equity | india | it services c yient ltd. initiating...

Equity | India | IT Services

Cyient Ltd.

Growing with technology…… April 05, 2018

BUY

Analyst

Omkar Tanksale

+91-22- 6614 2692 [email protected] Institutional Research 1

Initiating Coverage

CMP (`) Target (`)

665 807

Potential Upside Absolute Rating

21% BUY

Market Info (as on April 05, 2018)

BSE Sensex 27,975.86

Nifty S&P 8,492.30

Stock Detail

BSE Group A

BSE Code 532175

NSE Code CYIENT

Bloomberg Code CYL IN

Market Cap (`bn) 57.29

Free Float (%) 65%

52wk Hi/Lo 698.00 / 467.00

Avg. Daily Volume (NSE) 36971

Face Value / Div. per share (`) 5.00 / 3.00

Shares Outstanding (mn) 112.2

Shareholding Pattern (in %)

Promoters FIIs DII Others

22.23 35.78 13.43 28.56

Financial Snapshot (`mn)

Y/E Mar FY16 FY17 FY18 FY19E

Net Sales 30,956 35,858 38,654 44,452

EBITDA 4,208 4,772 5,412 6,223

PAT 3,263 3,396 4,058 4,736

EPS

29.0

30.6

36.6

42.7

ROE (%) 17% 16% 17% 18%

ROCE (%) 21% 21% 22% 23%

P/E 16.3 16.8 16.8 14.4

EV/EBITDA 11.3 10.5 11.0 9.4

Share Price Performance

95

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CYIENT Adj SENSEX Adj

Rel. Perf. 1Mth 3 Mths 6Mths 1Yr

Cyient (%) 3.67 14.04 28.38 40.77

Sensex (%) (3.6) (3.2) 5.1 24.36

Source: Company data, Institutional Research

Company Snapshot

Cyient Ltd. (Cyient) formerly known as Infotech Ltd. is an Indian IT services providing company.

Cyient is headquartered in Hyderabad (India) and majorly focus on the domains such as

Engineering, networking and operations. Cyient specializes in end to end solutions from co

creation and managing product life cycle which also helps Cyient to create long term

relationship with its clients. Cyient has also developed robust engineering ecosystem, functional

expertise, and streamlined processes. They deliver reliable and innovative products and

services, helping its clients to achieve and maintain competitive advantage.

Investment Rationale

Focus on moving up the value chain which will help to generate higher Realization

Cyient focus more on the product engineering and process engineering segment. More than 62%

of its revenue comes from the segment. Now company has also started to focus more on the

nonlinear business verticals like system integration, testing, embedded system etc. which help

to take value chain on the next level. This will also create Cyient better business opportunities

not only across verticals but also to give more robustness to the business structure.

Efficient use of the reserves to acquire companies will help to strengthen the business

Cyient has also history to use its reserves to strengthen the business among different verticals.

This helps Cyient to acquire new technology among different verticals and help to build brand.

Cyient has able to generate cash reserves on its balance sheet which help them to acquire the

business without raising the debt burden on their balance sheet. Company also finalizes the

strategic plan for growth for the verticals.

Long term contracts with global players will help Cyient to give more consistent

performance

Cyient specializes in providing end to end engineering solution to the companies across

verticals. The company has also become successful in delivering complete product engineering

solutions. Cyient has penetrated the business across geographies and make the company a

strong brand name in the field of product and process engineering. Strong clientele guarantees

the revenue over long term period. Timely delivery of the project will help the company to have

empanelment with the major businesses across the geographies. This strategy of the company

will help to create more stable business structure and also to perform consistently over the

longer period of time. The vertical wise list of clients given below gives an idea of

empanelment across the verticals and robustness of the business.

Valuation

At the CMP of `665, Cyient is trading at 21.6x and 18.1x its FY17, and FY18E EPS of `30.6 and

`36.60. Compared to its peers; Cyient is trading at a discount P/E multiple, although its margins

are better than or comparable to peers. We initiate coverage on Cyient Ltd with a BUY rating

and attach a multiple of 18.9 xs to Cyients’ FY19E earnings (EPS) of `42.7 to arrive at the target

price of `807.0, indicating a potential upside of 21%.


