Growth story at a discountstatic-news.moneycontrol.com/static-mcnews/2017/09/... · 2017-09-26 ·...

JM Financial Institutional Securities Limited

JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters

S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.

We initiate coverage on Cyient (CYL) with a BUY rating for a 19% upside. CYL is an

engineering and R&D (ER&D) services provider that has been adding manufacturing and

maintenance capabilities to integrate closely with its clients’ product lifecycles (and increase

the share of clients’ product development and support spends). Gains from its acquisitions-

driven portfolio expansion, while slow initially, are now coming in. CYL is also in a sweet spot

in its network services business (20%+ of revenues) that is seeing strong demand from the

roll-out of next-generation telecommunication networks by major global players. We expect

these to drive a 15.2% EPS CAGR over FY17-FY20. However, the improved growth trajectory

is yet to reflect fully in valuations; CYL trades at 13x 12-month forward EPS, below its 3-year

median PER (15x) and at a 27% discount to L&T Technology Services (LTTS IN; HOLD). Thus,

at 0.9x PEG, we find its risk-reward profile attractive.

An integrated play on the ER&D market opportunity. CYL is well established in the ER&D

services space, where we expect stronger growth vs. traditional IT services over the

medium term. The outsourced component is lower for ER&D services (<11% vs. 15% for

IT); India has a relatively low share of the global outsourcing market (28% vs. 62% for IT);

and ER&D services are relatively less affected by digital/automation-related disruptions. In

addition, CYL has been inorganically expanding downstream into electronic/mechanical

manufacturing and aftermarket services to offer integrated design-build-maintenance

services to clients.

The medium-term growth story is in telecom. Besides ER&D, CYL provides network

planning, design and roll-out services to telecom services providers. This business (23% of

1QFY18 revenue) posted c.8% CQGR over the past 5 quarters driven by fibre deployment

programmes underway across major geographies such as the National Broadband

Network (NBN) in Australia, Ultra-fast Broadband (UFB) in New Zealand, and the Connect

America Fund (CAF) in the US. CYL expects this momentum to sustain over FY18-FY19

given the extended deployment timelines of such programmes (eg. June 2021 for NBN).

Revenue momentum + operating leverage = strong EPS growth. We forecast 13% USD

revenue CAGR in the services business over FY17-FY20 led by communications (21%

CAGR) and transportation (19%). The consequent operating leverage should help services

EBITDA margin expand 100bps over FY17-FY20, in our view. A pick-up in cross-selling to

existing services clients could sustain 22% USD revenue CAGR in the DLM business; note

that UTC Aerospace approved CYL as a qualified product supplier in Jun’17. A potential

opportunity from the defence offset is the joker. The focus is more on margins though;

CYL expects breakeven in DLM by 4QFY18 and a 5-10% EBITDA margin by FY20.

Risk-reward attractive; BUY. Our Sep’18 TP of INR 610 is at 14x target PER on 12-month

forward EPS (implies 0.9x PEG on FY17-FY20 EPS CAGR). 1QFY18 was seasonally muted;

a recovery over 2Q-3QFY18 should help correct the valuation/growth anomaly, in our

view. Improved cash-flow (OCF/EBITDA of 88% in FY17 vs. 67% in FY16) is an added

support. Key risks: volatility in DLM and unforeseen client-specific issues.

Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E

Net Sales 30,876 35,859 38,914 44,066 50,279

Sales Growth (%) 12.9 16.1 8.5 13.2 14.1

EBITDA 4,247 4,850 5,448 6,271 7,370

EBITDA Margin (%) 13.8 13.5 14.0 14.2 14.7

Adjusted Net Profit 3,350 3,700 4,126 4,578 5,237

Diluted EPS (INR) 29.8 33.0 36.8 40.8 46.7

Diluted EPS Growth (%) -5.3 10.5 11.5 10.9 14.4

ROIC (%) 22.1 26.5 26.9 29.1 32.0

ROE (%) 17.7 18.3 18.3 17.9 18.1

P/E (x) 17.2 15.5 13.9 12.5 11.0

P/B (x) 3.0 2.7 2.4 2.1 1.9

EV/EBITDA (x) 11.9 10.0 8.6 7.1 5.7

Dividend Yield (%) 0.0 1.8 1.8 2.0 2.3

Source: Company data, JM Financial. Note: Valuations as of 22/Sep/2017

Pankaj Kapoor [email protected] | Tel: (91 22) 66303089

Akash Verma [email protected] | Tel: (91 22) 66241876

Recommendation and Price Target

Current Reco. BUY

Previous Reco. NR

Current Price Target (12M) 610

Upside/(Downside) 19.1%

Previous Price Target NA

Change NA

Key Data – CYL IN

Current Market Price INR512

Market cap (bn) INR57.6/US$0.9

Free Float 51%

Shares in issue (mn) 112.4

Diluted share (mn) 112.2

3-mon avg daily val (mn) INR33.7/US$0.5

52-week range 565/405

Sensex/Nifty 31,922/9,964

INR/US$ 64.8

Price Performance % 1M 6M 12M

Absolute -0.7 8.5 7.8

Relative* -2.6 -0.8 -2.8

* To the BSE Sensex

Cyient | BUY

25 September 2017 India | IT Services | Initiating Coverage

Growth story at a discount

Cyient


Investment summary

Outsourced ER&D is a USD 232bn market opportunity: ER&D services are the services

provided to product and process technology companies (in manufacturing, technology

and engineering industries) to help them develop and deliver their own products and

services to their end customers. The addressable market for outsourced ER&D services

was estimated at USD 232bn in 2016 by Zinnov, an industry research firm. Of this, only

37%—USD 85bn—is being currently addressed. GICs (captives) accounted for c.40%

(USD 34bn) of the total outsourced spend, with the remaining (USD 51bn) shared by

third-party engineering services outsourcing (ESO) firms in 2016.

We are seeing shifts in global ER&D spends... Corporate ER&D spend has been shifting

from physical products to software and services. The average allocation of R&D spends

to software/services grew to 59% in 2015 from 50% in 2010—and is projected to grow

to 63% by 2020—as per PwC Consulting. Evolving demand dynamics—need for faster

time-to-market and lower costs—are making clients use third-party ESOs more actively.

… that could continue to drive Indian ER&D services’ exports growth ahead of IT services:

India is a key destination for ER&D services; India’s ER&D exports at USD 22.5bn in FY16

accounted for c.30% of the addressed market, according to Nasscom. Importantly, the

growth (+11% YoY) was ahead of that for IT services (+7%) for the third consecutive

year, indicating a relative immunity of ER&D services from disruptions that have affected

the IT services. We forecast ER&D services exports to grow to USD 28bn in CY18 and USD

34bn by CY20 (11% CAGR over CY16–CY20) on assumptions of a continued shift to

outsourcing and a trend-line increase in India’s share of the globally sourced market. (In

comparison, both Nasscom and Zinnov projections are higher, 14% CAGR, over this

period.) The third-party players have been growing ahead of the industry (13% YoY in

2016, according to Zinnov). We expect market share gain vs. the captives to continue; we

forecast 13% CAGR in third-party ER&D services’ exports over 2016-20.

Cyient is an integrated play on the ER&D market opportunity. CYL is well-established in

the ER&D services space with an operative history of over 25 years. In addition, CYL has

been inorganically expanding downstream into electronic/mechanical manufacturing

(Rangsons acquisition in 4QFY15) and aftermarket services (MRO captive of Pratt &

Whitney in 2QFY16) to offer integrated design-build-maintenance services to clients in its

key verticals (aerospace) to start with. The Rangsons acquisition (now renamed Cyient

DLM) also enables CYL to target opportunities in the defence offset market.

Deep client relationships + domain competencies are key differentiators: CYL is a market

leader in aerospace and defence (35% of 1QFY18 revenues) and rail transportation

(10.5%) verticals. It had c.300 clients as of 30Jun’17, including Pratt & Whitney (part of

UTC Technologies), Bombardier, Boeing and Siemens. CYL has a relatively concentrated

portfolio but has recognised leadership in its focused verticals. For instance, it was rated

among the top 3 players globally in both aerospace and transportation by Zinnov in their

global ER&D services provider rankings in 2016.

The medium-term growth story is in telecom. Besides ER&D, CYL provides network

planning, design and roll-out services to telecom services providers. This business (23% of

1QFY18 revenues) posted c.8% CQGR over the past 5 quarters, driven by fibre

deployment programmes underway across major geographies such as the National

Broadband Network (NBN) in Australia, Ultra-fast Broadband (UFB) in New Zealand, and

the Connect America Fund (CAF I and II) in the US. Telstra, NBN Co., and AT&T are

among its key clients in this vertical. It was also selected by Liberty Global in March 2017

for their Gigaworld broadband programme roll-out. We expect the momentum in this

vertical to sustain over FY18-FY19 given the typically elongated deployment timelines of

such roll-outs (for example, the Jun’21 deadline for the NBN program in Australia).

FY18 guidance indicates a pick-up in growth momentum. CYL’s management has guided

for double-digit USD revenue growth in the services and 20%+ growth in the DLM

businesses for FY18. It expects a net 50bps YoY margin expansion, which should translate

to double-digit EPS growth in FY18. CYL has also indicated a greater focus on margins

While the commercial model of

ER&D outsourcing is similar to that

of IT services, the decision makers,

deal sizes and structure, and win

factors are significantly different

Third-party ER&D service providers

gained 2.6% market share vs. the

in-house captives over 2011-16

CYL has on average, over 7-year

relationships with its top 20 clients

that account for c70% of revenues

Communications contributed 57%+

of incremental services revenues

over the past 8 quarters

Cyient


(than revenues) in the DLM business and expects it to breakeven by 4QFY18 and record a

5-10% EBITDA margin by FY20.

We expect earnings to post 15%+ CAGR over FY17-FY20. We forecast 13% USD

revenue CAGR in the services business over FY17-FY20 led by communications (21%

CAGR) and transportation (19%) verticals. The consequent operating leverage should

help in margin expansion; we estimate services’ EBITDA margin to expand 101bps over

FY17-FY20, driven by higher realisations and better utilisation. We expect DLM revenues

to grow at 22%, helped by improved cross-selling to existing services clients; UTC

Aerospace approved CYL as a qualified product supplier in Jun’17. Tax rates are likely to

go up but FX hedge gains could offset the impact, at least in FY18-FY19.

