Cyient Surprises Negatively in Q3 FY20 Both in its DLM and Service Businesses
Cyient went into red territory in Q3 FY20, with revenues declining by 6% yoy to USD 155m. The company was impacted by a sharp 27% decline in its short series manufacturing unit, DLM, while its larger unit, its services arm, was down 3% yoy.
Cyient reiterated a well-known story, i.e., how it is repositioning DLM away from commodities to expand its margins. The process certainly is taking time, with revenues on a rollercoaster in the past quarters and an EBIT close to zero this quarter. Nevertheless, Cyient still believes it will capture revenue synergies starting in 12 to 24 months. I the long-term Cyient believes DLM should reach 6% in EBIT margins.
The revenue decline in Cyient’s service business came as a surprise. Previously, Cyient had guided its would resume growth in its two largest verticals Communication and Aerospace & Defense (A&D).
Communication did resume growth (to a modest +1%) thanks to is largest client Telstra, with fiber optical network roll-out driving growth.
A&D, however, declined by 9%, still impacted by project delays at Boeing. Cyient highlighted it is not involved in 737 MAX but impacted by Boeing postponing all projects across programs.
Meanwhile, the situation at P&W is gradually improving with the client having completed its post-merger integration work. Cyient is expecting P&W to resume spending in Q4 of this FY.
The bad surprise came from the transportation industry, from a rail stock client. Cyient has transitioned a T&M contract to an output-based one with the client. The contract change, which includes an expansion, resulted in Cyient’s canceling some of the revenues it had accounted in the previous quarters. Revenues from Transport were down 10%.
Finally, Cyient continues to be cutting-costs across employees and SG&As. Cyient expects its EBIT margin to improve over FY21 by 200-250 bps to ~11.5-12.0%, and still targets 14% in the long-run.