Cyient Gradually Back to Expansion

/ October 22, 2020/ Aerospace, Cyient, Financials, India

Cyient Suffering from its Vertical Mix

From the numbers, it may not show. But Cyient is indeed, gradually back to an expansion phase. During Q2 FY21, the company’s revenues were down by a significant 17.8% yoy to USD 114m. DLM, the short-series manufacturing unit, was down by 12.3% while services were down by 18.7%.

Services’ low performance reflected the company’s client base: Aerospace & Defense (A&D) sector, once Cyient Services’ largest sector, was down by -35.0%, impacted by commercial aviation. The poorly-named Energy & Utilities was down by 29.6%, suffering from manufacturing and utilities. Communications, now Services’ largest vertical, was up by 6.4%. Broadband, 5G roll-outs, and WfH helped significantly.

The Transformation of DLM Is Completed

DLM was down in all sectors apart from Medical & Healthcare (MTH), thanks to medical device manufacturers (+136%). MTH is DLM’s second-largest vertical, after A&D. We’ve always had mixed feelings about having a short-series manufacturing business. The business models are different. Manufacturing is about CAPEX management. DLM has learned it the hard way in the past years. This quarter, its FCF thanks to better inventory management this quarter.

Nevertheless, it has been five years since Cyient acquired Rangsons Electronics. The company believes it now has transformed DLM into an engineering-based short-series manufacturing firm. It expects a rebound in revenues thanks to a medical device contract in India and its Additive Manufacturing expertise. DLM’s EBIT margin should also move up from 4.7% in Q2 FY21.

Cyient believes it hit bottom this quarter. Revenue growth will gradually improve sequentially. The company has improved its revenue growth guidance from a decline of 15% to low double-digits.

Also, its EBIT margin reached 11.0%, up 140 bps yoy, and will increase qoq, despite a wage raise impact in Q3. Cyient believes it is also close to completing its cost reduction homework: Karthik Natarajan, Cyient’s COO and the former head of the engineering business of Tech Mahindra, was confident days of restructuring were over.

Back to Expansion

Gradually, Cyient is moving to an expansion phase. The company acquired IG Partners, a mining consultancy based in Australia. IG Partners provides the mining know-how to drive engineering work from India. Cyient wants to develop in electrification and connectivity in automotive. Finally, it intends to shift its portfolio to digital. The company is considering acquisitions, but valuations are too high still. Cyient will have to wait.

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