21E
Utilities and Geospatial 82.5 89.1 93.6 101.0 109.1
Growth (%) 8.0% 5.0% 8.0% 8.0%
As a % of Total Revenues 15.3% 14.7% 13.6% 12.9% 12.3%
Communication 102.7 127.5 147 164 184
Growth (%) 24.1% 15.0% 12.0% 12.0%
As a % of Total Revenues 19.1% 21.0% 21.3% 21.0% 20.7%
Source: Company, PL
Cyient
June 28, 2018 27
Acquisitions strategy aimed at expanding addressable market
Cyient has done a slew of boutique acquisitions over the past few years in a bid to
expand its offerings in the value chain and address a larger share of clients’ R&D
spends. Rangson acquisition aided Cyient in expanding into Manufacturing
segment. Softential acquisitions enhanced its positioning in Communication
vertical.
Major Acquisitions of Cyient
Year of acquisition Revenues at time of acquisition EBITDA Margin Employees Amount spent
ANSEM April 2018 USD10mn 20% 50 USD17mn
B&F Design Sep-17 USD9mn 10% 47 NA
Certon Mar-17 USD6mn Low Double Digit 45 NA
Pratt and Whitney Global Services Jul-15 USD10-12mn 12-14% 90 NA
Rangson Jan-15 USD66mn 10-12% 1000 ~USD50mn
Softential Mar-14 USD17mn 25% 140 USD18.7mn
Source: Company, PL
Cyient’s recent acquisition
Source: Company, PL
Cyient’s JV with BlueBird Aero Systems aims to support UAV manufacturing and
maintenance services for the Indian market. The JV will offer SpyLite™,
ThunderB™ and MicroB™ UAV systems for ISTAR1 applications to defence,
paramilitary, homeland security and police forces and will also address civilian
market requirements for mapping services. The JV will manufacture, integrate and
test UAV systems in Hyderabad under Defence industrial license with initial
production capacity of 100 systems per year and will also support aftermarket
services including training, spares, repairs and maintenance.
Cyient
June 28, 2018 28
Cyient’s growth and margins fare well among midcap peers
Cyient has delivered steady USD revenue growth of 14/13% for FY17/FY18 aided
by traction in both services as well as DLM business. Management guided for
steady revenue growth in FY19 as well and we expect 13.6% USD revenue growth
for FY19E led by traction in both Services and Rangson. Most of the mid-sized IT
vendors are poised to deliver double-digit USD revenue growth in FY19E.
USD revenue growth of mid-sized IT vendors
Fig in USD mn FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Mindtree 502 584 715 780 847 990 1129
Growth (%) 15.1% 16.4% 22.5% 9.0% 8.6% 16.9% 14.0%
Cyient 363 447 472 538 607 690 784
Growth (%) 5.2% 23.0% 5.6% 14.0% 12.9% 13.6% 13.6% Mphasis 1024 944 926 894 989 1136 1282
Growth (%) NA NA -1.9% -3.5% 10.6% 14.9% 12.8%
Hexaware 388 422 485 526 607 690 793
Growth (%) 6.4% 8.9% 14.9% 8.3% 15.6% 13.7% 14.9%
Persistent Systems 274 309 352 429 471 516 581
Growth (%) 15.2% 12.6% 14.0% 22.0% 9.7% 9.6% 12.7%
NIIT Tech 388 383 408 411 457 518 587
Growth (%) 3.4% -1.2% 6.5% 0.8% 11.1% 13.5% 13.3%
Zensar 383 430 452 459 482 548 603
Growth (%) -1.5% 12.3% 5.2% 1.5% 5.0% 13.6% 10.1%
L&T Infotech 749 813 890 971 1132 1321.5 1494.9
Growth (%) 19.1% 8.5% 9.4% 9.2% 16.6% 16.7% 13.1%
L&T Technologies NA 427.9 466.9 484.4 580.3 687.8 783.7
Growth (%) NA NA 9.1% 3.8% 19.8% 18.5% 13.9%
Source: Company, PL
Cyient’s EBITDA margins are lower than midcap peers. This is owing to its
presence in Manufacturing segment which has lower margins compared to Services
and hence, the drag impacts the overall margin profile. Select verticals like
Communication and Utilities have higher onsite effort which too is weighing on the
margin trajectory for Cyient.
