Cyient - Initiating Coverage - BUY - Engineered for Growth - Reliance Securities

Cyient is a mid-sized IT firm focused on 3 businesses i.e. Engineering Services (ENGG), Data Transformation, Network & Operations (DNO) & Design-led Manufacturing (DLM). We believe recent improvement in core services growth will be key driver for re-rating. Healthy order book and positive outlook in key verticals underpin our confidence for sustained growth. While strong client relationships and expansion of capabilities will further drive growth, high dividend payout and decent dividend yield provide cushion. Current valuation at 11.9x FY18E EPS is reasonable. We initiate coverage on Cyient with BUY recommendation and Target Price of Rs565.

Core Business Recovery - The Key Positive for Re-rating

Cyient's core services business (ex-Rangsons) saw a sharp recovery in USD rev growth over the past 3 quarters. USD rev growth of 13.7% yoy in 2QFY17 - the highest in 7 quarters - was the first quarter of double-digit yoy growth since 4QFY15, attributable to healthy growth in Communications, Aerospace, Utilities & Geospatial verticals. Over 77% of Cyient's revenue is witnessing good traction, which we believe will drive double-digit USD rev growth i.e. 13% & 13.5% in Cyient Services in FY17E & FY18E, respectively. We believe this is the key factor that warrants a stock re-rating.

Niche Focus, Long-term Client Relationships Drive Confidence

The ENGG segment is seeing better traction and less of the disruption that clouds the IT services sector. Marquee client base, long-term client relationships and introduction of newer practices (DLM, Medical & Healthcare) ensconce Cyient's position in its core areas of expertise. For example, Cyient has a 16-year relationship with Pratt & Whitney, a global major in the design and manufacture of aircraft engines and equipment. We expect long-term client relationships and client addition would drive revenue growth in ENGG biz, going forward. In DNO, Cyient enjoys long-term relationships with clients like Tom Tom. Consistent expansion of capabilities into newer domains i.e. Utilities has driven growth, which is likely to sustain in FY17E & FY18E.

Higher Dividend Payout Drives Yield, Assures Confidence on Cash Flow

Cyient's dividend payout ratio was 41.5% of PAT in FY16 (dividend yield 2.5%). Gross and Net Cash & Cash Equivalents were Rs8bn & Rs6.4bn, respectively at 2QFY17-end (Rs1.6bn dividend + DDT paid in FY16). We expect sustained high dividend payouts, boosting confidence on cash generation ability for capex and strategic acquisitions.

Outlook & Valuation

At CMP, the stock trades at a PE of 11.9x FY18E EPS, reasonable owing to improving growth in core business, strong long term client relationships, consistent introduction of newer practices, decent dividend yield, quality balance sheet and healthy EPS CAGR (18.7%) over FY16-FY18E. We initiate coverage on Cyient with BUY recommendation and Target Price of Rs565, which implies a PE of 14x FY18E EPS.

Shares of Cyient LTD. was last trading in BSE at Rs.495.8 as compared to the previous close of Rs. 501.6. The total number of shares traded during the day was 3751 in over 231 trades.

The stock hit an intraday high of Rs. 508 and intraday low of 492.05. The net turnover during the day was Rs. 1870153.

Source : Equity Bulls

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