Balance sheet and cash flows are healthy. CYL’s balance sheet is healthy (USD 131mn net

cash balance). Its RoE is optically low (18.3% in FY17); however, adjusted for cash, it is

29% vs 35% for LTTS. Cash flows have recovered after the drop in FY16 (OCF/EBITDA of

88% in FY17 vs. 67% in FY17) with improved collections (DSOs have declined to 74 days

vs. 83 days in FY15). CYL intends to pay out 30% of PAT as dividend (implies 1.8% yield

on FY18 dividend) and capex is likely to be stable at USD 23mn-30mn (4% of revenues).

The remainder should fuel CYL’s inorganic expansion as it has an active M&A strategy.

We find risk-reward attractive at current levels. CYL currently trades at 13x 12-months

forward EPS vs. 3-year median PER of 15x. On a relative basis, it is at a 27% discount to

LTTS, the closest peer, and 13%–21% discount to comparable mid-cap IT services players

(MTCL/PSYS/HEXW). We believe these levels are discounting the potential uptrend in

earnings growth. CYL is also relatively immune from any regulatory risks, with only 15%

of onsite employees on H1B/B1 visas. Thus, at 0.9x PEG, we see a 19% potential upside

in the stock over the next 12-18 months. Our Sep’18 TP of INR 610 is at 14x target PER.

After, a seasonally muted 1QFY18, we expect a recovery over 2Q-3QFY18 that could

correct the valuation/growth anomaly.

Key downside risks: 1) Changes to R&D budgets: Two of CYL’s largest industry segments

- aerospace and communications – are cyclical in nature and their R&D budgets tend to

be exposed to macroeconomic conditions. 2) Threat from captives: Several of CYL’s top

20 clients such as UTC and Bombardier have their captives in India. This poses a threat

both to incremental business flow as well as CYL’s pricing flexibility in contracts. 3) High

client concentration: CYL’s top 10 clients account for 55% of its revenues. Thus, any

client-specific issues, especially among larger clients, that affect their ER&D spend, could

have a material impact on CYL. 4) Volatility in DLM: Margins in the DLM (erstwhile

Rangsons) business are still below pre-acquisition levels. Further, it is exposed the typical

cyclicality of the manufacturing business. 5) Risk of an expensive acquisition and/or

integration risks: The performance of at least two previous acquisitions – Softential and

Rangsons – has been below management’s initial expectations. Also, at 0.9x revenues,

we believe valuations of Rangsons were expensive given its manufacturing-oriented

business. A repeat of such cases could affect CYL’s future financials.

Comparative valuations Exhibit 1. M-cap PER EV/EBITDA EV/Sales RoE

Name (USD m) FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2

India – Pure play

LTTS 1,220 18.4x 15.3x 13.3x 11.0x 2.2x 2.0x 27.0 26.8

Cyient 888 14.3x 12.2x 9.1x 7.7x 1.3x 1.1x 17.7 18.2

Global – Pure play

Altran 3,232 17.2x 14.9x 10.9x 9.7x 1.2x 1.2x 16.1 16.8

Alten 3,093 19.9x 17.4x 12.9x 11.5x 1.3x 1.2x 16.1 16.2

India - IT Services

Infosys 31,808 14.0x 13.0x 9.1x 8.4x 2.4x 2.2x 20.9 21.3

TCS 76,047 18.6x 16.9x 14.1x 12.8x 3.7x 3.4x 29.8 30.1

HCL Technologies 19,456 14.3x 13.1x 10.4x 9.4x 2.3x 2.0x 24.6 23.8

Tech Mahindra 6,895 13.8x 12.6x 9.5x 8.3x 1.3x 1.2x 16.9 16.6

Mindtree 1,203 16.8x 14.3x 9.9x 8.1x 1.3x 1.1x 17.4 18.8

Hexaware 1,251 17.3x 15.8x 12.0x 10.8x 2.0x 1.8x 25.9 24.9

Persistent 792 15.5x 13.3x 9.0x 7.6x 1.4x 1.3x 16.5 17.3

NIIT Technologies 492 11.7x 10.2x 5.4x 4.9x 0.9x 0.9x 14.9 15.6

Note: Based on stock price as on 22nd

Sep’17 Source: Bloomberg

We forecast EBIT to post 16%

CAGR over FY17-FY20

DSOs have come down by 9 days

over the past 3 years

We believe the current multiples are

at odds with the attractive FCF yield

(6%+) and PEG (0.9x)

Cyient


Key charts

Relatively low intensity of disruptions is driving growth in ER&D services ahead of IT services Exhibit 2.

Source: Nasscom, JM Financial

We expect exports by Indian third-party ER&D players to post 11% CAGR over 2016-20 Exhibit 3.

(USD bn) 2013 2014 2015 2016 2017 F 2018 F 2019 F 2020 F

Global ER&D spend 638.0 647.0 680.0 680.0 697.0 714.4 732.3 750.6

Change 3.9% 1.4% 5.1% 0.0% 2.5% 2.5% 2.5% 2.5%

Globally-sourced market 63.0 68.0 72.0 80.0 87.1 94.7 102.5 110.7

Change 8.0% 7.9% 5.9% 11.1% 8.9% 8.7% 8.3% 8.0%

Indian ER&D exports 15.6 18.0 20.3 22.5 25.0 27.8 30.8 34.0

Change 9.9% 15.4% 12.8% 10.8% 11.3% 10.9% 10.7% 10.7%

Indian third-party ER&D exports 6.2 6.9 7.9 8.9 10.1 11.5 13.0 14.6

Change 13.9% 11.2% 14.7% 12.7% 14.0% 13.4% 13.0% 12.7%

Source: Nasscom, Zinnov, JM Financial

Cyient is also playing on the opportunity of broadband network roll-outs across multiple countries Exhibit 4.

Program Country Target coverage and time-lines Planned investment Key participants

National Broadband Network (NBN) Australia 93% of premises by FTTH (Fibre-To-The-Home) access and

the remaining 7% by wireless and satellite by 2021 Up to USD 40bn Telstra, NBN Co.

Connect America Fund (CAF) – II United States Broadband access to 3.6m rural homes and businesses by

2020 USD 1.5bn

AT&T, CenturyLink,

Frontier, Windstream

Universal Service Obligation (USO) Canada Cover 90% of premises with fixed broadband Internet access services by 2021; remaining 10% in the next 10 to 15 years

USD 620mn over 5 years Rogers Wireless, Bell Mobility, Telus Mobility

National Broadband Plan (NBP) Ireland High-speed broadband (downlink speed of at-least 30 mbps)

to 100% of premises by 2020 USD 400mn EIR, BT Ireland

Regional Broadband Initiative and

Ultra-Fast Broadband (UFB) New Zealand

Access to 50Mbps peak speeds to 99% population and 10

Mbps to remaining 1% by 2025

USD 220mn (Phase-I) + USD

75mn (Phase-II) Chorus, Vodafone

Broadband Delivery UK United Kingdom Superfast (at-least 24 mbps) internet access to 97% of

premises by 2019 USD 1.3bn BT

Source: JM Financial

This is reflecting in an improved order book/deal pipeline for Cyient Exhibit 5.

Source: Company, JM Financial

49.2

55.461.0

65.1

15.618.0

20.3 22.5

0

10

20

30

40

50

60

70

FY14 FY15 FY16 FY17

IT services export (in USD bn) ER&D exports (in USD bn)

14.7%

12.6%

10.1%

6.7%

9.9%

15.4%

12.8%

10.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY14 FY15 FY16 FY17

YoY growth % YoY growth %

83.8

81.3

96.4 130.2

124.9

112.1

105.9

68.7

127.6

20.9

6.6

73.7 30.2

8.1

21.2

83

117 2

.7

0

20

40

60

80

100

120

140

160

180

200

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

Order intake - Services

Executable in the Current FY Executable after the Current FY

6.1 11.5

9.8

9.8

12.3

9.3

9.4

0.7

25

.9

0.2

3.1

4.0

1.4 2.2

2.1 4.3

70.0

4.0

0

10

20

30

40

50

60

70

80

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

Order intake - DLM


Cyient


We expect 12.5% USD revenue CAGR over FY17-FY20 with a concurrent 118bps expansion in the EBIT margin Exhibit 6.

Our forecasts include the latest acquisitions and compares with 14% CAGR

reported over FY14-FY17

We expect EBIT margin to expand 161bps from 1QFY18 trough to FY20

driven by improved utilisation and efficiency gains


Cyient’s financial model has a few differentiations vs. that of IT services companies Exhibit 7.

1There is a significant difference in per-person realisation between engineering services (USD 32-35 per hour, blended, JMFe) and Geospatial (USD 8-10 per hour, blended, JMFe)

2A high client concentration is typically complemented by a wider band in contracted rates (due to volume discounts to larger clients)

3Consolidated revenues (including DLM)


We believe current valuations are not fully reflecting CYL’s strong FCF generation and a healthy RoE Exhibit 8.

FCF conversion for CYL among the highest in the peer group CYL is currently trading at a 12% discount to past-3-year median PER

Source: Company, Bloomberg, JM Financial

23%

5%

14%13% 12% 12%

0%

5%

10%

15%

20%

25%

FY15A FY16A FY17A FY18F FY19F FY20F

USD revenue growth (YoY)

12.1%

10.9% 10.9%

11.2%

11.6%

12.0%

10%

11%

12%

13%

FY15A FY16A FY17A FY18F FY19F FY20F

EBIT margin

Engineering/geospatial/commn.&networking1

Contract structure

Fixed-price/T&M/risk-reward

Client concentration

Top30 clients/non-Top30 clients2

Delivery location

Services concentration

45.8% of revenues

Subcontracting costs

7.7% of revenues

Delivery mgtt. costs

1.9% of revenues

Direct salary costs

Travel costs

2.3% of revenues

Utilisation

Sales & marketing costs

6.6% of revenues

G&A costs

14.5% of revenues

REVENUE DRIVERS COST DRIVERS

71.7%

109.3%

90.4%

56.0%

35.1%28.7%

18.6% 22.0%

0%

20%

40%

60%

80%

100%

120%

LTTS CYL ALTEN ALTRAN

FCF/PAT RoE (excluding cash)

10

12

14

16

18

20

22

Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17

P/E Median +SD1 -1SD

Cyient


Demand environment: Cyient is in a sweet spot

Cyient (CYL) operates in three broad business segments - ER&D services (65% of revenues),

telecom network design and implementation (20%) and geospatial services (15%). We see

macro demand drivers in place for a steady growth in each of these segments.