Cyient Ltd. April 05, 2018

BUY

Institutional Research | Initiating Coverage 2

Index & Content

Sr. No. Topic Page No.

1 Company Background......................................... 3

2 Business Model................................................. 4

3 Key Management Personnel.................................. 5

4 Investment Rationale......................................... 6

5 Financial Overview........................................... 10

6 Key Risks........................................................ 14

7 SWOT Analysis.................................................. 15

8 Michael Porter’s Five Force Analysis........................ 16

9 Valuation & Outlook........................................... 17

10 Financials........................................................ 18

11 Disclaimer....................................................... 19



BUY


Company Background

Cyient Ltd. (Cyient) formerly known as Infotech Enterprises Ltd. is the Hyderabad based

midsized IT services company. The company is majorly involved in providing solutions and

engineering services to companies across verticals. Majority of verticals include Aerospace,

Transportation, Semiconductor, Medical and electronics etc. The company has developed

the expertise in the field of design engineering. Cyient also has strong presence in the field

of data transformation, network & operations and Utilities. They help their clients in

communication service providers (CSPs) plan, design and manage their next-generation

networks.

Historical Journey of Cyient Ltd

1991 Infotech Incorporated as private limited company.

1995 The company receives its first ISO 1992 certification

1997 Become Public Ltd. company, Partner with the IBM for ERP system.

1999 Infotech acquires Cartographic Sciences Pvt. Ltd. Mumbai, India, from analytical surveys Inc USA

2000 Infotech announces Acquisition of the German company, Advanced graphic software GmBH specializing in 3D CAD/ CAM.

2000 Infotech Wins Multimillion dollar GIS project from Dutch multinational group FUGRO.

2002Pratt & Whitney to participate with up to ~18% equity stake in Infotech, demonstrating long-term partnering intent and

endorsing Infotech's business competence.

2003 Infotech signs long-term outsourcing contract with Bombardier Transportation to provide engineering services in India.

2004 Infotech acquires VARGIS, a GIS company in the US.

2004Infotech divests 51% of its stake in Infotech Aerospace Services Inc. in favor of United Technologies International

Corporation.

2007 Infotech sets up a development center at Kakinada at the newly developed STPI facility.

2007 Joint venture between Infotech and HAL is announced. Joint venture between Infotech and Geospace Integra is announced.

2010 Signed a long-term engineering services contract with Hamilton Sundstrand.

2010 Acquired Daxcon Engineering Inc., USA. Acquired Wellsco Inc., USA.

2011 IGIL (Infotech Geospatial (India) Limited) becomes a wholly-owned subsidiary.

2011 Awarded Supplier of the Year award by Boeing.

2014 Revealed the new brand and changed the name to Cyient

2014 Ranked among top 30 outsourcing companies in the world by IAOP

2015 Cyient awrded for excellance in Aerospace exports at Aero India 2015

Source: Company, Institutional Research



BUY


Business Model

Cyient has unique business model and different area of practice as compared to other IT

services companies. It is basically an engineering service and solution providing company.

Cyient operates under five vertical Viz. Engineering, Design led manufacturing, Network

Operations, Analystics, and Geospatial. Majority of the revenue comes from Design

Engineering, DLM about 65% of the total revenue. Cyient has developed an expertise in the

field of design engineering across different segments like Aerospace, Heavy machinery,

Semiconductor, Transportation, Utilities & communication, Energy & Natural Resources.

Other major contributor of the top line is Data transformation, network and operations

(DNO). Cyient helps in efficiently managing their network infrastructure and assets. They

also support the implementation and integration of distribution management and outage

management systems. About 34% of the revenue comes from DNO segment. Remaining

revenue comes from Process Engineering.

