Cyient Ltd.

Q1FY15 Result Update

RETAIL RESEARCH

July 25, 2014

HDFC sec Scrip code

Industry

CMP (Rs.)

Recommended Action

Averaging price band (Rs.)*

Target (Rs.)

Time Horizon

CYIENTEQNR

IT

368.1

Buy at CMP and add on dips

309326

395

1 quarter

In our stock note dated May 30, 2014, we recommended investors to buy Cyient Ltd. (earlier Infotech Enterprises Ltd.) at the then CMP of Rs. 298.7 and to average it on
dips to Rs. 255270 for a price target of Rs. 350 over the next quarter. Thereafter the stock met our target on June 19, 2014. Currently it is quoting at Rs. 368.7.
Cyient delivered robust set of numbers for Q1FY15. While revenue growth was in line, PAT was above our estimates, aided by lower tax rate & higher other income.
However the company disappointed on the margin front which was impacted by wage hike and rupee appreciation. We present an update on the stock.

Key highlights of Q1FY15 results: (IFRS)

Consolidated revenues for the quarter increased by 28.5% YoY and by 4.5% QoQ to Rs. 6217 mn. USD revenues increased by 7.8% QoQ to USD 104 mn (up 7.2% Q
oQ in Constant Currency CC). Excluding Softential acquisition, company grew 4.2% QoQ and 16.8% YoY. Growth was broad based across geographies & operating
units. Engineering (including Aero and HTH) grew by 4.6% QoQ in USD terms (62% of the revenues) and Data Transformation, Network and Operations (DNO) [UT &
DA business units] increased by 14.1% QoQ (37% of revenues), aided by Softential acquisition.
EBITDA increased by 9.3% YoY and declined 18.5% QoQ. EBITDA margins fell by 247 bps YoY & 397 bps QoQ to 14.1%. The sequential fall in margins was on
account of the appreciation of the rupee (impact of ~297 bps) and wage hike (impact of 100 bps). The offshoring and utilizations were the lower than expected during
the quarter.
PAT grew at a relatively better rate by 27.1% YoY, supported by decline in the effective tax rate (down 1433 bps YoY) and lower depreciation cost (down 4.4% Yo
Y). Sequentially, degrowth in PAT was 3.2%, much lower than degrowth in EBITDA, aided by higher other income (due to higher treasury income, lower forward cover
losses and translation gains during the quarter) and lower effective tax rate (down 186 bps QoQ). PAT margins fell by 11 bps YoY & 82 bps QoQ to 10.3%.
EPS for the quarter stood at Rs. 6.1 vs. Rs. 4.9 in Q1FY14 & Rs. 6.2 in Q4FY14.

Quarter Financials: (Consolidated)

Particulars (Rs. in Mn)
Revenues
Cost of Software Development
Gross Profits
SG&A expenses
EBITDA
Depreciation & Amortization

RETAIL RESEARCH

Q1FY15

Q1FY14

VAR [%]

Q4FY14

VAR [%]

6217

4839.3

28.5

5948.0

4.5

3860.6
2356.4
1479.7
876.7
172.9

3085.6
1753.7
951.8
801.9
180.8

25.1
34.4
55.5
9.3
4.4

3493.1
2454.9
1379.8
1075.1
174.0

10.5
4.0
7.2
18.5
0.6

Remarks
USD revenues increased by 7.8% QoQ to USD 104 mn (up 7.2% QoQ in Constant
Currency CC). Excluding Softential acquisition, company grew 4.2% QoQ and 16.8% Yo
Y. Growth was broad based across geographies (APAC reported higher QoQ growth in
USD terms) & operating units (DNO reported higher growth).
Wage hikes of 8% for offshore & 2% for onsite employees resulted in higher employee cost.

