UPDATED: Cyient: Another Solid Performance in Q2 FY18

Cyient continued, in Q2 FY19, to enjoy double-digit revenue growth: revenues reached USD 169m and were up 12.5% yoy at CC, and up by an estimated 11.2% yoy at CC/CS.

The DLM business drove this growth, thanks to a 45% surge in revenues, to USD 23m. Cyient continues to transform DLM, closing low-margin contracts (with one telecom equipment manufacturer) and focusing on synergistic design and build deals (with its services unit). The transformation is gradually happening, with DLM currently winning small deals while building client confidence. Cyient still expects a 20% organic growth in FY19 in its DLM business, and overall growth of 35% thanks to the acquisition of B&F. Profitability is also gradually improving, with DLM now planned to reach an operating margin in the 3%-5% range.

Cyient’s service business, which primarily is its ER&D business, was up by 8.7% during the quarter to USD 146m. Growth slowed down somewhat. Nevertheless, Cyient remains optimistic about its ER&D business and has maintained its guidance of a double-digit growth during full-year FY19. The management of Cyient excels at managing steady growth, almost entirely organically.

Cyient suffered from continued flat growth with its largest client, UTC’s Pratt & Whitney. Outside of P&W, growth was approximately 50% yoy. As a result, growth in its Aerospace & Defense, Cyient’s largest sector (representing 34% of revenues) was only in mid- to -high-single digits.

The situation was very favorable in other units:

• Communications was still in double-digit figures thanks to the US, and cell design and fiber roll-out, and in APAC
• Transportation continued to do well, with a 14.5% growth, thanks to market conditions
• Semiconductors enjoyed a 54% growth in revenues, thanks to the Anselm acquisition. Excluding Anselm, growth was an estimated +10% thanks to good traction with existing semiconductor clients and new contracts with automotive clients. Cyient continues to look for acquisitions for its semiconductor business, which now represents ~USD 32m. The company is screening firms and wants to avoid staffing firms.

Cyient’s operating margin was down 90 bps in Q2 FY19, to 13.7% in spite of the better margin of DLM. Cyient has changed its operating margin guidance for the full year and is now expecting a 50 bps improvement, vs. flat at the beginning of the year. The increase comes mostly from forex gains. Cyient continues its margin improvement program. The company’s EBIT margin still looks somewhat low, by offshore standards. It is more or less in line with the EBIT margin of India’s other major ER&D service pure-play, LLTS.

Finally, Cyient continues to invest in its NBA program, spending approximately 1% of revenues this year. The company expects NBA to add in three years 300 bps to its 15% average revenue growth. It is working currently on 19 NBA projects, with traction mostly in IoT. Cyient also continues to look for significant acquisitions.