Margins of mid-sized IT vendors
FY16 FY17 FY18 FY19E FY20E
Mindtree 17.7 13.7 13.6 15.5 16.5
Cyient 13.7 13.4 14.0 14.0 14.3
Mphasis 14.7 15.9 16.2 16.1 16.2
Hexaware 17.8 17.0 17.5 17.0 17.4
Persistent Systems 18.0 15.8 15.5 16.3 16.8
NIIT Tech 17.6 17.3 16.8 17.0 17.0
Zensar 14.9 12.6 11.9 13.3 14.4
L&T Infotech 17.7 18.9 17.3 17.5 18.5
L&T Technologies 17.0 18.6 15.5 16.1 16.7
Source: Company, PL
Cyient
June 28, 2018 29
Financial Analysis
Broad-based growth across verticals to drive double-digit growth
Revenue growth: Consolidated Revenue Growth CAGR of 13.6% over FY18-FY20x
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Services 261 324 347 363 434 433 484 546 612 687 Growth (%) 24.0% 7.1% 4.8% 19.6% -0.4% 11.9% 12.7% 12.1% 12.2%
As a % of Total Revenues 100.1% 100.0% 100.4% 100.0% 97.2% 91.7% 90.0% 89.9% 88.7% 87.6%
DLM (Rangson) NA NA NA NA 9.2 39 53.8 61.6 78 97
Growth (%) 37.9% 14.6% 26.6% 24.4%
As a % of Total Revenues 2.1% 8.3% 10.0% 10.1% 11.3% 12.4%
USD revenue (USD mn) 261 324 345 363 447 472 538 607 690 784
YoY growth (%) 29.7% 24.1% 6.7% 5.2% 23.0% 5.6% 14.0% 12.9% 13.6% 13.6%
Source: Company, PL*Rangson was acquired in 4QFY15.
Cyient’s Services business (90% of the total revenues) has shown steady double-
digit USD revenue growth over FY17/FY18 led by growth in key verticals
(Communication, Transport and Aerospace verticals). Management guided for
double-digit revenue growth in the Services business for FY19 as well. DLM
business has also shown improvement in performance in FY18. Management
guided for 35% revenue growth in DLM business in FY19 which includes Blom
acquisition.
We believe that Cyient’s consolidated USD revenues can grow at 13.5% CAGR
over FY18-FY20E led by traction in both Services and DLM Business. Revenue per
reported employee stands at US$44,641 employees as on FY18 which is below
Tier 1 IT peers (TCS’ revenue per reported employee at US$48,800mn). Select
pieces of business in Data Network and Operations have lower billing rates (through
gross margins in these projects remain high) and hence, drags Cyient’s overall
revenue per reported employee.
Cyient
June 28, 2018 30
Investments and DLM weighing on EBITDA margin trajectory
EBITDA margin v/s Average Exchange Rate
Source: Company, PL
Cyient’s EBITDA margins had seen a steep fall in FY15 as the company stepped
up investments to drive the S3 strategy as well as ventured into manufacturing
business through Rangson acquisition. Margins have since then remained tepid as
company has shifted its focus from being a service-driven company to a more
solution-centric company. However, we note that management guided for
investments in FY19 as well for its New Business Accelerator Initiative. Hence,
Cyient guided for FY19 EBITDA margin at ~14%. While Cyient’s absolute margin
remained tepid, strong revenue growth continues to aid absolute EBITDA growth.
“We created this initiative called the New Business Accelerator to facilitate
innovations within Cyient to really focus on developing new products service
and solution. A key tenant of the S3 strategy is to move some services to
solutions and therefore it becomes quite important for us to be able to clearly
define and create these solutions. The solutions are little bit different from
just packaged services. Therefore, it becomes important to have the right
ecosystem, to have the right innovation, development, framework, etc. and
therefore, we create this thing called the New Business Accelerator. Where
this becomes relevant, we are committing this year that is about 100bps of
revenue or margin, so about US$7mn plus will go towards the NBA initiative”
Cyient CEO, Mr Krishna Bodanapu in Q4FY18 concall.
