Elevated focus on profitability revival

Transcription

1 BSE SENSEX S&P CNX 25,229 7,733 Stock Info Bloomberg CYL IN Equity Shares (m) Week Range (INR) 641/371 1, 6, 12 Rel. Per (%) 2/-6/7 M.Cap. (INR b) 52.6 M.Cap. (USD b) 0.8 Avg Val ( INRm) 46.3 Free float (%) 77.8 Financials Snapshot (INR b) Y/E Mar E 2018E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Shareholding pattern (%) As On Dec-15 Sep-15 Dec-14 Promoter DII FII Others FII Includes depository receipts Stock Performance (1-year) Cyient Sensex - Rebased May-15 Aug-15 Nov-15 Feb-16 May-16 6 May 2016 Update Sector: Technology Cyient CMP: INR468 TP: INR550(+18%) Buy S3 strategy, DLM to drive next leg of growth Elevated focus on profitability revival We attended CYL s analyst meet, where the company elaborated on its aim to become a major tier-i supplier in select verticals in the next ten years. It expects to drive accelerated, non-linear growth through the execution of its S3 strategy and design-led manufacturing (DLM). It has taken several steps for executing this strategy reorganization, investments in specific areas, and differentiated strategy for focus verticals. While the implementation of this strategy is not an immediate factor, CYL expects a revival in core business in FY17 to double-digit revenue growth compared to flat revenue previously. At the same time, it expects margin expansion, leading to a guidance of 15%+ earnings growth for FY17. Focus on S3 strategy CYL s S3 strategy (or the design-build-maintain continuum) applies to both its segments. In Engineering, it spans across Design & Engineering, Electronics & Mechanical Manufacturing, and Aftermarket & Operations Support. In DNO, the services that coincide with the continuum are Network & Operations, Systems & Applications, and Analytics. In accordance with this strategy, CYL has acquired four companies to fill capability gaps and pace towards customer lifecycle ownership. Reorganization to aid strategy execution To get closer to the S3 strategy and 2020 aspiration, CYL recently reorganized its structure into industry-focused business units (BUs). Eight BUs (Aerospace & Defense, Transportation, Medical & Healthcare, Utilities & Geospatial, Semiconductor, Communications, Industrial & ENR, and DLM) will drive business. These will be supported by the four enabling units of Finance, Strategy, Marketing & Communications, Corporate HR, and Business Excellence. Investments directed towards the long-term The company has been making several investments in line with its strategy. These are directed towards building: [1] technology capability (IoT, MedTech), [2] geographic capability (opening of center in Prague and commencement of JV in Israel for defense offsets), and [3] domain capability (Bogies technical center and inorganic growth). Investments are currently underway and are expected to start yielding results, going ahead. Signs of strategy execution a key positive CYL has articulated 18 key actionable areas across key verticals, with well-defined plans and timelines. Several of these areas have started to see progress, while some remain untouched. However, this provides for some additional indicators of progress, besides CYL s acquisitions over the last few quarters. Moreover, there has been a significant shift in pipeline, indicating a conscious move towards higher proportion of revenue from Systems and Solutions compared to Services. The Design:Build:Maintain ratio of the pipeline has changed from 61:14:25 in FY16 to 42:35:23 in FY17. Ashish Chopra (Ashish.Chopra@MotilalOswal.com); Sagar Lele (Sagar.Lele@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Acceptance of strategic direction by customers At the Analyst Meet, a few clients articulated their experience of working with CYL. While the common theme of satisfaction with work performed existed across the board, clients also highlighted some areas of opportunity for CYL. These stemmed out of CYL s existing capabilities, presence in multiple verticals, and additional areas the company has opened up following recent acquisitions. The intent of customers wanting to partner with CYL in wider areas in the future reflects strong relationships and their acceptance of its strategy. Revenue growth revival expected in FY17 CYL expects a revival in revenue growth in its core business. Excluding Rangsons, the Services business is likely to clock double-digit revenue growth compared with flat CC revenue in FY16. Rangsons had reported revenue of USD38m in FY16 disappointing, given the initial guidance of USD70m. This was due to delays in conversion of the order book to revenue. Based on executable order book, the management is confident of delivering 50% growth in DLM in FY17. Confidence lent by key customers and deal pipeline CYL faced headwinds in several of its top clients in FY16, leading to subdued revenue performance. With most customer-specific issues behind, it saw a revival in momentum in 4QFY16. This should continue in the year ahead, aided by the highestever deal pipeline CYL has seen. As at the end of FY16, CYL s deal pipeline stood at USD1,021m against USD799.8m at the end of FY15. This lends confidence to achieving FY17 targets, given the project-based nature of CYL s revenue. Elevated focus on revival of profitability After two years of disappointing margins, the management is focusing more on recouping profitability. It expects operating margin to expand to 15% in FY17, mitigating the wage hike impact through various operational levers. While shift in revenue mix towards onsite (which cannot be reversed) contributed to the decline, available levers are productivity, utilization, automation and employee pyramid. 6 May