Risks from digital disruptions are low in ER&D services (unlike IT services)

Globally, outsourcing for ER&D services is low compared with traditional IT services; the

spend on outsourced ER&D services at USD 85bn was just 37% of the addressable market in

2016, according to Zinnov. Further, a significant share of the outsourcing is primarily to GICs

(captives, in industry parlance) who accounted for c.40% (USD 34bn) of the total outsourced

spend, with the remaining for third-party ESO (engineering services outsourcing) firms.

However, there is a slow but steady shift both for outsourcing and share of third-parties.

Global sourcing of ER&D/PE services through GICs and third-party ESOs posted an 8.2%

CAGR over 2012-16; 3x of the growth (2.6%) in overall ER&D spend. The shift is driven by: a)

significant cost savings as overall R&D budgets remain constrained; b) lower time-to-market

of products to end customers; c) regulatory adherence; and d) ability to accelerate product

innovation. At a more structural level, the globalisation of product sales (and consequentially,

of manufacturing, either in compliance with local sourcing norms or to lower land costs) is

also shifting the ER&D investments to a more globally sourced model.

Indian ER&D services exports have posted a 12% CAGR over FY10-FY17 (vs. 13% CAGR for IT services) Exhibit 9.

ER&D services exports are relatively small vs. IT services… …But are growing in-line or ahead of IT services

Source: Nasscom, JM Financial

Under-penetration = opportunity

We forecast Indian ER&D services exports to record 11% CAGR to USD 34bn by 2020.

Growth for third-party service providers could be higher – 13% CAGR over 2017-20F. (In

comparison, Nasscom and Zinnov estimate the ER&D exports at USD 35bn-40bn by 2020.)

Our forecasts, constructed on ER&D spend by Global1000 companies, assume:

Growth in ER&D spend by G1000 companies (2.5% CAGR over 2016-20F) – after a flat

2016 due to cross currency impact – in-line with the growth reported over 2012-16.

A 299bps increase in the outsourcing share over 2016-20F, vs. 226bps (JMFe) over 2012-

16E, given the growing shift in spend from products to software and services.

A 263bps increase in India’s market share of global ER&D sourcing market over 2016-20F

– vs. a 378bps gain over 2012-2016E – implying a 31% market share. This could be

conservative; India’s ER&D exports grew over 4x the growth in global ER&D spend over

2012-16E.

We expect a continued shift from captive to third-party providers; our forecasts build in a

344bps increase in the share of third-party ER&D service providers in India’s ER&D export

over 2016-20F (vs. 125bps increase over 2012-16E).

49.2

55.461.0

65.1

15.618.0

20.3 22.5

0

10

20

30

40

50

60

70

FY14 FY15 FY16 FY17

IT services export (in USD bn) ER&D exports (in USD bn)

14.7%

12.6%

10.1%

6.7%

9.9%

15.4%

12.8%

10.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY14 FY15 FY16 FY17

YoY growth % YoY growth %

Global addressable market for ER&D

services was USD 232bn in 2016, as

per Zinnov

Share of outsourcing in the global

ER&D spend is up 189bps over the

last 4 years

India has 28% share of the global

outsourcing for ER&D services (vs.

62.5% share in IT services)

Indian ER&D exports have grown

ahead of IT services in each of the

last 5 years

Cyient


We expect exports by third-party India ER&D players to record an 11% CAGR over 2016-20E Exhibit 10. (USD bn) 2013 2014 2015 2016 2017 F 2018 F 2019 F 2020 F

Global ER&D spend 638.0 647.0 680.0 680.0 697.0 714.4 732.3 750.6

Change 3.9% 1.4% 5.1% 0.0% 2.5% 2.5% 2.5% 2.5%

Globally-sourced market 63.0 68.0 72.0 80.0 87.1 94.7 102.5 110.7

Change 8.0% 7.9% 5.9% 11.1% 8.9% 8.7% 8.3% 8.0%

Indian ER&D exports 15.6 18.0 20.3 22.5 25.0 27.8 30.8 34.0

Change 9.9% 15.4% 12.8% 10.8% 11.3% 10.9% 10.7% 10.7%

Indian third-party ER&D exports 6.2 6.9 7.9 8.9 10.1 11.5 13.0 14.6

Change 13.9% 11.2% 14.7% 12.7% 14.0% 13.4% 13.0% 12.7%

Share of total ER&D exports 39.7% 38.3% 38.9% 39.6% 40.5% 41.4% 42.3% 43.0%

Source: Nasscom, Zinnov, JM Financial

Pure-play Indian ESOs are still sub-scale Exhibit 11.

Note: HCL revenues are JMF estimates, excluding the revenues from acquired IP assets from IBM and Geometric; Quest’s figure is projected revenues for FY17; Global Logic figures are based on media reports; Figures for Altran and Alten are for CY15 and CY16 (Dec. FY-end) Source: Company, Bloomberg, JM Financial

Strong momentum in the network services market

Besides the structural demand tailwinds in the core ER&D services business, CYL is seeing a strong traction for its network design and implementation services. Unlike other Indian IT

services companies that primarily work with telecom services providers (TSPs) on their OSS/BSS systems, CYL works more closely on the network design, planning, field testing and roll-out. The communication vertical grew 32% YoY (in USD terms) in FY17 driven by

multiple deal wins around the broadband network roll-outs across various geographies. For example, CYL is working for Telstra on the integration of its network with the publically-funded NBN (national broadband network) program that is targeting 100% broadband

coverage of Australia by 2021 (CYL is also a vendor to NBN Co. that is rolling out networks not served by the existing TSPs). Similarly, it is working with major US-based TSPs on their network roll-outs as part of the CAF-II programme. CYL also won a large deal from Liberty Global in 4QFY17 around its fibre-based network rollout program (called GIGAWorld) to provide gigabit broadband access to 11 European countries serviced by Liberty Global.

Publicly-funded fibre-centric broadband network roll-outs are planned across multiple countries Exhibit 12.

Program Country Target coverage and time-lines Planned investment Key participants

National Broadband Network (NBN) Australia 93% of premises by FTTH (Fibre-To-The-Home) access and

the remaining 7% by wireless and satellite by 2021 Up to USD 40bn Telstra, NBN Co.

Connect America Fund (CAF) – II United States Broadband access to 3.6m rural homes and businesses by

2020 USD 1.5bn

AT&T, CenturyLink,

Frontier, Windstream

Universal Service Obligation (USO) Canada Cover 90% of premises with fixed broadband Internet access

services by 2021; remaining 10% in the next 10-15 years USD 620mn over 5 years

Rogers Wireless, Bell

Mobility, Telus Mobility

National Broadband Plan (NBP) Ireland High-speed broadband (downlink speed of at-least 30 mbps) to 100% of premises by 2020

USD 400mn EIR, BT Ireland

Regional Broadband Initiative and

Ultra-Fast Broadband (UFB) New Zealand

Access to 50Mbps peak speeds to 99% population and 10

Mbps to remaining 1% by 2025

USD 220mn (Phase-I) + USD

75mn (Phase-II) Chorus, Vodafone

Broadband Delivery UK United Kingdom Superfast (at-least 24 mbps) internet access to 97% of

premises by 2019 USD 1.3bn BT


32

3 75

3

580

1,17

2

38

5

468

471

42

0 16

4

132

2,15

9

1,71

0

38

6

85

7

555

1,22

4

483

484

535

45

0

19

1

16

8

2,3

47

1,9

35

0

500

1,000

1,500

2,000

2,500

Infosys TCS Wipro HCL QuestGlobal

LTTS Cyient GlobalLogic

Tata Elxsi KPIT Altran Alten

USD

mn

FY16 FY17

While the size of engg. services practices of scale IT services players is optically large, we believe it is dominated by OSPD

Most of pure-play Indian ESOs are still sub-scale; implies significant growth potential, in our view

Unlike IT services, there are only two scale global players with dominance of a single vertical/client

We believe competitive intensity

among third-party ESOs may not be

as intense as in IT services given the

vertical specialisation (involuntary, in

our view) and should imply lower

pricing pressures

Communication vertical has posted

6.6% CQGR over the past 9

quarters

Telstra is the second largest client

for CYL

Cyient


Cyient is well-positioned in focused verticals

ER&D services are characterised by high client stickiness; however, deal sizes are typically

smaller than traditional IT services—a typical large deal is worth USD 5mn TCV compared with USD 25mn+ in IT services (see Appendix: Engineering services – a primer). Thus, growing an account – and consequently, revenues – is an elongated process. It also implies the relatively higher importance of client mining vs. new customer addition for the business and results in a higher vertical concentration of business relative to the IT services.

For CYL, business is concentrated in three verticals – aerospace and defence, energy and utilities and transportation (mainly rail) – that account for c.70% of revenues. The long-standing client relationships in each of these verticals – Pratt & Whitney (15+ years) in Aerospace, Bombardier (15+ years) in transportation and Tom-Tom (20+ years) in utilities, for example – have helped CYL deepen its technical capabilities and develop leadership in focused micro-segments (such as avionics in aerospace and rolling stock design in rail transportation).

CYL ranks among the Top 5 players in each of its focussed verticals Exhibit 13.