We build a modest improvement in Cyient’s EBITDA margin over FY18-FY20E.
Turnaround in DLM’s business’ EBITDA margin would be the key driver for overall
margin improvement. DLM’s business which accounts to 10% of Cyient’s revenues
is at breakeven margin in FY18.
15.2%
17.4%18.2% 18.6%
14.7%13.7% 13.4%
14.0% 14.0% 14.4%
40.00
45.00
50.00
55.00
60.00
65.00
70.00
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
EBIDTA margin (%) Average Exchange Rate
Cyient
June 28, 2018 31
Steady FCF generation aids strong payout ratios
Cyient has seen volatile and weak free cash flow over FY08-FY13 owing to higher
capital expenditure as well as higher debtor days. However, the company has
cautiously changed its strategy to improve free cash flow generation. Hence, Cyient
shifted to the leased operating model which resulted in lowering capital expenditure.
The company is also focusing on reducing working capital management. Cyient’s
capex as a % of sales has moderated from 4.5-5% of sales as on FY13 to ~2.7-3%
as on FY18. DSO has also seen gradual moderation over the past few years. DSO
including unbilled stood at 81 days as on FY18 (v/s 95 days as on FY13).
Cyient has seen a steady improvement in free cash flow trajectory from FY13
onwards. Improving FCF has also aided the company in increasing dividend payout
ratio gradually. For FY18, Cyient’s payout ratio stood at 41%. We note that DLM
business (Manufacturing business) is still operating at negative free cash flow
(Rs410mn negative FCF for DLM business in FY18). Improvement in free cash flow
generation in this segment as well can further improve FCF trajectory.
Cash flow from Operations and free cash flow of Cyient
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Cash flow from operations 933 1257 1606 2272 3617 2785 4199 2963 3458 5622
Capex (729) (804) (924) (766) (818) (1,287) (1,080)
(1,474)
(1,200)
(1,000)
Acquisition Spend (217) 17 - - (4,519) - (811)
(332) - -
Free Cash flow 204 453 682 1,507 2,799 1,497 3,119
1,489
2,258
4,622
Free cash flow ( post capex+ acquisition) (13) 470 682 1,507 (1,720) 1,497 2,308
1,157
2,258
4,622
FCF /EBITDA 11.4% 16.8% 20.0% 36.7% 69.8% 35.2% 64.6% 27.1% 35.1% 62.2%
FCF/ EBITDA -0.7% 17.4% 20.0% 36.7% -42.9% 35.2% 47.8% 21.1% 35.1% 62.2%
Source: Company, PL
DSO Including Unbilled Days
Source: Company, PL
Dividend Payout Ratio and ROE (%)
Source: Company, PL
Capex as a % of Sales
Fig in Rs mn FY12 FY13 FY14 FY15 FY16 FY17 FY18
Capital Expenditure 790 924 556 734 778 953 1271
Capex (%of total Revenues) 5.09% 4.93% 2.50% 2.68% 2.42% 2.64% 3.24%
Source: Company, PL
99 9587 83 79 74
81
0
20
40
60
80
100
120
FY12 FY13 FY14 FY15 FY16 FY17 FY18
DSO Unbilled Total
0%5%
10%15%20%25%30%35%40%45%
FY14 FY15 FY16 FY17 FY18
Dividend Payout Ratio (Post Tax) ROE (RHS)
Cyient
June 28, 2018 32
Valuation and View
Cyient stock has seen a steady P/E re-rating over the past two years led by
improvement in revenue growth trajectory. The company has delivered strong
double-digit USD revenue growth for the past two consecutive years (FY17/FY18)
and continues to guide for double-digit USD revenue growth for FY19 as well. We
believe Cyient’s S3 Strategy (Services, Systems and Solutions) will help enable
address a larger market opportunity. Hence, we believe that Cyient can continue to
trade a premium P/E multiple. Cyient is currently trading at 17x one year forward
earnings (v/s 14x traded one year ago). Cyient trades at 30% discount to LTTS; we
note that LTTS has a larger vertical footprint and broader scale. Cyient also trades
at 25% discount to TCS.
