Cyient (CYL IN) Q3FY25 Result Update

Pritesh Thakkar

Although Q3 performance was in line with our estimates, the Q4 outlook was highly disappointing that is primarily attributed to the higher concentration of project-led revenues within Sustainability vertical. Ex-Sustainability, the DET revenues would have grown by ~5% QOQ CC in 3Q. With further softness anticipated in Q4, the vertical would be reporting fourth consecutive quarter of decline in Q4. The project closure activities along with unavailability of immediate fulfilment are resulting in immense volatility within the segment. Otherwise, the rest of the portfolio business has stabilized and even the deal wins are fairly built on those buckets. The company has adopted a few measures to mitigate the volatility within the business, however, we believe the portion of non-annuity revenue within Sustainability is meaningful and it will take a few more quarters before it stabilizes. More importantly, the CEO exit was surprising after having implemented cost controlling measures and invested heavily to stabilize growth and margins. Until the clarity emerges on the replacement, Krishna Bodanapu would be taking charge and continue as a CEO.

We remain conservative on the revenue for FY26E despite the Q3 order inflows being strong with shorter deal tenure. We expect the project-led volatility will continue in FY26E before it achieves some stability in FY27E, while the new CEO transition might slow the operational execution. Given a blurry outlook for FY26E/FY27E, we are cutting our revenue estimates to 6.2%/9.5% YoY CC (vs 9.8%/12.5% earlier). On the margins, previously the company adopted a calibrated approach and improvised on margins from a low base, which can be replicated going forward, hence we are keeping our margin estimates largely unchanged. With that our EPS (DET business) for FY26E/FY27E is seeing a cut of 3.1%.6.5%, respectively.

Revenue & Margin largely in line: CYL DET performance came largely in line with DET revenue coming at USD 175.2 mn, up 2.4% QoQ CC & 1.3% QoQ in reported terms compared to our estimate of 2.5% QoQ CC growth. EBIT margin during the quarter came at 13.5% marginally below our estimate of 13.7% & 40bps below consensus estimate of 13.9%. EBIT margin declined by 70 bps QoQ due to adverse impact of wage hikes & currency headwinds mitigated by the tailwinds of revenue growth & operational efficiencies.

Weak Outlook for Q4FY25 & FY25: Due to the weak performance of the DET business in 9MFY25, the company has revised its FY25 revenue guidance downward. It now expects a 2.7% YoY CC decline, compared to the previous guidance of flattish growth provided in Q1FY25 and high single-digit revenue growth given in Q4FY24. This revised guidance implies a 0.8% QoQ CC revenue decline in Q4FY25. The company has also revised its margin guidance. It now projects an exit EBIT margin of 13.5%, down from the previous guidance of 16% in Q4FY25.

Resignation of Karthikeyan Natarajan, CEO: Karthikeyan Natarajan, Executive Director and CEO of the company, resigned with immediate effect on January 23rd. Management announced that Krishna Bodanapu, Executive Vice Chairman and Managing Director, will serve as interim CEO until further notice.

Valuations and outlook: We are valuing the company on SOTP basis. However, we are shifting our DLM valuation to PLe vs (market valuation earlier) with a holding company discount of 20%, and the DET business at 23x PE FY27E EPS. We expect CYL’s DET USD revenue and INR PAT to grow at a CAGR of 7.3% and 20.1% over FY25-FY27E, respectively. Our SOTP-based target price of Rs. 2,010 implies an upside of 15%.

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