Hold Cyient: AnandRathi Financial Services

Cyient - Execution challenges amid a weak environment; Hold

Cyient reported a weak Q3 FY16 with no growth and qoq decline in margins. Yoy, it reported 3.2% growth primarily due to the Rangsons and GSEA acquisitions (rev. $2.8m, vs. $0.6m in Q2 FY16, though this was partially offset by the sale of its IT services). The positive was that it was able to curtail erosion in EBITDA margins despite the revenue miss. It reduced FY16 guidance for Rangsons from $60m to $38m-40m due to the continuing execution challenges and weak environment.

Dollar revenue flat qoq, up 3.2% yoy incl. acquisitions. In Q3 FY16, Cyient registered revenue of $118.4m (flat qoq, up 3.2% yoy), much below estimates. Organically, (excl. Rangsons and GSEA, and incl. Softential), dollar revenue slipped 7% yoy, due to client-specific issues in three of the top-five clients, some related to execution challenges at Cyient (winning and executing low-margin projects, shifts to cloud), some external (new verticals and O&G clients).

EBITDA margin slips 98bps qoq, 216bps yoy. The EBITDA margin was 14.1% (down 98bps qoq, 216bps yoy), in line with estimates. The gross margin fell a steep 222bps qoq, but was absorbed by a 4.5% qoq decline in absolute SG&A, chiefly driven by lower G&A costs. Rangsons reported a 3.7% margin and impacted company-level margins ~100bps. Better Rangsons margins would be contingent on its revenue growth, where visibility is bleak.

Rangsons guidance reduced to $38m-40m for FY16. Rangsons is now expected to deliver $38m-40m in FY16, a far cry from the $80m guided to at the start of the year/acquisition. Rangsons margins would continue at low single digits (3.7% in Q3), given this revenue shortfall vs. the guided to 10% EBITDA margin at acquisition.

Business outlook. Management is confident, however, of returning to growth in FY17 as top accounts stabilise and business from the natural-resources segment starts improving again.

Valuation. We are sharply lowering our FY16/17 estimates (by up to 12%), leading to a revision in the price target. We are also moving our TP to FY18 EPS. We retain our Hold recommendation, with a revised target of Rs. 520 (16x FY18e). Risk. Further erosion in O&G clients.

Shares of INFOTECH ENTERPRISES LTD. was last trading in BSE at Rs.415.2 as compared to the previous close of Rs. 431.35. The total number of shares traded during the day was 9321 in over 582 trades.

The stock hit an intraday high of Rs. 438.2 and intraday low of 404. The net turnover during the day was Rs. 3962167.

Source : Equity Bulls

Keywords