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EBIT

703.8

621.1

13.3

901.1

21.9

Other Income

131.5

182.1

27.8

20.4

744.6

Interest
PBT

11
824.3

6.9
796.3

59.4
3.5

8.3
872.4

32.5
5.5

Tax

186.7

294.5

36.6

213.8

12.7

PAT
Profit / Loss from Associates

637.6
47.5

501.8
41.3

27.1
15.0

658.6
39.8

3.2
19.3

Reported PAT

685.1

543.1

26.1

698.4

1.9

EPS
Equity
FV
Gross Profit Margin (%)

6.1
558.2
5.0
37.9

4.9
558.2
5.0
36.2

26.1
0.0
0.0

6.2
559.8
5.0
41.3

1.6
0.3
0.0

EBITDAM (%)

14.1

16.6

18.1

EBITM (%)
PATM (%)

11.3
10.3

12.8
10.4

15.1
11.1

Sequential sharp rise in other income was due to lower forward cover losses (loss of Rs.
38.8 mn compared to loss of Rs. 112.1 mn in Q4FY14 and translation gains (Rs. 43.5 mn
compared to translation loss of Rs. 35.4 mn in Q4FY14).

Effective tax rate on PBT declined by 1433 bps YoY & 186 bps QoQ to 22.6%. Lower tax
rate was due to ramp up in SEZ business and a oneoff benefit of 1.4%, towards deferred
tax & other onetime benefits. The company had earlier guided for lower tax rates in FY15
(expected t o go down by 2% over FY15).

Sequential PAT degrowth was better than expectations aided by higher other income and
lower effective tax rate.

QoQ fall in margins was due to INR appreciation (impact of ~297 bps) and wage hike
(impact of 100 bps).

(Source: Company, HDFC Sec)

Some observations on Q1FY15 results:

Geographically, the growth was led by APAC (up 12.3% QoQ) and Americas (up 4.7% QoQ Excluding Softential revenue of USD 3.56 mn). Europe, Middle East,
Africa and India [EMEA] grew marginally by 0.6% QoQ. North America growth was led by ramp up in key clients in Semiconductor, aerospace, Energy,
Communications and Utilities industries. Increased revenues in APAC were due to growth in existing customers in Energy and communication industries. Growth in
EMEA was driven by Aero, Content and Navigation industries.

Geography wise revenue distribution:

Particulars
Americas
EMEA
Asia Pacific

RETAIL RESEARCH

Q1FY15
60.9%
29.3%
9.8%

Q4FY14
59.2%
31.4%
9.4%

Q1FY14
58.4%
28.8%
12.8%

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 Employee Metrics

Total Manpower (incl. Subsidiaries)

Gross Addition
Net Addition
Attrition Rate (Voluntary)
Utilisation Rate

Q1FY15
12539

Q4FY14
12094

Q1FY14
10815

1014

786

763

445
15.3%
74.3

236
15.5%
76.2

298
12.2%
74.2

Remarks
Good employee addition continued. There was an increase is in support function staff due to the Softential,
Inc and restructuring as well.
Net addition remained steady aided by hiring in UT&DA division
Attrition rate decreased by 20 bps QoQ, but increased by 290 bps YoY.
Utilisation levels declined during the quarter due to Softential acquisition & use of subcontractors for a
North American utility company.

Other highlights
Client metric trends were encouraging. The company shifted focus to mining top 20 customers. Both top 5 and 10 customer revenues grew above company average by

8.7% & 9.2% QoQ respectively. The company added 9 customers (6 in ENGG and 3 in DNO) during the quarter.
The OnsiteOffshore mix is at 52.9:47.1 as on 30th June 2014 compared to 50.7:49.3 as on 31st March 2014. The onsite offshore split of revenue is 57:43 for ENGG

and 43:57 for DNO during the quarter.

Cyient, through its subsidiary Cyient Inc., USA, has completed acquisition of USbased Softential, Inc. on 1st Apr 2014. The results have been reflected in the financials
for the quarter ending 30th June 2014. The company has also taken a US$ denominated loan of $10 Mn via Cyient Inc to partly finance the acquisition. It shall give
benefit of treasury yield arbitrage and bring down the cost of capital.
The Company has hedged ~70% of inflows for next 12 months. The Total hedge position in US$ is USD 131 million.
The Business continues to generate strong Free Cash Flow (FCF), The FCF as % of EBITDA for the quarter stands at 48%. The Absolute FCF generated Rs 48.7 crore
during the quarter.
The Cash Balance, including liquid investments, is Rs 735.8 crore as on 30th June 2014.
As per the management, the Capex is expected to be 3.54% of Sales.