3 Aerospace creating a differentiated position Aerospace & Defense, CYL s largest vertical, has been going through a shift in spend from Design to Manufacturing, as product development cycles across players come to an end. However, Design is not the only capability with CYL, and it can play a major role in Manufacturing Engineering and Aftermarket Services. In fact, there has been an underlying shift in CYL s revenue composition from Aerospace, away from Design, without affecting overall revenue growth in the vertical. The key trends in the industry are: Supply chain constraints Legacy program sustenance Cost/weight reduction, and thus, efficiency enhancement Technology refresh in Avionics Offsets/Make in India The key areas CYL is tapping to create a differentiated positioning are: 1. Cross selling in the core: a. Cross-selling services of Value Engineering, Process Planning, FAI, and Inventory Management to existing customers; has tapped 7 OEMs so far b. Begun risk-reward sharing programs with two customers; CYL intends to expand to three more clients in 12 months, and to 10 in two years c. Expansion of repair engineering services through the acquisition of GSE-Asia d. Initiated PMA certification effort 2. Avionics: Building consulting layer and a strong partner ecosystem 3. Offsets and Make in India: Israel JV formed to aid progress in offset discharge and Make in India 4. Extension of DLM, Repair Engineering and Analytics to existing customers Aided by (a) changing spend pattern in Aerospace, (b) opening up of additional opportunities through acquisitions, and (c) investments, CYL expects over 3x growth in Aerospace & Defense over the next 4-6 years. Medical in investment mode Medical & Healthcare currently contributes ~2.5% of CYL s total revenue. However, CYL sees tremendous potential for growth and scalability in this vertical. It has been studying this vertical, defining its positioning, and making investments over the last few quarters. The trends prevailing in the Medical & Healthcare vertical are: Cost pressures in the market (higher than average operating costs in the industry) New growth frontiers (emerging markets) Difficult regulatory and innovation environment Digital revolution (IoT, big data, etc) CYL can add value in the industry with the combination of its services and by leveraging its S3 strategy. While it has capabilities in designing medical equipment, Rangsons has the manufacturing ability and acquisitions can extend the scope to Value Engineering and Predictive Analytics. 6 May