We value Cyient at 18x FY20E EPS which yields a target price of Rs880/sh.
Resume coverage with “BUY”.
Cyient’s one-year forward P/E
10.00
12.00
14.00
16.00
18.00
20.00
22.00
Apr/
15
Jun/1
5
Aug/1
5
Oct/15
Dec/
15
Feb
/16
Apr/
16
Jun/1
6
Aug/1
6
Oct/16
Dec/
16
Feb
/17
Apr/
17
Jun/1
7
Aug/1
7
Oct/17
Dec/
17
Feb
/18
Apr/
18
Jun/1
8
P/E Mean Mean + Std Dev Mean - Std Dev
Source: Company, PL, Bloomberg
Cyient v/s TCS
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Apr
-15
Jun-
15
Aug-1
5
Oct
-15
Dec-
15
Feb
-16
Apr
-16
Jun-
16
Aug-1
6
Oct
-16
Dec-
16
Feb
-17
Apr
-17
Jun-
17
Aug-1
7
Oct
-17
Dec-
17
Feb
-18
Apr
-18
Jun-
18
Source: Company, PL, Bloomberg
Cyient
June 28, 2018 33
Company Background
Cyient is a global solutions provider focused on engineering, manufacturing, data
analytics and network & operations. Infotech enterprises was established in 1991
in Hyderabad and was rebranded as Cyient in 2014. The company featured among
the top 30 outsourcing companies. It is actively engaged in investing in emerging
technologies that are reshaping several industries and as a result will ensure its
growth. Cyient has domain knowledge and technical expertise to solve complex
business problems across more than ten industries, including Medical Technology
& Healthcare, Aerospace & Defense and Communications.
Business profile of the company
Source: Company, PL
Shareholding pattern for March 2018
Promoters22%
Aditya Birla Sun Life5%
Reliance Capital Trustee
Company5%
Franklin India Balanced Fund
4%
Goldman Sachs India Ltd.
2%Amansa Holdings Pvt Ltd
6%ICICI Pru Life
4%
Other FPI's32%
Others18%
Source: Company, PL
Revenues
Vertical Mix (%)Aerospace : 33.4
Railways:11.6
I&ENR: 8.3
Semiconductor : 4.0Medical : 2.0
Utilities& Geospatial : 16.2
Communication : 24.7
Geography Mix (%)North America: 53.3
Europe : 29.2
APAC : 17.5
Key Competitors LTTS, TCS, HCL Tech
HCL Tech
Quest
Headcount14,125
Client concentration as on Q4FY18
Top 5- 39
Top 10- 52
Cyient
June 28, 2018 34
Senior Management
Chairman
Mr Mohan Reddy founded Cyient in 1991, with the vision of providing engineering services to global markets. He served as the Chairman of NASSCOM from 2015 to 2016 and Chairman of the Confederation of Indian Industry (CII). Mohan Reddy holds a graduate degree in mechanical engineering from the College of Engineering, Kakinada, India and postgraduate degrees from the Indian Institute of Technology in Kanpur and the University of Michigan.
Managing Director and CEO
Mr Krishna Bodanapu is the Managing Director and Chief Execution officer of Cyient. Prior to Cyient, Krishna was with Altera Corporation, a leading semiconductor manufacturer in San Jose, California. Mr Krishna holds a bachelor's degree in electrical engineering from Purdue University and a master's degree in business administration from the Kellogg School of Management, at Northwestern University.
President & Chief Financial Officer
Mr Ajay Aggarwal joined Cyient as the Chief Financial Officer in March 2011. Ajay is an FCS, FICWA, and holds an engineering degree from BITS, Pilani, India. He completed the corporate finance program at Euromoney, UK.