Business Model

Domain

Engineering

Aftermarket

Electrical Engineering

Embedded Software & Electronics

Engineering Application Software

Developmen

IP and Allied Services

Manufacturing

Engineering

Mechanical

Engineering

Plant Engineering

Rail Signaling &

Electrification

Semiconductor Design

Services

Overview

Mechanical Manufacturing

Services

Electronic Manufacturing

Services

Design led Manufacturing

Analytics

Advanced Analytics

IoT and M2M

Big Data Consulting

Network Engineering Operations

IT Service

Management

IT Services

Utility Systems

SD-WAN

Data Management

Networks & Operations

Geospatial

Acquisition

Navigational Database

Generation

Remote Sensing

Navigational Data

Mapping

Location Based

Services

Source: Company, Institutional Research



BUY


Key Management Personnel

Cyient Ltd. is blessed with credible management that takes Cyient on the path of the

growth.

B.V.R Mohan Reddy (Executive Chairman):

Mohan focuses on the medium- to long-term future of the company. He is also involved in

leadership development, innovation, information systems and corporate social

responsibility.

Krishna Bodanapu (Managing Director and CEO):

Krishna Bodanapu joined Cyient in 2001. In his current role, he provides the strategic

direction for growth and is responsible for all operations.

B. ASHOK REDDY (President, Corporate Affairs & Infrastructure):

Ashok has fiduciary responsibility for all of Cyient’s subsidiaries. As the chairman of the

subsidiaries, he maintains all government and industry body relationships

AJAY AGGARWAL (Sr. VP & CFO):

Ajay has extensive international experience spanning 27 years in financial management and

commercial management at large multi-location, multiproduct organizations. He is skilled

in setting up startups with expertise in funding, banking and strategic planning, business

modeling, MIS, ERP implementations, capital budgeting, corporate finance, M&A and

restructuring.



BUY


Investment Rationale

Strategic vertical split to drive the desire growth

Cyient is operating under different verticals to provide design and engineering services to

its clients. The company has managed successfully its product mix across different verticals

to attain desire growth momentum. Engineering Services Outsourcing (ESO) is one of the

most highly growing sectors in IT service industry. India will be leading offshore destination

which provide high end ESO.

Revenue Split (Geographical)


From the above chart we can see that in the Cyient operates in three main geographies.

North America remained major contributor to the top line. IT spending in the verticals and

automation will help company to deliver consistent revenue growth over the longer period

of time. We believe that the contribution from the North America region will likely to be

robust in the near term. Growth in the region will help them to grow in the near term. Also

We believe that strong growth in APAC region and Europe will reduce the dependency on

the north America.



BUY


Robust top line growth is expected in the upcoming period with high

growth in the segment revenue.

Cyient is the market leader in the field of Product engineering and Design Engineering. More

than 65% of the top line contribution comes from this segment. The Engineering services

outsourcing (ESO) is outpaced the IT service industry over the last five years. The engineering

services outsourcing has been growing across the geographies and among different sub

segments like new product development, Engineering consulting, value Engineering etc.

India's Product Engineering Growth Rate ($ bn)

1314.7

42

0

5

10

15

20

25

30

35

40

45

FY11 FY12 FY2020E

13% YoY Growth

Source: Zinnov, Institutional Research

From the above diagram we can say that, ESO has shown strong growth momentum in the past

few quarters and also have higher growth prospects. Cyient has larger client distribution from

the same industry.

India is one of the largest contributors to the industry with more than 20% market share. India

is considered to be better option for ESO as easy availability of the highly skilled labor,

infrastructure and technology. The total product engineering outsourcing sector is likely to

grow with 13-15% in the upcoming years. By the year 2020 the sector has the outlook of

growing with 14% CAGR. The total market size of the Indian Engineering outsourcing will be

$42 bn , this potential of the market will definitely give Cyient an edge to grow with higher

momentum. We believe that as a market leader in India Cyient will outperform the market

growth rate. Specialize technology in the field will help the company to grow in the upcoming

future.



BUY


Consistent employee addition help company to maintain higher efficiency

Strong employee support makes IT service company stronger. Higher the employees higher

the projects IT company can take. Employee addition increases the efficiency of the

company. This will ultimately help to attain higher top line growth and also help company to

grow.