Note: CYL’s revenue share is based on 1QFY18 reported financials. Major players are as defined as the Top5 players in the leadership zone for each vertical as per Zinnov Zones – 2016. Source: Company, Zinnov, JM Financial

Business strategy is focused on wallet share gains

If one looks at engineering services on the dimensions of the stages in a product life cycle

and nature of potential services, we believe the majority of third-party ESOs are still viewed as providers of support services for product/system engineering and hence their deployment has

been largely fractional. This also explains the relatively low ACV (annual contract value) as well as shorter contract durations vs. IT services. We believe a growing propensity of clients to outsource is likely to lead to consolidation of multiple smaller ACV contracts with multiple

vendors into larger ACV contracts with fewer providers for gain-sharing from economies of scale. This should benefit players with integrated upstream/downstream capabilities. We

believe this forms the core of the S3 strategy articulated by CYL (Exhibit 14).

CYL’s business strategy is aimed at gaining wallet share of client’s ER&D spend through an integrated portfolio of services Exhibit 14.


Automotive + Transportn. Aerospace and Defense Energy and Utilities Semiconductors Medical devices

USD 107 bn USD 27bn USD 21bn USD 49bn USD 21bn

10.5% 35.2% 25.1% 4.5% 2.0%

Harman Altran

TCS Cyient

Altran TCS

TECHM TECHM

LTTS Alten

Altran

Cyient

Quest Global

TECHM

Cap Gemini

TCS

LTTS

Altran

Quest Global

Cyient

Aricent

Wipro

TCS

Altran

HCL

CapGemini

HCL

TCS

Altran

Quest Global

VERTICAL

MARKET SIZE

CYL’S REV. SHARE

MAJOR PLAYERS

Ideate

Design

Engineer

CYL’s S3 SRATEGY

ServicesAdd/expand on discrete technical engineering services

SystemsIntegrated capabilities for design, prototype, testing & certifying

SolutionsAftermarket support, end-to-end process mgtt., and analytics

AEROSPACE

DESIGN

MAINTAIN

BUILD

P&W GSE

Rangsons

Build

Test and Certify

Operate

Connect

Analysis

Maintain

SHARE OF TOTAL PRODUCT SPEND

15%

35%

50%

PR

OD

UC

T L

IFE

CY

CLE

CURRENT POSITION

MARKET SEGMENTATION

ASPIRED POSITION

30%

20%

50%

TARGET REVENUE SHARE (2020)

ILLUSTRATION

B&F Design

CERTRON

Organic

Acquisitions

CYL has been working with 10+

years on an average with each of its

Top 5 clients

Cyient


We believe the vertical re-org of the business in FY16 was with this objective to consolidate vertical-specific execution experience that would help in cross-selling of services. However, given the limitations of an organic expansion, CYL has also put in place an extensive M&A strategy to inorganically add upstream/downstream capabilities (Exhibit 8). Understandably,

the strategy has focused on the core verticals in the initial period – at-least four of the eight acquisitions since 2014 have been in aerospace and defence verticals.

CYL’s M&A strategy is focussed on adding complementary capabilities Exhibit 15.

Year Entity Geo. Payout (USD mn) Rev. (USD mn) Domain Capabilities

Mar-14 Softential US 20.0 19.0 Communication Design, implementation and management of systems and applications

for real-time monitoring and control of communication network

Aug-14 Invati Insights India 0.5 <0.5 mn Aerospace, Utilities Data analytics

Jan-15 Rangsons Electronics India 60.0 66.0 Aerospace & Defense Electronic systems design and manufacturing

Jul-15 P&W Global Services Engg. Asia Singapore 7.0 10.0 Aerospace & Defense MRO services for Pratt & Whitney's gas turbine engine components

Nov-16 Blom Aerofilms UK 10.0 9.1 Geospatial Ground surveying, digital mapping, aerial photography and laser scanning solutions

Apr-16 Optimal Design Solutions Australia 0.5 <0.5 mn Communication Design and roll-out of fiber network

Mar-17 CERTON US 7.5 6.0 Aerospace & Defense Testing and verification services for safety-critical systems, embedded

software, and electronic hardware

Sep-17 B&F Design US 10.0 9.0 Aerospace & Defense Design and manufacturing of precision engine assembly equipment, and

repair tooling 1JMFe assumption of valuations at 1.0-1.2x revenues


The strategy could work; our analysis of the R&D spend for ten large engineering services clients for CYL indicate a collective spend of USD 23bn in CY16. Importantly, spend posted a 1.7% CAGR over CY14-16 despite weak revenue growth during this period. We believe this

suggests significant growth headroom for CYL. However, spend by aerospace companies – CYL’s core vertical – has been weak due to low spend on core design at present given industry cyclicality. This makes it imperative for CYL to fast-track the expansion of its services

footprint inorganically, in our view.

We see significant headroom for CYL to grow among its large clients Exhibit 16.

R&D spend (USD bn) R&D spend (as % of revenue)

CY14 CY15 CY16 CY14 CY15 CY16

Pratt & Whitney (parent UTC) 2.5 2.3 2.3 4.3% 4.1% 4.1%

Siemens 3.8 5.1 5.3 3.9% 5.9% 5.9%

Boeing 3.0 3.3 4.6 3.4% 3.5% 4.9%

Airbus 4.5 3.8 3.3 5.6% 5.4% 4.5%

Bombardier 0.3 0.4 0.3 1.7% 2.0% 1.8%

Dassault Aviation 0.6 0.5 0.3 13.3% 10.3% 8.0%

Caterpillar 2.4 2.1 2.0 4.3% 4.5% 5.1%

UTAS (Hamilton Sundstrand) 2.5 2.3 2.3 4.3% 4.1% 4.1%

Phillips 2.2 2.1 2.2 7.6% 7.9% 8.2%

DIEHL Group 0.3 0.3 0.2 7.3% 7.7% 6.5%

Source: Bloomberg, JM Financial

Management expect a strong demand traction across most verticals for FY18 Exhibit 17.


Core capabilities

Aerospace & Defence Communication Utilities & Geospatial Medical & Healthcare Transportation Energy & Resources Semiconductor

• Aerostructures• Avionics• Engines• Interiors• Aerosystems

• Network planning & design

• Network Installation & commissioning

• Field engineering

• Remote sensing• Photogrammetry• Navigational data• Asset data mgtt.

• diagnostic imaging• In-vitro diagnostics• Point-of-care devices

• Rolling stock• Rail signaling• Electrification

• Upstream drilling and production facilities

• Naval architecture• Data analytics

• ASIC/SoC/FPGA design• Design verification• IC design• Data analytics

Revenue shareand growth

35.2% in 1QFY1810% YoY in FY17

23% in 1QFY1832% YoY in FY17




9% in 1QFY18-6% YoY in FY17

5% in 1QFY18-6% YoY in FY17

FY18 outlook Positive Positive Positive Positive Positive Soft Moderate

Drivers

• CERTON integration• Serial production of

an in-flight system LRU development for Indian defense sector

• Mfgg./aftermarket are growth areas

• Fibre roll-outs across major markets

• Liberty Global deal

• Strong order backlog• New accounts added• Focus on grid

solutions and asset mgtt.

• Partnerships with medical device & tech firms in America & Europe

• Continued investment in rail infrastructure globally esp. in focus areas of rolling stockand signaling

• Healthy deal pipeline

• Investment cycle yet to come back

• Westinghouse, largest client in this segment, is facing problems

• Consolidation in the end-user industry

• Modest recovery is likely over FY18

We estimate CYL has spent USD

120mn+ on acquisitions since 2014

Collectively, the share of R&D spend

as % of revenues for the 10 large

engineering services clients of CYL

grew to 5% in CY16 from 4.5% in

CY14

Total R&D spends by these 10 large

clients could post 2.5%-3.0%

CAGR over CY16-18

Cyient


Design-led manufacturing: a work-in-progress?

CYL ventured into design-led manufacturing with the acquisition of a 74% stake in Rangsons Electronics in 2015. Rangsons is based in Mysore, India and is engaged in the manufacture

and assembly of electronics systems. At the time of the acquisition, Rangsons had revenues of USD c.70mn and EBITDA margins of 10%-12%. Aerospace and defence accounted for c.70% of revenues with Rafale, Israel Aerospace, Elbit Systems, and Thales being key clients. The acquisition was aimed at adding prototyping, testing and volume manufacturing capabilities and leveraging Rangosn’s status as a pre-qualified partner and its catalogue of certifications (that are a pre-requisite to work for some of the larger aerospace/defense manufacturers) to expand existing client relationships. Rangsons was also a potential play on defence offset (local investment requirements) opportunities with large OEMs.

The acquisition performance so far has been below management’s initial expectations. Revenues declined to USD 40mn in FY16 and despite a recovery in FY17 (USD 54mn), are still

tending below the run-rate at the time of acquisition. Concurrently, margins declined, with the DLM business reporting EBITDA loss in FY17. We believe a restructuring of client/business portfolio could have contributed to the revenue slippage. At the time of acquisition, Rangson’s business was mainly from assembly/manufacturing of electronics devices. However, CYL is focusing on integrated design + manufacturing offerings. CYL has also invested in sales to cross-sell the DLM capabilities to existing clients for engineering services

which likely affected the margins in FY17. We suspect multiple leadership changes could have also affected the pace/profile of transition.

We see signs of early success; order intake jumped to USD 110mn in FY17 from USD 46mn in FY16 (and an incremental USD 30mn in 1QFY18). Importantly, the deals are now longer-term

– 71% of the order book addition in FY17 was executable after FY17 vs. 20% in FY16. We believe this is driving the current management confidence in sustaining a 20%+ revenue CAGR in DLM over the medium term. Note UTC Aerospace approved it as a qualified product

supplier in Jun’17. Also, the Indian government signed an agreement with France to induct 36 Rafale aircraft over 2019-2022 where the minimum offset obligation is 50% of the contract value. We believe CYL could be a potential beneficiary of the potential USD 4.5bn

offset opportunity in the deal given its existing supplier relationship with Rafale/Dassault Aviation. There is also a strong focus on margins; it expects EBITDA breakeven in FY18, 4% in FY19 and 7% in FY20.

