COVID-19: Cyient Warns of 15-20% Decline in Revenues in Q1 FY21

/ May 17, 2020/ Aerospace, Cyient, Financials, India

Cyient Suffered from COVID-19 and Aerospace in Q4 FY20

Cyient surprised, negatively, the markets by announcing a decline of 9.7% in its Q4 FY20 revenues (to USD 149m) and an adjusted EBIT margin down 440 bps (to 8.4%).

The Services business was down by 12.1% and faced two significant headwinds:
(1) The Boeing 737 MAX fiasco impacted the aerospace industry in Aerospace & Defense (A&D). A&D, Cyient’s largest vertical, was down 11%.
(2) COVID-19 across the board. Communications (its second-largest vertical) was flat. Transportation (-18%) and E&U (-22%) suffered heavily from a combination of factors including WaH transition, IP license sales not billed, and a client-specific issue. Finally, in Semiconductor (-37%), Cyient suffered from a lack of component shipments from China.

DLM, the short-series manufacturing unit of Cyient, had revenues down 6.6%. Its Mysore facility suffered from the lockdown, and disruption in logistics to receive raw material and ship finished goods.

Q1 FY20 Revenues Will Decline by 15-20%

Q4 FY20 was a difficult quarter and Q1 FY21 looks very challenging, with Cyient expecting a 15-20% decline in revenues. Aerospace will be under further pressure, with Cyient’s aircraft MRO engineering business suffering from the lack of aircraft flying (and requiring maintenance). COVID-19 is preventing Cyient from collecting data from the field (and optimizing network locations) in its Communication business and also Geospatial (E&U). Nevertheless, Cyient expects E&U, Transport, and Communications to bounce back in H2 FY21.

Clearly, Cyient has been suffering since Q4 Y19, from a mix of heavy exposure to the aerospace industry, specific client issues, and also execution issues. Also, the DLM business has not helped: since its acquisition in 2015, the former Rangsons Electronics has systematically had a disappointing performance. We reiterate the view that mixing engineering services and short-series manufacturing is a great idea that rarely works.

Cyient Looking to Change its Client Profile

The arrival of the former head of Tech Mahindra’s Integrated Engineering Services LoB, Karthik Natarajan, will bring Cyient a lot of experience. As we all know, ER&D is a service activity, and this requires a strong focus on execution.

In the meantime, Cyient acknowledges it needs to diversify its client base and wants to develop “smaller verticals,” e.g., defense, medical devices, and semiconductors that have high-growth potential. As the company mentioned, this is easier said than done. However, the good news is that Cyient now realizes it needs to go back to basics 1. execution 2. diversified client base.

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