Elara Capital
Cyient (Accumulate)
CMP: ₹581.75
Target: ₹690
Management has repeatedly overestimated revenue potential of the Rangsons acquisition (rechristened deisgn-led manufacturing — DLM — and including another acquisition, B&F Design, starting in FY18). However, this did not have a significant impact on EPS, given low margin for DLM; services revenue growth was in line with guidance up until FY19. For FY17 as well as FY18, management held on to an ambitious guidance for DLM until Q3. This could be due to 1) Lumpiness in DLM revenue with Q4 accounting for 29-35 per cent of full-year revenue over FY16-18; 2) Management still on a learning curve with DLM being a new segment with order intake and revenue recognition that has a much smaller lead time than services; and 3) A smaller portfolio of DLM clients than services, leading to difficulty in filling any revenue gaps that come up through the year from any client-specific issues.
After factoring in revised guidance, we see an FY20E EPS impact of 3.9 per cent. We lower our multiple, given management’s repeated inability in meeting guidance for DLM now seems extended to services as well. But we remain structurally positive on engineering services. We revise our rating to ‘Accumulate’ from Buy and arrive at a new target price of ₹690 from ₹770 on 15x (from 16x) FY20E P/E (and now at a 35 per cent discount to LTTS’ target multiple of 23x vs 30 per cent earlier).