DLM business gives access to CYL to

play in the USD 12bn defence offset

market opportunity

The focus in DLM business has

shifted to integrated services +

mfgg deals instead of standalone

mfgg/assembly work

DLM margins are expected to grow

to 5%-10% by FY20 helped by

growing share of end-to-end orders

Cyient


Financial analysis

CYL’s financials appear back on track after a weak FY16 due to client-specific issues

Cyient’s financial model has a few differentiations vs. that of IT services companies Exhibit 18.

1There is a significant difference in per-person realisation between engineering services (USD 32-35 per hour, blended, JMFe) and Geospatial (USD 8-10 per hour, blended, JMFe)

2A high client concentration is typically complemented by a wider band in contracted rates (due to volume discounts to larger clients)

3Consolidated revenues (including DLM)


Revenue growth picked up in FY17 after a weak FY16 due to challenges among a few of Top 10 clients Exhibit 19.

44% of incremental revenues over FY14-17 were from acquisitions Jump in revenue per employee in FY17 is mainly from higher onsite (+3ppt

YoY)


CYL’s high client dependency and few, but long-standing relationships are typical of the ER&D space Exhibit 20.

C70% of CYL’s revenues come from the Top20 clients Bounce back in USD 20mn+ clients drove the revenue growth in FY17


Engineering/geospatial/commn.&networking1

Contract structure

Fixed-price/T&M/risk-reward

Client concentration

Top30 clients/non-Top30 clients2

Delivery location

Services concentration

45.8% of revenues

Subcontracting costs

7.7% of revenues

Delivery mgtt. costs

1.9% of revenues

Direct salary costs

Travel costs

2.3% of revenues

Utilisation

Sales & marketing costs

6.6% of revenues

G&A costs

14.5% of revenues

REVENUE DRIVERS COST DRIVERS

23%

5%

14%

17%

-3%

12%

-5%

0%

5%

10%

15%

20%

25%

FY15A FY16A FY17A

Reported USD rev. growth (YoY) Organic USD rev. growth (YoY) - JMFe

39,279

37,290

40,655

34,000

36,000

38,000

40,000

42,000

FY15A FY16A FY17A

Revenue productivity (USD/employee)

36% 35% 35% 36%40% 43% 44% 43% 41%

16% 15% 15% 15%

16%14% 15% 14%

14%

0%

10%

20%

30%

40%

50%

60%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

Top 5 clients Next 5 clients

44 2

2 3 3 35 54 5

89

7 78

4 4

1412 9

9 9 9 10 11 12

3739

41 42 41

3739

42

36

0

5

10

15

20

25

30

35

40

45

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

20 Mn+ 10-20 mn 5-10 mn 1-5 mn

Cyient


EBITDA margins have been largely flat over the last eight quarters Exhibit 21.


Increased onsite delivery + onsite centric acquisitions have pushed up both the direct salary costs and sub-contracting costs Exhibit 22.

35% jump in subcon costs is likely from 45% growth in commn. over FY15-17 Higher onsite + acquisitions could explain the high G&A costs


Operating profit (EBIT) recorded an 8.7% CAGR over FY15-FY17 vs. 2.5% growth in the reported PAT Exhibit 23.

CYL hedges c70% of receivables over the next 12 months on rolling basis ETR is up on higher onsite + higher treasury income + slower SEZ expansion


12.7%

+4.6%+0.5%

+0.5% -2.5%

-1.6%

-1.3%-0.2%

12.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1QFY16 Efficiency gains Currency SG&A leverage Salary hike Sub-contracting Acquisitions Others 1QFY18

• There were efficiency gains over the last eight quarters from improved utilisation (+7obps JMFe) and indirect costs absorptions (120bps)

• Higher onsite (+3ppt), due to multiple onsite-centric acquisitions + strong growth in the onsite intensive communication and networking

business (+6.6% CQGR over the last 8 quarters vs. 2.2% for the overall services revenues)

• We attribute the bulk of 13.5% jump in blended realisation to higher onsite delivery share; cross-currency gains are likely to have also

pushed up the realisation

• We estimate a 30bps INR/USD sensitivity to margin for CYL; INR has been a net positive for CYL over the last 8 quarters but we expect the

trend to reverse in the near-term

1.17 1.21 1.27

7.5%7.5%

8.5%

7%

7%

7%

7%

8%

8%

8%

8%

8%

9%

9%

1.08

1.12

1.16

1.20

1.24

1.28

1.32

FY15A FY16A FY17A

Cost/employee (INR mn) sub-contracting cost (as % of services rev)

8.3%7.6%

6.7%

14.5%13.8%

14.5%

0%

4%

8%

12%

16%

FY15A FY16A FY17A

S&M as % of revenue G&A as % of revenue

8.9

4.46.2

10.0

8.84.0

0

2

4

6

8

10

12

14

16

18

20

FY15A FY16A FY17A

Treasury income FX hedge gain/loss

24.6%

23.8%

24.2%

23.2%

23.6%

24.0%

24.4%

24.8%

FY15A FY16A FY17A

Effective tax rate

Cyient


Addition to the order book has been improving both for the services and the DLM business Exhibit 24.

CYL sees a strong deal pipeline in transportation and communications Share of integrated orders are growing for DLM


Cash-flow generation and return ratios have recovered after the slip in FY16 Exhibit 25.

DSOs have declined by 9 days over FY15-FY17 on improved collections High cash balance has weighed on the reported RoE


Capital allocation policy has been consistent in shareholder returns and growth investments Exhibit 26.

CYL’ cash reserve is among the highest in the peer group CYL is using the cash for acquisitions than returning it to shareholders


83.8

81.3

96.4 130.2

124.9

112.1

105.9

68.7

127.6

20.9

6.6

73.7 30.2

8.1

21.2

83

117 2

.7

0

20

40

60

80

100

120

140

160

180

200

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18


6.1 11.5

9.8

9.8

12.3

9.3

9.4

0.7

25

.9

0.2

3.1

4.0

1.4 2.2

2.1 4.3

70.0

4.0

0

10

20

30

40

50

60

70

80

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18


90%

67%

88%

105% 88% 109%

83

79

74

68

70

72

74

76

78

80

82

84

0%

20%

40%

60%

80%

100%

120%

FY15A FY16A FY17A

OCF/EBITDA FCF/PAT DSO (days)

20.5%

17.7% 18.3%

30.3%

25.8%

28.7%

0%

5%

10%

15%

20%

25%

30%

35%

FY15A FY16A FY17A

RoE (reported) RoE (excluding cash)

107118

145

60

44

55

0

20

40

60

80

100

120

140

160

FY15A FY16A FY17A

Cash balance (USD mn) FCF (USD mn)

31% 29%35%

101%

39%

14%

5.7%

4.1%3.8%

0%

1%

2%

3%

4%

5%

6%

7%

0%

20%

40%

60%

80%

100%

120%

FY15A FY16A FY17A

Dividend (% of PAT) Acquisition (% of FCF) Capex (% of revenues)

Cyient


Cross-comparison with global/Indian peers on key parameters

Client-specific issues have affected revenue growth for Indian cos vs. global peers Exhibit 27.

Client-specific issues have affected growth of both LTTS & CYL A high client concentration weighs on CYL’s revenue productivity

Note: Figures for Altran and Alten are for CY14-16 (December financial year-end) Source: Company, Bloomberg, JM Financial

A high client concentration shows up in the bigger relationship sizes for Cyient Exhibit 28.

CYL has highest client concentration among Indian/global peers… …But this also reflects in deeper and larger client relationships

Note: Figures for Altran and Alten are for CY16 (December financial year-end) Source: Company, Bloomberg, JM Financial

Cyient’s high onsite presence has affected its relative margin even as its cash generation is one of the best among peers Exhibit 29.

G&A optimisation could be a key margin lever for CYL CYL’s RoE (ex-cash) compares well with peers

Note: Figures for Altran and Alten are for CY16 (December financial year-end) Source: Company, Bloomberg, JM Financial

6.3%3.8%

24.4%

21.1%

0%

5%

10%

15%

20%

25%

30%


Revenue 3-yr CAGR (USD mn)

48,751

40,655

58,104 56,999

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


Revenue productivity (USD/employee)

23.2%

42.4%

23.7% 25.3%

35.6%

56.9%

33.4% 33.7%

0%

10%

20%

30%

40%

50%

60%


Top 5 customers Top 10 customers

2

5

4 4

0

1

2

3

4

5

6

LTTS CYL

20 mn+ 10-20 mn

17.5% 21.8% 10.9% 18.7%

16.1%

10.6%

9.0% 9.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0%

5%

10%

15%

20%

25%


SG&A as % of Revenue EBIT margin

71.7%

109.3%

90.4%

56.0%

35.1%28.7%

18.6%22.0%

0%

20%

40%

60%

80%

100%

120%


FCF/PAT RoE (excluding cash)

Cyient


We forecast 15% EPS CAGR over FY17-FY20

CYL’s management has guided for double-digit USD revenue growth in the services and

20%+ growth in the DLM business for FY18. We believe the revenue growth targets are

achievable; USD revenue growth was 13% YoY (though seasonally muted at -0.4% QoQ in

constant currency terms, JMFe) and the pending long-term order book in FY17 was up 75%

YoY. For the DLM business too, FY17 order intake was at an all-time-high.

In the longer term, we expect CYL to sustain the momentum helped by the structural

demand drivers highlighted earlier. We forecast 13% USD revenue CAGR in the services

business over FY17-FY20 led by communications (21% CAGR) and transportation (19%)

verticals. The long-term deal win from Liberty Global in 4QFY17 and growing penetration in

key transportation clients such as Bombardier, Thales and Siemens Rail should support it. We

expect growth to be steady in aerospace and defence (9.5% CAGR) and geospatial (8.3%

CAGR) verticals and strong in green-field verticals – medical & healthcare (13.2%) and

semiconductors, IoT & analytics (12.5%). Energy and resources are likely to stay muted

(1.5%).

We expect DLM revenues to grow 22% helped by improved cross-sell to existing services

clients; note UTC Aerospace approved it as a qualified product supplier in Jun’17.

Management indicated a strong pipeline in this business with the majority being integrated

deals (design + manufacturing) and expect the share of cross-selling to grow significantly over

the next 3 years from c.20% at present.