4 In the Medical & Healthcare space, CYL will focus on Diagnostic Imaging, In-vitro Diagnostics and Cardiology, which together constitute ~50% of the market opportunity. It will serve global R&D and manufacturing operations as well as local captives of large MedTech organizations. To aid the tapping of this addressable market, CYL has been investing in 1. Enhancing delivery capabilities (senior management with years of experience, domain specialists, structuring teams like OEMs are set up) 2. Expanding sales footprint (to cater to large customers, key geographies) 3. Partner ecosystem (academia, universities, startups) 4. Actively assessing inorganic growth avenues Valuation and view revival in organic business playing out as expected CYL is a market leader in Engineering Services in the Aerospace and Railways verticals, which contribute 50% of its total revenue. Its relationships with marquee clients, years of experience, and partnering with customers in critical parts of their development programs have helped CYL sustain its leadership. To further boost its positioning, CYL is geared to tap the potential in three areas that are all at the cusp of a multi-year growth trajectory: [1] Electronic Manufacturing Services, [2] MRO, and [3] Defense. Together, these three areas increase its addressable market by ~12x (from USD1b in Aerospace Engineering Outsourcing to USD12.3b in the three additional areas). This should help turn around growth performance going ahead, following two years of subdued numbers caused by client-specific headwinds. With most issues behind, we expect revenue growth to bounce back, leading to 11% CAGR over FY16-18 in the core business, and 12% CAGR in overall revenue. Revival of growth has showed up in 4QFY16 performance, and validates the expectation of continued improvement over the course of FY17. Margins declined by ~400bp in FY15 thanks to pricing pressure, change in business mix, reinvestments in restructuring, and acquisition of lower margin business and a further 100bp in FY16. While we see challenges to CYL s 150bp margin expansion target in FY17, we expect margin recovery to be gradual and play out over time expansion of 100bp over FY16-18 on the back of revenue growth revival, turnaround in Rangsons, higher offshoring, improved utilization, and lower subcontracting costs. Upside risk to our margin estimates could come from sharper uptick in Engineering segment s utilization. Although the margin recovery story seems to be taking longer than earlier anticipated, revenue visibility suggests CYL s turnaround on that front is playing out on expected lines. It remains well placed to address opportunities in the Engineering and Defense segments. Our target price of INR550 discounts forward earnings by 13x, at a discount to peers such as PSYS and MTCL (which demonstrate potential in newer services), but at a premium to peers such as MPHL, KPIT, and NITEC (given strong competitive positioning, well defined niche and strategy to drive next leg of growth). 6 May

5 Key triggers Continued momentum in organic revenue growth Revival in Softential and improved outlook for Rangsons Uptick in margins, led by operational efficiency Key risk factors Prolonged client specific issues leading to a pause in recovery Dampening of outlook in Rangsons hampering confidence in S3 strategy Delayed recovery in margins Exhibit 1: 1-year forward P/E band PE (x) Peak(x) Avg(x) Min(x) Exhibit 2: 1-year forward P/B band PB (x) Peak(x) Avg(x) Min(x) Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Source: MOSL Source: MOSL 6 May

6 Story in charts Exhibit 3: Expect revenue growth to pick up Exhibit 4: S3 strategy to propel positioning Revenue (USDm) Growth (YoY, %) FY14 FY15 FY16 FY17E FY18E Source: Company, MOSL Exhibit 5: Most client specific issues now behind FY16 Growth (YoY, %) Source: Company, MOSL Exhibit 6: Margin recovery expected over FY7-18 EBITDA margin (%) Aerospace Transportation Off-highway products Semiconductor Medical & electronics Utilities Communications Energy & natural resources Commercial and geospatial Others FY13 FY14 FY15 FY16 FY17E FY18E Source: Company, MOSL Source: Company, MOSL Exhibit 7: led by utilization Exhibit 8: and reduction in subcontracting, apart from other levers Utilisation: Engineering (%) Utilisation: DNO (%) Subcontracting costs (% of revenue) QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Source: Company, MOSL Source: Company, MOSL 6 May

7 Exhibit 9: Operating metrics 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Geographic Mix - % Americas Europe Asia Pacific Business Units - % Engineering DNO Others Vertical Mix - % Aerospace Transportation Off highway products Semiconductor Medical & electronics Utilities Communications Energy & natural resources Commercial and geospatial Others Revenue Mix - % Onsite Offshore Utilization - % Engineering DNO Overall Client Buckets USD1m USD5m USD10m USD20m Client Contribution - % Top Top Product Realisation Business Geographic Mix - % Americas EMEA & India Asia Pacific Vertical Mix - % Aerospace and Defence Industrial Medical Communication Others Source: MOSL, Company 6 May

