Buy This IT Stock For 34% Upside Suggests Motilal Oswal

Key investment rationale for Cyient according to Motilal Oswal

• Cyient (CYL)'s 3QFY22 revenue grew 5.2% QoQ in USD terms, above our estimate of 3.6% QoQ growth, led by beat on both Services (+4.4% QoQ CC) and design-led manufacturing (+12.8% QoQ USD). Services growth was driven by Portfolio (10.0% QoQ), Aerospace (3.9% QoQ), and Communication (3.5% QoQ), while Rail Transportation (-9.5% QoQ) was weak.
• The 3Q earnings before interest and taxes (EBIT) margin saw a minor 14bps QoQ drop to 13.9% (above expectation), with improvement in Services (+14bp QoQ), compensated by weaker margins in design-led manufacturing (DLM) (-80bps QoQ). CYL has raised its margin guidance for FY22 to at least 350bps YoY margin expansion (250-300bps earlier).
• The management retained its double-digit growth guidance in FY22 in the Services business, while design-led manufacturing (DLM) growth was cut sharply to the low single digits, from the earlier guidance of 15-20%, due to supply issues. Moreover, CYL's management expects supply-side issues in DLM to continue for the next 12- 15 months. Although it sees an ongoing revenue impact, the company is confident about growing the DLM business by 15-20% YoY in FY23E, along with a margin uptick, as it prioritises high-margin business, which would help keep absolute EBIT stable.
• We see the impact on the DLM business due to the global chip supply shortage as a negative, given the hit on near-term growth. Nonetheless, the continued outperformance in the larger Services business (82% of 3Q revenues and 90% of EBIT) should more than compensate for any impact on earnings.
• The management commentary on improving order intake (+16% YoY) and the deal pipeline (+25% YoY) further supports our view that the Services vertical should see strong revenue growth improvement in FY23E, and it remains on track for its best performance in many years. Despite factoring in a more prolonged recovery in DLM - we estimate growth in the low teens next year - CYL should deliver robust growth of 16.8% YoY in FY23E.

Buy With A Target Price of Rs. 1310

Motilal Oswal has said in a report "We continue to see a strong rebound in ER&D spending, led by increasing outsourcing and larger deal sizes. The management strategy to leverage these spends, led by a refreshed GTM strategy and increased focus on large deal wins, should bode well for its growth performance. We expect CYL to deliver a 15% USD revenue CAGR over FY22-24. The growth momentum in verticals such as Communications, Utilities, Semiconductor, Automotive, Medical Devices, and Mining is expected to continue for the next 2-3 years. Aerospace is expected to bounce back to pre-COVID levels in FY23."

According to the brokerage "Although near-term growth may be soft, better margins would compensate for the growth. We expect an 18% EPS CAGR over FY22-24. We increase our estimates as we expect better margin performance led by the management's medium-term outlook. We maintain our Buy rating on attractive valuations. Our target multiple of 20x FY24E EPS takes our TP to INR1310/share, implying an upside of 34%."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.