On margins, CYL has guided for a net 50bps YoY EBITDA margin expansion with INR/USD at

current levels. CYL has also indicated a greater focus on margins (than revenues) in the DLM

business and expects it to breakeven by 4QFY18 and achieve 5%-10% EBITDA margin by

FY20. However, we have conservatively build 45bps EBITDA margin expansion in FY18 – and

113bps over FY17-FY20 – despite assuming 1.6% depreciation in INR/USD over FY17-FY20.

We expect non-operating income to get a boost in FY18/FY19 from hedge gains; CYL

expects a gain of USD 7.2mn (of which USD 6.2mn in FY18) with INR/USD at 64.70. Our

forecasts are factoring in USD 9.2mn/6.2mn of FX gains in FY18/FY19. This should partially

offset the impact of higher tax rates. We have assumed an effective tax rate of 27% over

FY18-FY20, at the mid-point of guided 26%-28% band for FY18 even though management

expects it to come down if there is an increase in their SEZ delivery share.

We have assumed the dividend payout to be stable around 30%; our discussions with

management indicate a keenness to use the cash reserves to pursue inorganic expansion.

We expect a 12.5% USD revenue CAGR and 113bps EBITDA margin expansion over FY17-FY20 Exhibit 30.

Communications and transportation are likely to be the growth drivers We expect EBITDA margin to expand 182bps from 1QFY18 trough to FY20


22.3%21.2%

18.9%

12.5% 13.2%

9.5%8.3%

1.6%

0%

5%

10%

15%

20%

25%

DLM

Co

mm

n.

Tra

ns.

Sem

ico

n.

Med

ical

A&

D

U&

G

E &

NR

CAGR over FY17-20

12.8% -4.5%

-0.6% +0.9%

+2.0%

+1.0%

+1.0%

+2.3% 14.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1Q

FY1

8A

An

nu

al w

age

hik

e

B&

F ac

qu

isit

ion

INR

dep

reci

atio

n

DLM

mar

gin

exp

ansi

on

Sub

con

trac

tin

g co

sts

Uti

lisat

ion

Effi

cien

cy g

ain

s (i

ncl

ud

ing

SG&

A)

FY2

0 JM

Fe

We forecast 12.5% CAGR in USD

revenues over FY17-FY20

Our forecasts build in integration of

B&F Design from 3QFY18

We estimate positive cross-currency

impact of 150bps in 2QFY18

We have factored in INR/USD at

64.54 for FY18 and 65.00 / 66.00

for FY19 / FY20

We forecast EBIT to post 15.8%

CAGR over FY17-FY20

Cyient


Key assumptions and forecasts Exhibit 31.

FY16A FY17A 1Q18A 2Q18F 3Q18F 4Q18F FY18F FY19F FY20F

Exchange rate (INR/USD) 65.57 67.04 64.49 64.15 64.50 65.00 64.54 65.00 66.00

A. Key operating metrics - services

Total manpower 12,498 12,965 13,216 13,094 13,084 13,084 13,206 13,307 13,481

Utilization - blended 75.2% 74.8% 74.1% 75.5% 76.3% 76.5% 75.6% 76.0% 77.3%

Billed effort (person-months) - 6.2% -1.5% 2.9% 2.0% 1.6% 2.9% 10.7% 11.1%

Onsite billed effort share 19.8% 21.6% 22.5% 22.7% 22.5% 22.7% 22.6% 22.3% 22.2%

Blended realisation - gorwth (QoQ/YoY) - 5.5% 4.7% 0.1% -0.3% 0.3% 7.3% -0.1% 0.3%

B. Key financial forecasts - Services

Total revenue (USD mn) 431.8 483.5 128.8 132.7 134.9 137.5 533.9 590.3 657.9

Change (QoQ/YoY) - 12.0% 3.5% 3.0% 1.7% 1.9% 10.4% 10.6% 11.5%

Total revenue (INR mn) 28,314 32,418 8,307 8,510 8,701 8,936 34,454 38,367 43,420

Change (QoQ/YoY) - 14.5% -0.4% 2.4% 2.3% 2.7% 6.3% 11.4% 13.2%

EBITDA margin 14.7% 15.0% 14.6% 15.5% 16.0% 16.7% 15.7% 15.5% 16.0%

C. Key operating metrics - DLM

Total headcount 625 646 629 634 644 664 664 694 729

D. Key financial forecasts - DLM

Net revenues (USD mn) (excl. excise duty) 39.1 51.3 11.3 15.2 17.5 20.5 64.6 78.2 94.0

Change (QoQ/YoY) - 31.4% -24.7% 34.9% 15.4% 17.1% 25.8% 21.2% 20.2%

Net revenues (INR mn) (excl. excise duty) 2573.5 3441.8 727.0 975.2 1131.2 1334.9 4168.3 5085.4 6204.1

Change (YoY) - 33.7% 14.9% 16.0% 16.0% 18.0% 21.1% 22.0% 22.0%

EBITDA margin 4.2% -0.4% -7.3% -1.0% 0.8% 4.0% 0.0% 5.0% 5.8%

E. Key financial forecasts - Consolidated

Consolidated revenue (USD mn) 470.9 534.9 140.1 147.9 154.7 160.3 602.9 677.9 761.8

Change (QoQ/YoY) 5.3% 13.6% 0.1% 5.5% 4.6% 3.6% 12.7% 12.4% 12.4%

Consolidated revenue (Rs m) 30,876 35,859 9,034 9,485 9,978 10,417 38,914 44,066 50,279

Change (QoQ/YoY) 12.9% 16.1% -3.3% 5.0% 5.2% 4.4% 8.5% 13.2% 14.1%

EBITDA margin 13.8% 13.5% 12.8% 13.8% 14.2% 15.0% 14.0% 14.2% 14.7%

Change (QoQ/YoY) -92bp -23bp -53bp 97bp 38bp 82bp 47bp 23bp 43bp

EPS (Rs) 29.1 30.6 7.8 9.0 9.5 10.4 36.7 40.8 46.7

Change (QoQ/YoY) -7.8% 5.2% 11.0% 15.6% 5.3% 10.1% 20.0% 11.4% 14.4%


How we differ from the consensus? Exhibit 32.

Consensus estimates

JMFe

Difference

FY18F FY19F FY20F

FY18F FY19F FY20F

FY18F FY19F FY20F

Sales (INR mn) 39,212 44,470 49,931

38,914 44,066 50,279

-0.8% -0.9% 0.7%

EBITDA (INR mn) 5,421 6,450 7,394

5,448 6,271 7,370

0.5% -2.8% -0.3%

EBITDA margin 13.8% 14.5% 14.8%

14.0% 14.2% 14.7%

13bp -27bp -15bp

Net Income (INR mn) 4,038 4,703 5,506

4,126 4,578 5,237

2.2% -2.7% -4.9%

EPS (INR) 35.9 41.9 48.8

36.7 40.8 46.7

2.2% -2.5% -4.3%


Initiate with BUY for 19% upside

The stock has been largely stable YTD with a marginal YTD outperformance (c5%) to the

broader BSE IT Index. We attribute that to CYL’s relatively low exposure to regulatory risks –

only 15% of onsite headcount are on H1B/B1 visa vs. the typical for 50-75% for Indian IT

services companies – and the structural immunity of ER&D services from disruptions affecting

the IT services space, the two factors that have weighed on the IT stocks in the recent period.

However, despite the stock’s stable performance on an absolute basis, it trades at 12.6x

FY19F EPS, at 27% discount to LTTS (LTTS IN; HOLD), its closest Indian peer and 14%/27%

discount to global peers (Altran/Alten). We believe the discount to LTTS is largely due to

technical factors – low float and concentrated holding for LTTS. The discount to similar scale

peers in the broader IT services space (16%/13%/21% to MTCL/PSYS/HEXW) could be

attributed to the relatively modest financial performance, especially in the seasonally weak

1QFY18. We expect a recovery over 2Q-3QFY18 to help correct both the valuation/growth

anomaly, in our view. Improved cash flows (OCF/EBITDA of 88% in FY17 vs. 67% in FY16)

are an added support.

CYL trades at 16%/13% discount

to MTCL and PSYS

Cyient


We initiate with a BUY rating. Our Sep-’18 INR 610 price target is at 14x 12-month forward

EPS (implies 15x FY19F EPS) and translates to 0.92x PEG (based on FY17-20F EPS) vs. a

median historical PEG 1.5x.

Cyient has traded at a median PER of 15x over the last 3 years Exhibit 33.

P/E band chart - CYL P/E median chart - CYL


CYL trades at discount to both its ER&D services peers as well as the IT services players with comparable scale Exhibit 34.

PER premium/discount vs LTTS, Altran and Alten PER premium/discount vs MTCL, HEXW and PSYS


Key risks

Changes to R&D budgets: Some of CYL’s largest industry segments such as aerospace

and communications are cyclical in nature and their R&D budgets tend to be exposed to

macroeconomic factors as well as demand and production trends in the industrial sectors.

A reduction in the R&D budgets of CYL’s existing or prospective customers on

macroeconomic or other factors could materially affect its revenue growth. For instance,

an internal technology transition and a concurrent price renegotiation at TomTom, a large

client for geospatial services, affected CYL’s revenue growth in FY16.

Threat from captives: Several of CYL’s top 20 clients such as UTC, Bombardier and

Caterpillar, have their captive in India. This poses a threat both to incremental business

flow as well as CYL’s pricing flexibility in contracts.

-

100

200

300

400

500

600

700

800

900

1,000


Price 12X 18X 24X

10

12

14

16

18

20

22


P/E Median +SD1 -1SD

-80%

-40%

0%

40%

80%

120%


vs LTTS vs ALTRAN vs ALTEN

-80%

-40%

0%

40%


vs MTCL vs HEXW vs PSYS

Cyient


High client concentration: CYL’s top10 clients account for 58% of its revenues. Thus,

any client-specific issues, especially among larger clients, that affects their ER&D spend,

could have a material impact on CYL, as the contribution to revenue from new

customers is typically small for the first year. Hence, growth among existing large clients

is a key for CYL to sustain its growth trajectory.