Source: Company, PL
Operating Metrics of Cyient
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18
North America 60.0 59.1 58.0 57.1 55.8 54.2 55.1 53.3
Europe 24.6 24 24 25.1 26.6 26.7 27.7 29.2
APAC 15.4 16.9 18 17.8 17.6 19.1 17.2 17.5
Top 5 clients 40.2 42.7 43.5 42.9 41 41.6 40.1 38.9
top 10 Client 55.7 57 58 56.9 54.8 55 54 52.4
20mn+ 3 3 3 5 5 5 5 4
10mn+ 10 10 11 9 9 9 11 12
5 mn+ 19 19 21 20 21 22 23 24
1mn+ 60 56 60 62 57 65 66 63
Offshore 40.7 40.1 40.4 39.2 40.4 41.2 42.8 44
Onsite 59.3 59.9 59.6 60.8 59.6 58.8 57.2 56
Headcount 12,965 13,216 13,094 13,084 13,206 13,568 13,829 14,125
Net addition 467 251 -122 -10 122 362 261 296
Source: Company, PL
Cyient
June 28, 2018 35
Consolidated Model Sheet of Cyient
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Services Business (USD mn) 324 347 363 434 433 484 546 612 687
Growth (%) 24.1% 7.1% 4.8% 19.6% -0.4% 11.9% 12.7% 12.1% 12.2%
DLM (USD mn) 9.2 39.0 53.8 61.6 78.0 97.0
Growth (%) 323.9% 37.9% 14.6% 26.6% 24.4%
Total Revenues (USD mn) 324 347 363 444 472 538 608 690 784
Growth (%) 24.1% 6.7% 5.2% 23.0% 5.6% 14.0% 12.9% 13.6% 13.6%
Average Exchange Rate ( USD vs INR) 47.9 54.3 60.7 61.2 65.6 66.9 64.5 66.6 66.0
Revenues (INR mn) 15,531 18,730 22,063 27,359 30,956 36,022 39,176 45,930 51,727
Growth (%) 30.7% 20.6% 17.8% 24.0% 13.1% 16.4% 8.8% 17.2% 12.6%
EBIDTA 2,705 3,417 4,100 4,012 4252 4825 5493 6433 7435
EBIT 2,211 2,781 3,380 3,299 3359 3873 4442 5332 6272
PAT 1,614 2,310 2,660 3,535 3281 3442 4090 4773 5477
EPS 14.54 20.81 23.70 31.37 29.15 30.62 36.38 42.46 48.30
EPS growth (%) 15.6% 43.1% 13.9% 32.4% -7.1% 5.1% 18.8% 16.7% 13.7%
EBIDTA margin (%) 17.4% 18.2% 18.6% 14.7% 13.7% 13.4% 14.0% 14.0% 14.4%
EBIT margin (%) 14.2% 14.8% 15.3% 12.1% 10.9% 10.8% 11.3% 11.6% 12.1%
ROE (%) 14.8% 18.6% 18.3% 20.2% 17.2% 17.4% 18.3% 19.2% 19.7%
ROCE (%) (Post Tax ) 14.8% 18.7% 18.4% 19.8% 16.6% 16.7% 17.5% 18.0% 18.6%
ROIC (%) 24.3% 27.1% 29.4% 22.6% 18.9% 24.5% 25.3% 27.9% 30.7%
Dividend Payout Ratio (%) 20.2% 25.4% 24.6% 29.7% 28.9% 40.9% 43.3% 42.1% 42.1%
P/E 48.8 34.1 30.0 22.6 24.4 23.2 19.5 16.7 14.7
EV/EBIDTA 27.5 21.5 17.6 18.5 17.4 15.1 12.9 10.8 9.0
Consolidated Balance Sheet (Rs mn)
Total Networth 11574 13221 15885 19117 18372 21199 23442 26204 29373
Net Cash on Balance sheet 4748 5591 7257 5282 4736 6088 7296 8527 9518
Net Cash per share 43 50 65 47 42 54 65 76 84
Net Cash per share as a % of Mcap 6.0% 7.0% 9.1% 6.6% 5.9% 7.6% 9.1% 10.7% 11.8%
Consolidated cash flow (Rs mn)
Cash Flow from Operations 1257 1606 2272 3617 2785 4199 2963 3458 5622
Capex 804 924 766 818 1287 1080 1474 1200 1000
Acquisitions 0 0 4519 0 811 332 0 0
Free Cash Flow 453 682 1507
(1,720) 1497 2308 1157 2258 4622
FCF/EBIDTA (%) 16.8% 20.0% 36.7% -42.9% 35.2% 47.8% 21.1% 35.1% 62.2%
Source: Company, PL
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June 28, 2018 36
Financials