8 Financials and Valuations Income Statement (INR Million) Y/E Mar E 2018E Net Sales 11,880 15,530 18,731 22,064 27,359 30,955 35,816 41,567 Change (%) EBITDA 1,796 2,689 3,416 4,101 4,014 4,247 5,083 6,123 EBITDA Margin (%) Depreciation EBIT 1,310 2,195 2,780 3,381 3,301 3,354 4,262 5,188 Interest Other Income ,236 1,065 1,147 1,209 Extraordinary items PBT 1,572 2,363 3,166 3,538 4,457 4,220 5,175 6,168 Tax ,030 1, ,242 1,480 Tax Rate (%) Min. Int. & Assoc. Share Reported PAT 1,373 1,628 2,329 2,660 3,511 3,349 3,981 4,736 Adjusted PAT 1,373 1,628 2,329 2,660 3,511 3,349 3,981 4,736 Change (%) Balance Sheet (INR Million) Y/E Mar E 2018E Share Capital Reserves 9,737 11,018 12,667 15,325 17,879 20,382 23,168 26,483 Net Worth 10,293 11,575 13,225 15,885 18,441 20,944 23,731 27,046 Debt ,103 1,504 1,233 1,333 Deferred Tax Total Capital Employed 10,744 12,060 13,651 16,318 19,666 22,448 24,964 28,378 Gross Fixed Assets 5,782 6,404 7,301 7,976 9,318 10,618 11,618 12,618 Less: Acc Depreciation 2,933 3,345 3,973 4,634 5,696 6,589 7,410 8,344 Net Fixed Assets 2,848 3,059 3,328 3,342 3,622 4,029 4,208 4,274 Capital WIP Investments ,000 1,200 Current Assets 8,597 10,558 11,934 15,652 21,732 23,596 26,474 30,439 Inventory ,139 Debtors 2,567 3,675 4,007 4,800 5,336 6,191 7,163 8,313 Cash & Bank 3,477 4,496 4,939 6,886 5,704 7,716 8,910 10,993 Loans & Adv, Others 2,552 2,387 2,988 3,966 10,086 8,870 9,409 9,993 Curr Liabs & Provns 1,109 1,976 2,449 3,147 6,120 6,138 6,879 7,695 Curr. Liabilities 836 1,499 1,964 2,523 5,164 5,538 6,179 6,895 Provisions Net Current Assets 7,487 8,581 9,486 12,505 15,612 17,459 19,595 22,744 Total Assets 10,744 12,060 13,651 16,318 19,666 22,358 24,873 28,288 6 May

9 Financials and Valuations Ratios Y/E Mar E 2018E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales EV/EBITDA Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios (%) Fixed Asset Turnover (x) Debtors (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 2018E Adjusted EBITDA 1,796 2,689 3,416 4,101 4,014 4,247 5,083 6,123 Non cash opr. exp (inc) ,018-1, ,205 (Inc)/Dec in Wkg. Cap , Other operating activities CF from Op. Activity 1,018 1,259 1,599 2,272 3,617 3,995 2,962 3,952 (Inc)/Dec in FA & CWIP ,274-1,000-1,000 Free cash flows ,511 2,814 2,722 1,962 2,952 (Pur)/Sale of Invt , Others CF from Inv. Activity ,282-1, Inc/(Dec) in Net Worth Inc / (Dec) in Debt Divd Paid (incl Tax) & Others ,194-1,421 CF from Fin. Activity ,428-1,650 Inc/(Dec) in Cash 1,142 1, ,947-1,183 2,013 1,194 2,083 Add: Opening Balance 2,336 3,492 4,528 4,939 6,886 5,704 7,716 8,910 Closing Balance 3,477 4,496 4,939 6,886 5,704 7,716 8,910 10,993 6 May

10 CYIENT GALLERY CYIENT OTHER COMPANIES SECTOR UPDATES

11 N O T E S 6 May

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