Volatility in DLM: Margins in the erstwhile Rangsons business are still trending below the

levels at the time of acquisition. Further, it is exposed the typical cyclicality in the

manufacturing business. Management expects the DLM business to break even in FY18

and grow margins to 5%-10% over the next 2-3 years. An underperformance on either

revenue growth or margins could affect our forecasts.

Currency risks: Our forecasts assume a gradual depreciation in INR. As such, a movement

adverse to our assumptions could affect our estimates as well as the price target.

Risk of an expensive acquisition and/or integration risks: Financial performance of at least

two of CYL’s earlier acquisitions – Softential and Rangsons – have been below

management’s initial expectations. Also, at 0.9x revenues, Rangsons appears as an

expensive acquisition given its mainly manufacturing (and thus volatile) business. A repeat

of such cases in the – CYL continues to follow an active M&A strategy – is a risk.

Cyient


Appendix I: Engineering Services—a primer

Engineering research and development (ER&D) services is defined as the set of services

provided to product and process companies to help them develop and deliver their own

products and services to their end customers. ER&D services players typically focus on the

design, development, testing, roll-out and maintenance aspects of the product and process

development chain and not on mass manufacturing of the product. The ER&D services

market includes product engineering and process engineering services.

Product engineering services typically address the product development lifecycle for

companies, which produce discrete products through services in areas such as mechanical

engineering, embedded systems and software product engineering.

Process engineering services involve services to assist process companies in the production

of facilities and processes that produce value-added outputs and components through

plant design engineering, industrial engineering and process control systems.

ER&D industry verticals and services lines Exhibit 35.

Source: Zinnov, JM Financial

Qualitative differences between IT services and ER&D services Exhibit 36.

IT Services ER&D/Product engineering services

Key service lines Business process services Product development (mechanical/embedded/software)

Application services Product sustenance and support

Infrastructure services Manufacturing engineering

Process engineering

Network engineering

Deal structure & size Deals follow RFI system and are larger in size Deals majorly come from proactive selling and hence are smaller

25mn+ ACV would be considered as a large deal 5mn+ ACV would be considered as a large deal

Growth headroom 15% of the global IT spend is currently outsourced Only 6% of the global ER&D spend is currently outsourced

Customer stickiness Lower as there are single deals over a fixed period of time Higher and account sizes accrue over time

GICs presence Lower number of GICs, which are majorly competitors Higher number of GICs and can be a customer/collaborator to the ESPs

Primary stakeholders Chief Information Officer Chief Technology Officer/product owners, VP—Engineering

Win factors Global delivery models, billing rates, resource capabilities Knowledge assets (IP/Solution), R&D, infrastructure, innovative

engagement models


SERVICE LINES/HORIZONTALS

Au

tom

oti

ve

Ae

rosp

ace

Tran

spo

rtat

ion

Tele

com

&

Ne

two

rkin

g

Co

nsu

me

r El

ect

ron

ics

Co

mp

ute

r P

eri

ph

era

ls&

Sto

rage

Ind

ust

rial

A

uto

mat

ion

Me

dic

al D

evi

ces

Sem

ico

nd

uct

or

Co

nst

ruct

ion

, H

eav

yM

ach

ine

ry

Ene

rgy

& U

tilit

ies

Ente

rpri

se IS

V

Inte

rne

t/O

nlin

e

Software EngineeringGraphical user interface, mobile applications, application program interface, software product/platforms for ISV/Technology Companies

Mechanical / ElectricalExternal Housing, Inner Frame, Industrial Design, Styling, Surfacing, Ergonomics, Solid Modeling, Drafting, and structural Analysis

Embedded SystemsEmbedded hardware & software, Semiconductor, Processor, RTOS, OS-ware, Codec, Communication protocol, Application software etc.

Manufacturing EngineeringTooling and factory equipment design, Jigs & Fixture Design, PCB Manufacturing, Should Costing etc.

Plant Engineering Plant Design, Instrumentation and Control engineering, Civil/Structural engineering, Process and Instrumentation Diagram , FEED engineering

VERTICALS

Cyient


Outsourced ER&D is a USD 232bn potential market Exhibit 37.


ER&D market is chracterised by few – but large – spenders in each vertical Exhibit 38.


Key characteristics of third-party ESO providers across geographies Exhibit 39.

Western Europe India North America China/Asia (ex-India) Eastern Europe

Size of third-party market USD 19.5bn USD 8.9bn USD 10.4bn USD 7.0bn USD 3.0bn

Characteristics Large key vertical focussed service providers

Large offshore staffing organisations

ER&D/PES division of mid-sized IT services companies

Focussed on OSPD for ISV, Telecom and Digital

Focus verticals Automotive, Aerospace,

Energy Largely diversified

Aerospace, Automotive,

Software, Telecom

Automotive,

Software/Internet, Telecom

Software/Internet, Telecom,

Automotive

Pure play players Altran, Alten, Bertrandt,

EDAG Technologies

LTTS, Aricent, Quest Global,

Tata Elxsi, Cyient Belcan, Aerotek

EPAM

Non-pure play Tieto HCL Tech, Wipro, TCS,

Infosys CDI Neusoft, Chinasoft SoftServe, Luxoft

Customer segment Local Europe-based

customers, on-shore needs

Typically address North

America and European

clients

Local R&D units of large

corporates

Local needs to large Chinese

companies & localisation

services of MNCs in China

Near-shore for European

companies and offshore for

US companies

Challenges

High employee costs

Limited ER&D spend

Growth of Aerospace

sector in the EU

Alternate employment

Large GIC presence

Growing competition

from E. European vendors

Emerging competition from LATAM vendors

Concern of IP violation

Language capabilities

Political environment

Competition from India and China

Political uncertainty (= higher regulatory risks)

Blended billing rate USD 70–90K per year USD 40–50K per year USD 80–110K per year USD 25–35K per year USD 50–60K per year


USD 621bn USD 232bn USD 85bn USD 23bn

G500 ER&D spend Addressable market Addressed market Addressed from

India

61%

40%

76%

38%28%

41%49%

54%59%

39%

60%

24%

62%72%

59%51%

46%41%

Aerospace & Defence* Automotive Consumer Electronics Energy & Utilities Industrial Automation Medical Devices Semiconductors Software/Internet Telecom & Networking

19 61 24 28 46 23 43 61 28

Total n. of G500 companies in the vertical

Cyient


Appendix II: Company and management profile

Cyient (erstwhile Infotech Enterprises) is a provider of engineering design and electronics

manufacturing, telecom networks and operations management, geospatial, and data

transformation and analytics services. The company’s clients operate across verticals such as

aerospace & defence, rail transportation, oil & gas, communications, utilities and power

generation, off-highway & industrial, infrastructure, semiconductors, medical technology

and healthcare. It currently employs nearly 14,000 people across 48 development facilities in

India as well as North America, Europe and the Asia-Pacific.

Cyient was founded in 1991. Until 2000, it was focused on the digitisation of maps for

geographic information systems with Analytical Surveys, ETAK and TomTom as its major

clients, some of who remain large even at present. In 2000, it signed a contract with Pratt &

Whitney that marked its entry into engineering services for aerospace. Later, it added other

clients for engineering services both in aerospace and other verticals such as Bombardier,

Boeing, Airbus, Alstom Transport and Hamilton Sundstrand. It also leveraged its background

in GIS to provide focused services for utilities and communications verticals and added

clients such as KPN Telecom, Swisscom, Telstra, FUGRO and VWT. It expanded into

prototype/volume manufacturing of electronics components with the acquisition of

Rangsons Electronics in 2015.

CYL – time-line of key developments Exhibit 40.

Source: Company

CYL - Organisational structure Exhibit 41.

Source: Company

Signs MSA with Pratt & Whitney

Acquires Advanced Graphics Software GmbH

Sets up SDC in Hyderabad

Acquires Daxcon Engineering Inc., US

Acquires Wellsco Inc., US

Signs a long term contract with Hamilton Sundstrand

Infotech Enterprises incorporated as a pvt.ltd. company

Acquires Map Centric, a Europe based GIS distributor

Bags USD 7 mn+ contract with Photogrammetry

Reorganises as a public limited co.

Diversifies into software services with the acquisition of SRG Infotech

1991 1997 1998 2000 2002 2010 2014 2016 2017

Signs a USD 5mn+ deal for GIS services with Analytical Surveys Inc.

Acquires RangsonsElectronics to foray into prototype/volume mfgg.

Acquires CERTON, a US-based testing & verification services provider

Acquires B&F Design

1999

Sets up a subsidiary in the US

Acquires Dataview Solutions Limited

Acquires Cartographic Sciences Pvt. Ltd. from Analytical Surveys, a client

2001

Business structured along verticals

Acquires VARGIS, a US-based GIS co.

2004

Pratt & Whitney acquires c. 18% equity stake in Infotech

Rebrands to 'Cyient'

Executive Chairman

MD and CEOCorporate Affairs

Aerospace &

DefenceTransportation

Medical&

HealthcareCommunications

Utilities&

Geospatial

Industrial, Energy& Resources

Design LedManufacturing

Semiconductor,IoT & Analytics

DLM Operations India & Israel Sales

Corporate HRChief Financial

Officer

Strategy, Marketing& Communications

Business Excellence

Business units Enabling units

Cyient


CYL – Profiles of key management personnel Exhibit 42.