Income Statement (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Net Revenues 36,022 39,176 45,930 51,727
YoY gr. (%) 16.4 8.8 17.2 12.6
Employee Cost 20,388 21,432 26,062 29,031
Gross Profit 15,634 17,744 19,868 22,696
Margin (%) 43.4 45.3 43.3 43.9
SG&A Expenses 10,809 12,251 13,435 15,261
Other Expenses - - - -
EBITDA 4,825 5,493 6,433 7,435
YoY gr. (%) 13.5 13.8 17.1 15.6
Margin (%) 13.4 14.0 14.0 14.4
Depreciation and Amortization 953 1,051 1,102 1,163
EBIT 3,873 4,442 5,332 6,272
Margin (%) 10.8 11.3 11.6 12.1
Net Interest 177 224 160 200
Other Income 887 1,458 910 903
Profit Before Tax 4,582 5,676 6,082 6,975
Margin (%) 12.7 14.5 13.2 13.5
Total Tax 1,044 1,381 1,399 1,604
Effective tax rate (%) 22.8 24.3 23.0 23.0
Profit after tax 3,538 4,295 4,683 5,371
Minority interest (42) (38) - -
Share Profit from Associate 123 11 90 106
Adjusted PAT 3,442 4,090 4,773 5,477
YoY gr. (%) 4.9 18.8 16.7 14.7
Margin (%) 9.6 10.4 10.4 10.6
Extra Ord. Income / (Exp) - - - -
Reported PAT 3,442 4,090 4,773 5,477
YoY gr. (%) 4.9 18.8 16.7 14.7
Margin (%) 9.6 10.4 10.4 10.6
Other Comprehensive Income - - - -
Total Comprehensive Income 3,442 4,090 4,773 5,477
Equity Shares O/s (m) 113 113 113 113
EPS (Rs) 30.6 36.3 42.4 48.6
Source: Company Data, PL Research
Balance Sheet Abstract (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Non-Current Assets
Gross Block 11,107 12,217 13,417 14,417
Tangibles 6,972 7,616 8,576 9,376
Intangibles 4,135 4,601 4,841 5,041
Acc: Dep / Amortization 6,875 7,791 8,894 10,058
Tangibles 3,955 4,396 4,956 5,547
Intangibles 2,920 3,395 3,938 4,511
Net fixed assets 4,232 4,426 4,523 4,359
Tangibles 3,017 3,220 3,620 3,829
Intangibles 1,215 1,206 903 530
Capital Work In Progress 265 515 515 515
Goodwill 3,278 3,549 3,549 3,549
Non-Current Investments 1,237 568 788 1,008
Net Deferred tax assets (201) (35) (35) (35)
Other Non-Current Assets 1,538 1,491 1,491 1,491
Current Assets
Investments 925 1,130 1,230 1,330
Inventories 935 1,312 1,312 1,312
Trade receivables 6,496 6,913 8,179 9,212
Cash & Bank Balance 8,781 9,807 10,485 13,203
Other Current Assets 916 910 930 950
Total Assets 31,364 34,326 36,707 40,634
Equity
Equity Share Capital 563 563 563 563
Other Equity 20,610 22,876 25,638 28,807
Total Networth 21,173 23,439 26,201 29,370
Non-Current Liabilities
Long Term borrowings 492 630 630 630
Provisions 813 878 978 1,078
Other non current liabilities 35 26 26 26
Current Liabilities
ST Debt / Current of LT Debt 1,159 1,780 1,780 1,780
Trade payables 4,021 3,813 3,223 3,750
Other current liabilities 3,111 3,028 3,158 3,288
Total Equity & Liabilities 31,364 34,326 36,707 40,634
Source: Company Data, PL Research
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June 28, 2018 37
Cash Flow (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E Year
PBT 4,441 5,411 6,172 7,081
Add. Depreciation 953 1,052 1,102 1,163
Add. Interest 172 204 160 200
Less Financial Other Income 887 1,458 910 903