Employee distribution


As shown in the above chart, Cyient has consistent employee addition which ensures timely

completion of the project. Higher efficiency ensures lower operating cost which will help

Cyient to produce better operating margins. Moderate addition in the employees also helps

to add active clients. This will also help to attain desire top line growth. From the above

chart we can see that, Cyient has maximum dedicated employees to engineering and DNO

services. Stable utilization levels also show the efficient use of its manpower to generate

revenue. This enables company to acquire new projects easily as compared to its peers, and

also ensures the timeline based delivery of the project.



BUY


Financial Overview

Pretax Margin

EBITDA Margins

As shown in the graph below, Cyient has shown consistent EBITDA growth over the past few

quarters. This shows that Cyient has been successful in managing the operating expenses

efficiently with the rise in the top line. After the slight decline in the EBITDA margins in

1QFY18 company has started regaining the desire operating efficiency over last two quarters

and will also likely to continue in the upcoming period.

EBITDA Margins


Operating Margins

As shown in the graph below, Cyient has become successful in increasing the operating

margins over past few years. Consistent rise in the operating profit indicates that, Cyient has

become successful in transferring the operating cost to its customers. This also indicates

rising efficiency in the business. We believe that Cyient will deliver better operating margins

as they focus more on the segments where they have higher realizations.

Operating Margins

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EBIT after other Income Margin




BUY


Net Profit Margin

Cyient has become successful in delivering consistent and high growth in the net profit and

also margins are showing consistent growth. This shows that the business of the company has

become more robust over the period of time. Large multiyear contracts, strong client

addition makes company more lucrative. We believe that Cyient will likely to report higher

bottom line growth in the upcoming future. This also makes Cyient a safer bet.

NPAT Margin


Return Margin

ROE performance

As shown in the diagram below, we can see that ROE of the company has increasing

consistently over last four years. This shows that Cyient has produced better results on the

invested equity. This shows that, Cyient is a better investment opportunity and can produce

better return in the future.

RoE




BUY


Return on the capital Employed (ROCE)

Return on the capital employed (ROCE) is also one of the major important aspect while

investing. Cyient has zero or marginal debt on their balances sheet. Hence company has

produced the strong growth in terms of ROCE as net profit is growing. We believe that Cyient

will show a strong growth for the upcoming period.

RoCE


Payout Ratio

Dividend Payout Ratio

Cyient is one of the highly dividend paying company. As shown in the graph below Cyient has

strong payout ratio. This also makes stock very lucrative. We believe that in the upcoming

period Cyient will likely to maintain the payout ratio of 20% in the upcoming period.

Dividend Payout Ratio




BUY


Net Profit to Payout Ratio

Cyient has history of paying dividend to its shareholder. As shown in the diagram below we can

see that company had given dividends as proportion to the net profit. We believe that payout

ratio to net profit ratio will likely to remain same. This also makes stock more lucrative.

Investor can also take privilege of higher payout ratio.

Net Profit to Payout Ratio




BUY


Key Risks

Investment Risk :

• Fluctuations in the US$-INR and GBP-INR and GBP-US$. As majority of the revenue comes

from international territories. Fluctuation in the currencies will impact the revenue of the

company.

• Change in the economic climate / legislation against Indian offshore development in the

countries where the company provides its services. Fluctuation in world’s largest economy

will affect the IT services business on substantial front.

• Increase in Visa fees will increase the cost. Rise in the visa fees will lead to rise in the

operating cost (Employee expenses) to IT industry. So it plays a major role in the IT industry.

• Salary hikes i.e. wage inflation may cause a spoil sport. Rising economic growth will create

more jobs in the country. This will ultimately give rise to wages hikes. Wage hikes will affect

the operating margins of the company. So fluctuation in the wages is considered to be

significant risk in IT service Industry.



BUY


SWOT Analysis

Cyient

Limited

Strengths

• Strong domain focus

• Diversification of business.

• North America is the main area

of operations

• Strong management and

Employee workforce

Opportunities

• Further penetration in US

• Mining the existing and the new

clients

Weaknesses

• High client concentration

• High geography concentration

• Single domain dependence

Threats• Slowdown in the European

economy

• Slowdown in the IT spending

• Loss of top client

• INR appreciates vis-a-vis

Source: Institutional Research



BUY


Michael Porter’s Five Force Analysis

Inter-firm Rivalry–High

Lower Entry barriers in

the industry have led to

high concentration in

the industry.

