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Cyient Ltd: A decent operating performance - Views on News from Equitymaster
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Cyient Ltd: A decent operating performance
Jul 22, 2015

Cyient Ltd has announced its first quarter results for FY16. The company's net sales have decreased by 0.5% QoQ. The net profit has decreased by 20.1% QoQ for the quarter.

Performance summary
  • Consolidated net sales decreased by 0.5% QoQ during 1QFY16. In US dollar terms the topline was down 2.6% QoQ.
  • The operating performance was good despite seasonal headwinds like wage hikes and visa costs. The operating margin in 1QFY16 came in at 12.7% compared to 12.4% in 4QFY15. The operating profit increased by 2.2% QoQ.
  • Depreciation charges were flat sequentially while other income was down 23.5% QoQ due to lower treasury income. The sharp fall in the other income sequentially contributed to the fall in the profit before tax (PBT) by 7.3% QoQ.
  • The net profit was down by 20.1% QoQ. The normalization of the tax rate on a sequential basis also contributed to the fall in the bottomline.
Consolidated financial snapshot
(Rs m) 4QFY15 1QFY16 Change
Sales 7,300 7,263 -0.5%
Operating expenditure 6,398 6,341 -0.9%
Operating profit (EBDITA) 903 922 2.2%
Operating profit margin (%) 12.4% 12.7%  
Finance costs 29 40 41.1%
Other income 378 289 -23.5%
Depreciation 186 183 -1.6%
Profit before tax 1,066 988 -7.3%
Tax 172 284 65.0%
Associate profit & minority interest 42 44 3.1%
Profit after tax/(loss) 937 748 -20.1%
Net profit margin (%) 12.8% 10.3%  
No. of shares (m)   112.4  
Diluted earnings per share (Rs)*   32.0  
P/E ratio (x)*   16.6  
* On a trailing 12-months basis

What has driven performance in 1QFY16?
  • In 1QFY16 the performance across verticals, service lines and geographies was mixed. While aerospace and defense as well as off-highway did well in the quarter, utilities & energy were under pressure.

    Revenue break-up
    Verticals 4QFY15 1QFY16 Change
    Aerospace & defense 2,519 2,600 3.2%
    Transportation 759 755 -0.5%
    Off-highway equipment 365 378 3.5%
    Semiconductor 409 407 -0.5%
    Medical & consumer electronics 110 102 -7.1%
    Utilities 803 770 -4.1%
    Telecom 1,197 1,177 -1.7%
    Energy & natural resources 511 479 -6.2%
    Geospatial 569 530 -6.9%
    Others 58 65 11.9%
    Service lines
    Engineering Services 4,512 4,561 1.1%
    Data network operations (DNO) 2,730 2,644 -3.2%
    Others 58 58 -0.5%
    Geography
    US 4,650 4,648 0.0%
    Europe, Middle East, Africa (EMEA) 1,883 1,743 -7.5%
    ROW 767 872 13.7%

  • The operational performance for the quarter was good considering the seasonal impact of visa costs and wage hikes. The company has given a salary hike of 8% for off-shore staff and 2% for on-site staff.

  • The bottomline decreased by 20.1% QoQ in 1QFY16 largely due to the fall in the other income and the increase in the tax rate both on a sequential basis. This does not worry us as the profitability can be expected to improve going forward.
What to expect?
At the current price of Rs 532 the stock of Cyient trades at 16.6 times its trailing twelve months (TTM) earnings.

Cyients topline was impacted due to a few large clients pushing work into 2QFY16. We expect this to normalise in the next quarter. The companys deal pipeline remains strong. The recent acquisitions have provided Cyient with significant cross-selling opportunities. It is now just a question of when and by how much will the topline improve going forward because of this. On an organic basis, the companys topline grew by 1.6% QoQ in 1QFY16.

Despite the pressure on the topline, the management has done a good job on the margin front. This was as a result of continuing improvements operational efficiencies. Utilisation was up sequentially from 73.8% to 75.4%. The off-shore delivery was up sequentially from 43.3% to 43.9%. The SG&A expenses were also contained (as a % of sales) in the quarter.

Post the results declaration, the company has announced the acquisition in the Aerospace vertical. Cyient has acquired leading aerospace player, Pratt & Whitneys engineering services division in Asia. We will provide our view on the same in the next issue of The India Letter.

The long term fundamental story for Cyient remains intact. The recent acquisitions have brought in little volatility to the topline on a sequential basis. However, the full year FY16 performance will determine how growth will pan out. We remain confident on that front.

In our July 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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