Cyient warns on a softer Q4 FY19 than expected, stock down 12%
Cyient warned investors that its Q4 FY19 would not be as good as expected. The company saw softness in both its services and DLM activities.
Services were impacted by the delay of contracts in its communication business (in Australia, we assume this is Telstra) and in aerospace (we assume this is P&W). As a result, Cyient is now only expecting a sequential growth in its service business of 1% to 2% (probably in INR terms).
Cyient started to feel pressure in its two largest verticals (combined, representing 57 of revenues) recently: Aerospace & Defense has been impacted by its P&W relationship (with P&W/UTC being the largest client of Cyient) with revenues flat to declining. Communications has suffered for two sequential quarters from a slowdown in Australia, as the client re-evaluates its sourcing strategies. In other words, Cyient is suffering from its client concentration.
Bad news never come alone. The award of USD 5m contract was delayed in its DLM business. The deal is significant and represents approximately 6% of DLM’s expected revenues in FY19. What is unclear is how a contract order could have such a direct impact of revenues. We would have assumed revenues would have flown into revenues over two quarters or more.
During an interview on Indian’s business TV, the CFO of Cyient expressed its revised financial objective for full-year FY19:
- A 7.5% revenue growth at CC of 7.5%. The previous guidance was growth at CC in the range of 8.5%-9.5%
- A 24% revenue growth in DLM. Previous guidance was 35%.
- No change in the operating margin guidance quite surprisingly.
At this point, we see the “soft” Q4 performance as a glitch in the performance of the firm, rather than a major issue. Cyient has delivered high growth for five years and a deceleration in growth is part of the life of the business.
At a strategic level, we still wonder if entering the small series manufacturing was a good idea. At a strategic level, manufacturing requires a different type of business model, and the turn-around of DLM is taking much more time than anticipated, when Cyient acquired Rangson, in January 2015.