Threat of new entrants –

Increasing

• MNCs are entering the ‘offshore’

business heavily.

Bargaining Power of

Suppliers – High

• Intense competition in the

recruitment market puts higher

wage pressure and increasing

trend of attrition is witnessed.

Bargaining Power of Buyers –

Increasing

• With availability of multiple

vendors, Buyers have a lot of

choice and this has led to

pressures on the billing rates.

Threat from Substitutes -

Increasing

• Emerging economies like China,

Brazil and Russia can be the

substitute places for ‘offshoring’

taking away the India advantage

to certain extent.

Source: Institutional Research



BUY


Valuation & Outlook

At the CMP of `665, Cyient is trading at 21.6x, and 18.1x its FY17 and FY18E EPS of `30.6

and `36.60. Compared to its peers; Cyient is trading at a discount P/E multiple, although its

margins are better than or comparable to peers. We initiate coverage on Cyient Ltd with a

BUY rating and attach a multiple of 18.9 xs to Cyients’ FY19E earnings (EPS) of `42.7 to

arrive at the target price of `807.0, indicating a potential upside of 21%.

1 year forward P/E Chart

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Source: Capitaline, Institutional Research

1 year forward P/ BV Chart

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Source: Capitaline, Institutional Research



BUY


Income Statement

Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E

Net revenues

27,359

30,956

35,858

38,654

44,452

Employee Cost

16,432

18,081

20,490

21,839

25,115

EBITDA

4,017

4,208

4,772

5,412

6,223

EBITDA Margin (%) 15% 14% 13% 14% 14%

Depreciation

805

893

953

1,000

1,200

Other Income

1,215

1,085

932

1,200

1,500

Interest (Net) 66 179 172 180 200

Exceptional Items 0 87 261 250 250

PBT

4,361

4,134

4,318

5,182

6,073

PBT Margin (%) 16% 13% 12% 13% 14%

Tax

1,096

986

1,045

1,244

1,458

Adjusted PAT 3266 3148 3273 3938 4616

Extraordinary Items

150.8

120.3

123.0

120.0

120.0

Reported PAT

3,439

3,263

3,396

4,058

4,736

Balance Sheet

Y/E Ma r ( ₹ mn) FY15 FY16 FY17 FY18 E FY19 E

Equity capital 562 562 563 563 563

Reserves & Surplus 18,556 18,536 20,610 22,967 25,525

N et wo rth 19 ,117 19 0 9 8 2 117 3 2 3 5 3 0 2 6 0 8 8

Total debt 1,052 681 724 700 750

Deffed tax liability 51 42 302 350 400

T o tal Liabilit ies & Equity 2 5 ,6 6 3 2 7 ,3 7 0 3 1,3 6 4 3 3 ,5 5 0 3 6 ,4 13

