HDFC Securities has reduce rating on Cyient, target price Rs 240

HDFC Securities has given a reduce rating to Cyient with target price of Rs 240.

The brokerage downgraded Cyient to reduce from add post a weak performance and bleak growth outlook. Services growth and margin performance in the fourth quarter was disappointing. Growth in the first half of FY21 will be severely impacted due to structural problems in A&D and supply side (Covid related) issues in communication and transportation verticals.

Cyient’s higher mix of mechanical services and elevated exposure to stressed verticals has magnified the Covid-19 impact vs. its peers. We have reduced EPS est. by 16.4/13.8% for FY21/22E. The target price is based on 9 times FY22E EPS, which is at ~30% discount to 5 year average 1-year forward P/E multiple.


Investment Rationale

Cyient is struggling with issues such as (1) Stress in services portfolio, (2) Stress in top accounts (3) Issues in core vertical (A&D), (4) Focus on lower margin DLM business and (5) Lower margins structure due to investments and muted growth. Concerns related to slowdown in decision making, Covid-19 related uncertainty and higher mix of legacy services remain. The brokerage expects dollar revenue growth of -20.0/+7.8% and EBIT% of 7.8/8.8% for FY21/22E. The stock is down ~50% in 3 months and trades at P/E valuation of 10.0/8.7 times FY21/22E (vs. 5-year average of 13.5 times).

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1105.90 crore, down -4.57 per cent from last quarter sales of Rs 1158.90 crore and down -6.89 per cent from last year's same quarter sales of Rs 1187.70 crore. The company reported net profit after tax of Rs 109.90 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 22.87 per cent stake in the company as of March 31, 2020, while FIIs held 42.16 per cent, DIIs 22.1 per cent and public and others 12.88 per cent.