Conclusion & Recommendation

Cyient delivered robust set of numbers for Q1FY15. While revenue growth was in line, PAT was above our estimates, aided by lower tax rate & higher other income.
However the company disappointed on margin front, which was impacted on account of wage hike and rupee appreciation. We were impressed by the broad based
growth reported across geographies and operating units.
The management has delivered 3 straight quarters of robust 34% organic growth, which is encouraging. It indicated that it is on right track and hopes to continue to the
growth momentum in FY15, likely to be driven by robust & improving orderbook, positive outlook of transportation, (2 of the top5 clients are seeing good ramp up), off
highway, utilities, Aerospace & Improvement in semiconductors & telecommunication industries. Focus on mining top 20 customers would further aid the growth.
The Company expects margins to be similar as last year in constant currency terms. It indicated that that a sharp fall in margins in Q1 was a onetime hit from one big
project where most of the work started from the onsite. This is expected to be corrected going forward. The Company is actively working on the levers of margin to
RETAIL RESEARCH

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improve the same over the course of the year, starting in Q2. The management expects utilisation rate to improve going forward as subcontractors will be replaced by in
house staff by end of Q2 or early Q3.
We feel Cyient is on track to achieve our FY15 revenue estimates. Hence we are keeping the same unchanged. However, we feel the company could disappoint at the
operating level on the back of wage hikes & rupee appreciation. Hence we are downgrading the operating profit estimates by 8.8%. But we feel the company would be
able to perform better than our projections at the net level, aided by higher other income & lower than expected tax rates. Hence we are enhancing our PAT estimates by
2.6%. Accordingly revised EPS for FY15 is estimated at Rs. 29.9 (vs Rs. 29.2 originally estimated). We have incorporated FY16 projections, wherein we expect Cyients net
sales, operating profit & PAT to grow by 13%, 17% & 14.7% respectively. EPS is projected at Rs. 34.4. While we expect the operating margins to fall in FY15, we expect an
improvement in FY16, as we expect the negative impact of salary hikes & rupee volatility (if rupee appreciates in FY16) to be offset by improvement in offshore mix &
utilisation. Lower tax rate on the back of higher profits expected from SEZ operations would boost the net profits & NPM over the next two years.
At CMP, the stock trades at 10.7x FY16E EPS. Cyients niche expertise and presence in less crowded verticals (limited competition), its higher cash to market cap
compared to peers, higher margins gives the company an edge over its peers. Consistent improvement in revenue visibility could result in improved financial performance
and the stock could continue to be rerated gradually. Valuing the stock at 11.5xFY16E EPS, we arrive at a price target of Rs. 395. We feel investors could buy the stock at
CMP and add it on dips to Rs. 309326 (99.5xFY16E EPS) for our price target over the next quarter.

Financial Estimates: (IFRS)

Particulars (Rs. in Millions)
Net Revenue
EBIDTA
Adjusted PAT
EPS (Rs.)
OPM (%)
PATM (%)
PE

FY12
15531.4
2704.5
1624.1
14.5
17.4
10.5
25.4

FY13
18730.7
3415.7
2323.1
20.7
18.2
12.4
17.7

FY14
22064.3
4100.9
2660.1
23.8
18.6
12.1
15.5

FY15 (OE)*
25594.6
4773.4
3266.4
29.2
18.7
12.8
12.6

*OE = Original Estimates; RE = Revised Estimates

FY15 (RE)*
25594.6
4351.1
3352.9
29.9
17.0
13.1
12.3

FY16 (E)
28921.9
5090.3
3846.6
34.4
17.6
13.3
10.7

(Source: Company, HDFC Sec Estimates)

Analyst: Mehernosh K. Panthaki IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
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