Net block 3,718 3,129 3,017 3,439 3,921

Capital WIP - 108 265 300 350

Total fixed assets 3,718 3,237 3,282 3,739 4,271

Investments 675 796 1,237 1,500 1,500

Other Fixed Assets - 847 1,215 1,250 1,400

T o tal no n curreent A ssets 10 ,0 8 3 9 ,4 2 3 10 ,6 5 1 11,7 9 5 12 ,8 8 7

Debtors 5,336 6,145 6,496 6,900 7,200

Cash & bank 6,229 6,951 8,781 10,597 11,487

Loans & advances 1,363 1,089 - 1,250 1,300

Other Current Assets 1,834 1,993 916 1,000 1,224

T o tal C urrent A ssets 15 ,7 0 3 17 ,9 4 7 2 0 ,7 13 2 1,7 5 5 2 3 ,5 2 6

Creditors 813 1,147 1,159 1,200 1,250

Provisions 279 1,843 2,452 2,500 2,500

C urrent Liab. & P ro v. 5 ,4 4 3 6 ,6 7 6 8 ,2 9 1 8 ,0 5 0 8 ,2 0 0

T o tal A ssets 2 5 ,7 8 5 2 7 ,3 7 0 3 1,3 6 4 3 3 ,5 5 0 3 6 ,4 13 Key Ratio

Y/E Ma r ( ₹mn) FY15 FY16 FY17 FY18 E FY19 E

Pe r Sha re Ra tios

Fully diluted E P S 30.7 29.0 30.6 36.6 42.7

Book Value 171 170 190 212 235

Cash per share 56 62 79 95 103

Va lua tion Ra tio

P/E 17.4 16.3 16.8 16.8 14.4

P/BV 3.1 2.8 2.7 2.9 2.6

EV/EBITDA 13.6 11.3 10.5 11.0 9.4

EV/Sales 2.0 1.5 1.4 1.5 1.3

Growth Ra tios

Sales Growth 24% 13% 16% 8% 15%

EBITDA Growth -2% 5% 13% 13% 15%

Net Profit Growth 29% -5% 4% 19% 17%

EPS Growth 30% -6% 5% 20% 17%

Common size Ra tios

EBITDA Margin 15% 14% 13% 14% 14%

EBIT margin 12% 11% 11% 11% 11%

PAT margin 13% 11% 9% 10% 11%

Employee cost 60% 58% 57% 57% 57%

Re turn ra tios

RoNW 18% 17% 16% 17% 18%

RoCE 22% 21% 21% 22% 23%

Turnove r ra tios (da ys)

Debtors ( Days) 5 5 6 6 6

Creditors ( Days) 37 37 41 39 34

Inventory (Days) - - - - -

Solve nc y Ra tios

Total Debt/Equity 0 0 0 0 0

Interest coverage - - - - -


Cash Flow

Y/E Ma r ( ₹mn) FY15 FY16 FY17 FY18 E FY19 E

PBT 4,361 4,134 4,318 5,182 6,073

Add: Depreciation 805 893 953 1,000 1,200

Other Adjustments (5,000) (77) (145) (145) (145)

Chg in working capital (66) 4,025 6,183 7,094 8,185

Taxes paid (1,096) 1,024 996 996 996

CF from ope ra tions 1,0 3 0 3 ,0 0 1 5 ,18 7 6 ,0 9 8 7 ,18 9

Change in fixed assets (883) (1,287) (1,080) (1,080) (1,080)

Purchase of investment 0 (1,283) (1,080) (422) (482)

Proceeds from investement sale 15 5 42 (263) 0

Other Adjustments (513) 710 184 35 150

CF from Inve sting a c ti. (3 19 ) (1,10 7 ) (9 3 4 ) (1,7 3 0 ) (1,4 12 )

Chg in debt 0 (402) (309) 24 (50)

Chg in Equity capital - 1 1 - -

Chg in Pref. capital

Dividend & dividend tax (670) (1,344) (620) (1,134) (1,198)

Interest paid (56) (179) (174) (1)

Other Adjustments (115) 1,278 (1,320) (1,440) (3,639)

CF from fina nc ing a c ti. (8 4 0 ) (6 4 6 ) (2 ,4 2 3 ) (2 ,5 5 1) (4 ,8 8 8 )

Chg in cash (129) 1,248 1,830 1,816 890

Opening cash 5 5,703 6,951 8,781 10,597

Closing cash 5,703 6,951 8,781 10,597 11,487 Du-Pont Analysis

(%) FY15 FY16 FY17 FY18 FY19E

PAT/ PBT 79% 79% 79% 78% 78%

PBT/ PBIT 99% 94% 91% 92% 93%

PBIT / Sales 16% 14% 13% 15% 15%

Sales / Assets 134% 150% 155% 152% 158%

Assets/ Equity 106% 108% 109% 108% 108%

ROE 18% 17% 16% 17% 18%



BUY


NOTES



BUY


Recommendation Rationale

Recommendation Expected Absolute Return (%) over 12 months

BUY >15%

ACCUMULATE <10% and >15%

NEUTRAL <-10% and <10%

REDUCE >-10% and <-20%

SELL >-10

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month

horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch

between upside/downside for stock and our recommendation.

GEPL CAPITAL Pvt Ltd

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Analyst Certification

The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or

indirect compensation in exchange for expressing specific recommendations or views in this report:

Name : Omkar Tanksale

Sector : IT Services

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