Add. Other (737) (392) (910) (903)
Op. profit before WC changes 4,829 6,275 6,523 7,541
Net Changes-WC 366 (1,659) (1,667) (315)
Direct tax (996) (1,653) (1,399) (1,604)
Net cash from Op. activities 4,199 2,963 3,458 5,622
Capex+ acquisitions (1,849) (1,801) (1,200) (1,000)
Interest / Dividend Income 344 398 910 903
Others (298) (52) (300) (300)
Net Cash from Invt. activities (1,803) (1,455) (590) (397)
Issue of share cap. / premium 15 9 - -
Debt changes (41) 97 - -
Dividend paid (746) (1,894) (2,011) (2,308)
Interest paid (174) (192) (160) (200)
Others 12 621 - -
Net cash from Fin. activities (934) (1,359) (2,171) (2,508)
Net change in cash 1,462 149 697 2,717
Free Cash Flow 2,308 1,157 2,258 4,622
Source: Company Data, PL Research
Quarterly Financials (Rs m)
Y/e Mar Q1FY18 Q2FY18 Q3FY18 Q4FY18
Net Revenue 9,070 9,654 9,834 10,618
YoY gr. (%) 9.2 5.7 7.2 12.8
Employee costs 5,283 5,408 5,731 5,868
Gross Profit 3,787 4,246 4,103 4,750
Margin (%) 41.8 44.0 41.7 44.7
EBITDA 1,160 1,410 1,431 1,492
YoY gr. (%) (7.1) 21.6 1.5 4.3
Margin (%) 12.8 14.6 14.6 14.1
Depreciation / Depletion 261 259 274 257
EBIT 899 1,151 1,157 1,235
Margin (%) 9.9 11.9 11.8 11.6
Net Interest 44 57 56 67
Other Income 371 406 273 408
Profit before Tax 1,226 1,500 1,120 1,576
Margin (%) 13.5 15.5 11.4 14.8
Total Tax 373 421 251 336
Effective tax rate (%) 30.4 28.1 22.4 21.3
Profit after Tax 853 1,079 869 1,240
Minority interest (14) (17) (7) -
Share Profit from Associates 20 19 - (28)
Adjusted PAT 887 1,115 876 1,212
YoY gr. (%) 19.9 14.5 (7.0) 53.9
Margin (%) 9.8 11.5 8.9 11.4
Extra Ord. Income / (Exp) - - - -
Reported PAT 887 1,115 876 1,212
YoY gr. (%) 19.9 14.5 (7.0) 53.9
Margin (%) 9.8 11.5 8.9 11.4
Other Comprehensive Income - - - -
Total Comprehensive Income 887 1,115 876 1,212
Avg. Shares O/s (m) - - - -
EPS (Rs) - - - -
Source: Company Data, PL Research
Key Financial Metrics
Y/e Mar FY17 FY18 FY19E FY20E
Per Share(Rs)
CEPS 39.0 45.7 52.2 59.0
BVPS 188.0 208.2 232.7 260.8
FCF 20.5 10.3 20.1 41.0
DPS 10.4 13.1 14.8 17.0
Return Ratio(%)
Core RoCE 25.4 25.1 26.5 30.8
RoCE 18.0 18.3 19.6 20.8
ROIC 25.4 25.1 26.5 30.8
RoE 17.4 18.3 19.2 19.7
Balance Sheet
Net Debt : Equity (x) (0.4) (0.4) (0.4) (0.4)
Debtor Day (Days) 66 64 65 65
Valuation(x)
PER 24.6 20.7 17.8 15.5
P/B 4.0 3.6 3.2 2.9
P/CEPS 41.3 48.3 55.2 62.4
EV/EBITDA 15.9 13.9 11.7 9.8
EV/Sales 2.1 1.9 1.6 1.4
Dividend Yield (%) 1.4 1.7 2.0 2.3
Source: Company Data, PL Research * ROCE mentioned in pretax ROCE
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June 28, 2018 38
Price Chart
PL’s Recommendation Nomenclature (Absolute Performance)
BUY : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
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507
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769
900
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June 28, 2018 39
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