Cyient’s revenues decline in Q1 FY20
Cyient’s revenues in Q1 FY20 declined, slightly, by 2.6%
In its Services activities, Cyient suffered from its client concentration and its exposure to Communications and Aerospace & Defense.
Cyient was impacted by its largest communication client, Telstra, engaged in making 9k positions redundant, and delaying engineering projects. As a result, revenues from Communications, Cyient’s second-largest vertical (22% of revenues) were down by 12.7%.
Cyient also suffered in its core Aerospace & Defense (A&D) vertical from flat growth (-0.8% in Q1 FY20). The company was impacted by the difficulty to recruit and rising attrition. Also, its largest client, UTC has merged with Collins Aerospace and spinning-off Carrier and Otis, and is delaying projects.
Growth in other sectors was muted, with revenue growth ranging from -10% to +4%.
Outside of Services, in DLM, revenue growth also decelerated with Cyient existing its low-margin manufacturing activities in for communication clients.
Unsurprisingly, Cyient’s EBIT margin declined, by 360 bps, caused by the lower utilization rate (160 bps) and lack of SGA absorption (100 bps).
Cyient believes it has hit the bottom in Q1 FY20 and guided financial analysts for a better performance in Q2. The company, however, suspended its previous revenue growth guidance (high single-digit growth in services, +15% in DLM). It however maintained its guidance of a double-digit growth in its EBIT for full-year FY20.
To a large extent, Cyient is unlucky with timing, with its largest clients putting on pause their ER&D spending at the same time. The future looks promising with client Telstra that needs to invest in broadband across Australia and deploy fiber and 5G. The future is more uncertain, with UTC, soon a pure-play aerospace firm, exiting three strategic moves and now looking to merge with Raytheon, and likely to further freezing ER&D spending.
The priority for Cyient is now to balance its vertical and client concentration and have a more diversified profile. This will require time: Cyient is postponing acquisitions to concentrate on its financial and operational recovery. Cyient will retain its lack of balance for some time still.