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Cyient Ltd: Short term impact on margins - Views on News from Equitymaster
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Cyient Ltd: Short term impact on margins
Apr 24, 2015

Cyient Ltd has announced its fourth quarter and full year results for 2014-2015. The company's net sales have increased by 2.6% QoQ. The net profit has decreased by 7.1% QoQ for the quarter.

Performance summary
  • Consolidated net sales increased by 2.6% on a QoQ basis during the fourth quarter of financial year 2014-2015 (4QFY15). In US dollar terms the topline was up 2.3% QoQ. The FY15 revenues were up 24% YoY.
  • The operating performance was impacted due to the higher costs associated with Rangsons Electronics which the company had acquired in Jan 2015. The operating margin in 4QFY15 fell by 3.8% QoQ and stood at 12.4%. The operating profit decreased by 21.9% QoQ. However, for the full year FY15, the operating profit was flat on a YoY basis.
  • Other income came in higher by 2.9% QoQ while finance costs more than doubled sequentially.
  • Depreciation was higher by 7.1% QoQ. The sharp fall in the operating profit as well as higher depreciation sequentially contributed to the fall in the profit before tax (PBT) by 20.2% QoQ.
  • The net profit was down by 7.1% QoQ. The fall in the bottomline was reduced to an extent by a steep fall in the tax rate for the quarter.
  • The company has declared a final dividend of Rs 5 per share.

Consolidated financial performance
(Rs m) 3QFY15 4QFY15 Change FY14 FY15 Change
Sales 7,118 7,300 2.6% 22,064 27,359 24.0%
Operating expenditure 5,963 6,398 7.3% 17,962 23,351 30.0%
Operating profit (EBDITA) 1,156 903 -21.9% 4,102 4,008 -2.3%
Operating profit margin (%) 16.2% 12.4%   18.6% 14.7%  
Finance costs 13 29 120.9% 14 58 320.4%
Other income 367 378 2.9% 169 1,218 618.8%
Depreciation 174 186 7.1% 720 713 -1.0%
Profit before tax 1,337 1,066 -20.2% 3,538 4,456 25.9%
Tax 374 172 -54.0% 1,030 1,096 6.4%
Associate profit & minority interest 46 42 -7.2% 152 173 13.7%
Profit after tax/(loss) 1,008 937 -7.1% 2,660 3,532 32.8%
Net profit margin (%) 14.2% 12.8%   12.1% 12.9%  
No. of shares (m)         112.4  
Diluted earnings per share (Rs)*         31.4  
P/E ratio (x)*         15.6  
* On a trailing 12-months basis

What has driven performance in 4QFY15?
  • Cyient witnessed growth in 4QFY15 in its non-core markets. While aerospace and defense did well in the quarter, telecom was under pressure. The engineering division was strong but data network operations (DNO) witnessed de-growth on a sequential basis.

    Segment-wise performance
    Verticals 3QFY15 4QFY15 Change
    Aerospace & defense 2,221 2,519 13.4%
    Transportation 719 759 5.6%
    Off-highway equipment 320 365 14.0%
    Semiconductor 420 409 -2.7%
    Medical & consumer electronics 85 110 28.2%
    Utilities 861 803 -6.8%
    Telecom 1,303 1,197 -8.1%
    Energy & natural resources 491 511 4.0%
    Geospatial 634 569 -10.1%
    Others 64 58 -8.8%
    Service lines
    Engineering Services 4,093 4,512 10.2%
    Data network operations (DNO) 2,961 2,730 -7.8%
    Others 64 58 -8.8%
    Geography
    US 4,627 4,650 0.5%
    Europe, Middle East, Africa (EMEA) 1,908 1,883 -1.3%
    ROW 584 767 31.3%

  • The operational performance to a hit in the quarter due to the integration of Rangsons. The management stated that the accounting policies of Rangsons have to be aligned with that of Cyient. As this has now been completed, margins will expand going forward.

  • The bottomline increased by 32.8% YoY in FY15. With margin improvement being the top priority of the management, profitability can improve going forward.
What to expect?
At the current price of Rs 490 the stock of Cyient trades at 15.6 times its trailing twelve months (TTM) earnings.

The company had a fairly muted quarter in 4QFY15 due to multiple factors. The Rangsons acquisition boosted the topline but impacted the operating margin. The management stated that margin improvement is their top priority. They expect synergies from the Rangsons acquisition to kick in post 1QFY16. The company has already started bidding for large end-to-end product design and development projects post the acquisition. Conservatively the management expects Rangsons to contribute US$ 75 m to the topline in FY16.

On an organic basis the company's deal pipeline remains strong. Cyient added 67 clients in FY15; 41 in DNO and 26 in Engineering. The company has received a significant short-term boost for cross-selling opportunities due to the recent acquisitions of Softential, Invati and Rangsons. Also client specific issues in the DNO segment have been sorted out. Thus, we see no problems with revenue growth expectations for FY16 at least.

However, operating margin improvement will be the key factor going forward. FY15 was disappointing on that front. Post the wage hikes in 1QFY16; the management has stated several measures which will improve operating margins. We will closely track the same in the coming quarters.

Cyient has had a record year in terms of cash generation. Free cash flow grew by 35.8% YoY to Rs 2.968 bn. The dividend payout ratio has consistently increased from just 6% in FY10 to about 26% in FY15. The strong revenue visibility as well as the management's focus to improve margins will hold the company in good stead.

In our April 2015 India Letter report we had asked investors who have already bought the stock, not to buy any more at current levels. Also, investors who have not bought the stock until now can put 50% of the money they intend to put into the stock at current levels. We maintain the same view.

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