This Small Cap IT Software Stock Grew 101% In 3 Years, Buy For Rs 910 Target Price: Motilal Oswal

Motilal Oswal has given a buy call to Cyient Limited (CYL) for a target price of Rs 910 per share. The target price given by the brokerage firm indicates that the stock is likely to surge 14% from its current level. It is a small-cap IT Software sector stock having a market cap of Rs 8,843.61 crore.

The brokerage in the report said, "We attended CYL's investor day, where the management said its focus is on five growth pillars to accelerate towards the five megatrends in its end-markets. It also discussed plans to double down on Automotive, Healthcare, Communication, and Sustainability, and shared its outlook on the DLM business. It reiterated its guidance, with a strong demand and growth outlook, and aims to improve EBITDA margin by 300-350bp over the next six quarters."

Stock outlook & Returns

On the NSE, the stock last traded at Rs 800.50 per share after gaining 0.76%. It has given 5.28% positive return in a week, whereas, in 1 month, it gave 5.87% positive return. In the past 3 months, the stock fell by 5.58%. Over a year, the stock fell by 29.44%, giving a negative return. It has given 101% multibagger returns in the past 3 years. In the past 5 years, it has given 43.61% positive returns. The stock recorded its 52-week high level on 24 November 2021 at Rs 1,133 and the 52 week low at Rs 720 on 26 May 2022, respectively.

 

To focus on five pillars to tap the five megatrends

CYL will focus on the five growth pillars: Digital, Embedded, Networks, Semiconductor design, and Geospatial.

The management has identified five megatrends: Smart Operations, Intelligent Mobility, Digital Healthcare, the Sustainable business, and Meta Mobility and Space. These are expected to grow at 20-40% and will contribute 50% to FY25 revenue (v/s 20% at present). 

It also shared its S3 strategy, where it aims to strengthen services and accelerate solutions.  Along with its 15-15-15 model (organic growth-inorganic growth-EBIT margin) it also shared its 5*5 operating model, with five GTM approaches co-related to the five delivery factories.

Renewed focus on newer growth areas

Aerospace, being cyclical in nature, has not played out well for CYL. The management shared its plan to double down on newer areas of growth such as Automotive, Communication, Healthcare, and Sustainability. There is a lot of ITOT convergence happening, which is a huge opportunity. Industry 4.0 could be a USD1t market in a few years.  The management also reiterated its focus on consulting and how it would help CYL to build client relationships.

Solid backlog to drive growth in DLM

Despite the strong synergies between CYL and DLM, the management is carving out the business and evaluating options to meet its capital requirements as DLM's capital structure is different from CYL.  There is a shift away from China (China+1) and the management's focus is on de-risking the supply chain. Domestic demand for high complexity electronics is set to exponentially increase over the next decade. DLM currently has a record high backlog to execute and is poised for a strong recovery in 2HFY23.

Strong business outlook

Technology is seeing a faster acceleration in the current decade vis-à-vis the past two decades. In Aerospace, revenue per passenger mile (v/s pre-COVID levels) stands at 80-90%/70% for domestic/international. Though it will see a double-digit growth recovery in 2HFY23, the recovery is slow. Non-Aerospace/Services is clocking 20%/11.5% organic growth in CC terms. Around 75% of the Services business is growing at 21-22%.  DLM has the highest backlog and should see a good recovery in 2HFY23. Energy, Utilities, and Rail should also see a growth in 2HFY23.  It has cut down on 150 non-strategic logos over the past 18 months and is rationalizing G&A to improve margin. CYL is on track to hit the guided run-rate of USD1b, and sees FY24 EPS at INR 60, with a good growth (organic + inorganic) and strong margin expansion. It aims to improve EBITDA margin by 300-350bp by FY24 from current levels.

Valuation and view - Maintain our Buy rating

Motilal Oswal said, "We continue to see a strong rebound in ER&D spending, led by increased outsourcing and larger deal sizes. The management plans to leverage these spends, led by a refreshed GTM strategy and increased focus on large deal wins should bode well for its growth performance. 

It added, "The growth momentum in verticals such as Communications, Utilities, Medical Devices, Automotive, and Mining is likely to continue for the next two-to-three years. We maintain our Buy rating led by attractive valuations. Our target multiple of 14x FY24E EPS implies a TP of INR910."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.