Krishna Bodanapu Managing Director and CEO

Appointed as MD & CEO in 2014; worked earlier as COO, marketing manager for the company's aerospace vertical and key account manager for major customers in the engineering

services; holds a bachelor's degree in electrical engineering from Purdue University and an MBA

from Kellogg School of Management

Ajay Aggarwal Chief Financial Officer

Joined as CFO in 2011; has international experience of 27+ years; Before joining Cyient, he was

Chief Corporate Controller with Tata Chemicals and prior to that, he worked in various roles at

Reliance Industries, Kirby Building Systems, P T Polysindo, and J K Synthetics

B. Ashok Reddy President – Corporate Affairs & Infrastructure Manages all the Cyient subsidiaries, government and industry body relationships and infrastructure planning and development; Joined Cyient from Voltas Ltd., where he was the

chief HR manager for their home appliances business division

P. N. S. V. Narsimham Sr. VP – Global Human Resources Joined Cyient in May 2016; has experience of 25+ years in the HR function across companies

such as Microland, HP, Motorola, Arvind Mills and the India captive centre of UBS

N. J. Joseph Sr. VP – Corporate Strategy & Marketing Joined Cyient in early 1998; has worked across various businesses of Cyient in sales and

planning functions

Rajendra VelaGapudi Sr. VP – Business Excellence and MD & CEO -

Cyient DLM

Joined Cyient in 1999; manages quality function and has been heading the DLM business since

April 2017; worked with Ford’s Truck Division, Bajaj Tempo and Bharat Earth Movers Ltd. before

joining Cyient

Anand Parameswaran Sr. VP – Aerospace & Defence Earlier led global sales and delivery for the transportation, hi-tech, heavy equipment, consumer and medical units and also been the head of HR and quality functions; worked for Wipro and

Cognizant before Cyient

Tom Edwards Sr. VP – UTC Account & President – North

America

Joined Cyient in 2010 and manages sales and relationships for UTC, the largest customer; had a

26-year sales career at IBM prior to joining Cyient

Sanjay Krishnaa Sr. VP – Communications & President APAC Has over 19 years of international business experience; heads the Asia-Pacific region and is also

the global head for the communications vertical

Katie Cook Sr. VP – Industrial, Energy & Natural Resources Joined Cyient in 2010; earlier, was the head of sales and account mgtt for North America; spent

16 years at IBM in sales before Cyient

Brian Wyatt Sr. VP – Medical Tech Joined Cyient in 2009; heads medical and healthcare business unit; has 10+ years of experience

with global technology cos. prior to Cyient

Prabhakar Atla Sr. VP – Rail transportation Joined Cyient in 2004; has 20+ years of experience in sales, product management, client

relationship management and business leadership

Suman Narayan Sr. VP – Semiconductor Heads the Semiconductor, IoT and Analytics business units; has 20+ years of experience in high-tech electronics and semiconductor industry across ON (Fairchild) Semiconductor and Texas

Instruments

John Renard President – Utilities & Geospatial & President

EMEA

Joined Cyient in 2000; head EMEA (Europe, Middle East, and Africa) and is also the head for

Utilities and Geospatial business unit; has 25+ years of experience in IT, geospatial, data

engineering

Sunil Kumar Makkena Sr. VP – Utilities & Geospatial One of the first three associates of Cyient since its inception in 1991; heads utilities and

geospatial business unit

Source: Company

Cyient


Appendix IV: Key metrics Key operating metrics - Services Exhibit 43.

1QFY16 2QFY16 3QFY16 4QFY16 FY16 1QFY17 2QFY17 3QFY17 4QFY17 FY17 1QFY18

Revenue distribution – By geography (%)

Americas 64.0% 64.1% 63.6% 60.2% 63.0% 60.0% 59.1% 58.0% 57.1% 58.5% 55.8%

Europe, Middle-east, Africa and India 24.0% 24.1% 23.2% 25.4% 24.2% 24.6% 24.0% 24.0% 25.1% 24.4% 26.6%

Asia Pacific 12.0% 11.8% 13.2% 14.4% 12.8% 15.4% 16.9% 18.0% 17.8% 17.1% 17.6%

Revenue distribution – By Industry (%)

Aerospace and Defence 35.8% 36.2% 37.7% 38.9% 37.1% 38.7% 36.8% 35.6% 35.7% 36.7% 35.2%

Transportation 10.4% 10.6% 10.2% 10.0% 10.3% 10.3% 9.4% 9.4% 9.7% 9.7% 10.5%

Industrial Energy & Natural Resources 11.8% 11.4% 10.8% 10.3% 11.1% 10.0% 9.3% 9.3% 8.7% 9.3% 8.5%

Semiconductor 5.6% 5.3% 4.3% 4.4% 4.9% 4.3% 4.1% 3.9% 4.2% 4.1% 4.5%

Medical and Healthcare 1.4% 1.5% 1.5% 1.7% 1.5% 1.9% 1.9% 1.9% 1.9% 1.9% 2.0%

Utilities and Geospatial 17.9% 15.8% 15.7% 16.8% 16.5% 15.8% 16.7% 17.2% 18.5% 17.1% 16.6%

Communications 16.2% 18.4% 19.4% 17.6% 17.9% 18.9% 21.8% 22.7% 21.4% 21.2% 22.8%

Revenue distribution – By location (%)

Offshore 43.9% 43.7% 43.4% 40.7% 42.9% 40.7% 40.1% 40.4% 39.2% 40.1% 40.4%

Manpower and execution metrics

Total headcount 12,210 12,026 12,186 12,498 12,498 12,965 13,216 13,094 13,084 13,084 13,206

- Delivery headcount 703 715 705 714 714 692 716 730 805 805 790

Attrition (voluntary + in-voluntary) 21.4% 24.8% 22.4% 20.0% 20.0% 23.0% 26.7% 24.5% 19.5% 19.5% 18.5%

Utilization - blended 75.4% 76.1% 76.7% 72.7% 75.2% 71.5% 76.0% 76.3% 75.4% 74.8% 74.1%

Client metrics

Top 5 clients 35.7% 35.3% 34.7% 35.7% 35.3% 40.2% 42.7% 43.5% 42.9% 42.4% 41.0%

Top 10 clients 51.2% 50.1% 49.4% 51.1% 50.4% 55.7% 57.0% 58.0% 56.9% 56.9% 54.8%

20 mn+ clients (nos) 4 4 2 2 2 3 3 3 5 5 5

10 mn+ clients (nos) 8 9 10 11 11 10 10 11 9 9 9

5 mn+ clients (nos) 22 21 19 20 20 19 19 21 20 20 21

1 mn+ clients (nos) 59 60 60 62 62 60 56 60 62 62 57

Order intake details

Executable in the Current FY 83.8 81.3 96.4 130.2 391.7 124.9 112.1 105.9 68.7 411.6 127.6

Executable after the Current FY 20.9 6.6 73.7 30.2 131.4 8.1 21.2 83 117 229.3 2.7


Key operating metrics – DLM Exhibit 44. 1QFY16 2QFY16 3QFY16 4QFY16 FY16 1QFY17 2QFY17 3QFY17 4QFY17 FY17 1QFY18

Revenue distribution – By geography (%)

Americas 43.6% 12% 22% 10% 18.9% 12% 14% 11% 15% 13.2% 18%

Europe, Middle-east, Africa and India 37.9% 40% 51% 82% 56.1% 76% 76% 88% 84% 81.9% 70%

Asia Pacific 18.5% 48% 27% 8% 25.0% 12% 9% 1% 1% 4.9% 12%

Revenue distribution - By Industry (%)

Aerospace and Defence 19.4% 49.8% 50.4% 32.9% 39.9% 15.3% 10.7% 46.3% 9.2% 20.9% 17.0%

Industrial Energy & Natural Resources 45.3% 26.8% 25.9% 27.3% 29.5% 32.6% 29.5% 17.1% 20.6% 24.0% 29.1%

Medical and Healthcare 20.3% 10.9% 11.3% 9.9% 12.1% 11.5% 12.4% 11.3% 9.7% 11.1% 12.5%

Communications 14.8% 11.3% 11.0% 29.9% 17.7% 38.7% 46.4% 24.0% 59.3% 42.7% 40.4%

Transportation/Others 0.3% 1.1% 1.4% 0.0% 0.7% 1.8% 1.1% 1.3% 1.2% 1.3% 1.0%

Manpower metrics

Total headcount 602 598 616 625 625 630 635 636 646 646 629

Client metrics

5 mn+ clients (nos) 3 2 3 2 2 3 1 3 4 4 4

2 mn+ clients (nos) 4 4 5 5 5 6 0 6 6 6 6

1 mn+ clients (nos) 6 7 6 7 7 8 4 9 9 9 10

Order intake details

Executable in the Current FY 6.1 11.5 9.8 9.8 37.2 12.3 9.3 9.4 0.7 31.7 25.9

Executable after the Current FY 0.2 3.1 4 1.4 8.7 2.2 2.1 4.3 70.0 78.6 4.0


Cyient


Financial Tables (Consolidated)

Income Statement (INR mn)

Y/E March FY16A FY17A FY18E FY19E FY20E

Net Sales 30,876 35,859 38,914 44,066 50,279

Sales Growth 12.9% 16.1% 8.5% 13.2% 14.1%

Other Operating Income 0 0 0 0 0

Total Revenue 30,876 35,859 38,914 44,066 50,279

Cost of Goods Sold/Op. Exp 20,004 23,440 25,316 28,739 32,677

Personnel Cost 0 0 0 0 0

Other Expenses 6,626 7,569 8,150 9,056 10,232

EBITDA 4,247 4,850 5,448 6,271 7,370

EBITDA Margin 13.8% 13.5% 14.0% 14.2% 14.7%

EBITDA Growth 5.8% 14.2% 12.3% 15.1% 17.5%

Depn. & Amort. 893 953 1,072 1,179 1,313

EBIT 3,354 3,897 4,376 5,093 6,056

Other Income 867 685 1,031 893 833

Finance Cost 0 0 0 0 0

PBT before Excep. & Forex 4,221 4,582 5,407 5,986 6,890

Excep. & Forex Inc./Loss(-) 0 0 0 0 0

PBT 4,221 4,582 5,407 5,986 6,890

Taxes 986 1,047 1,489 1,616 1,860

Extraordinary Inc./Loss(-) -87 -261 0 0 0

Assoc. Profit/Min. Int.(-) -115 -166 -208 -208 -208

Reported Net Profit 3,263 3,439 4,126 4,578 5,237

Adjusted Net Profit 3,350 3,700 4,126 4,578 5,237

Net Margin 10.8% 10.3% 10.6% 10.4% 10.4%

Diluted Share Cap. (mn) 112.3 112.2 112.2 112.2 112.2

Diluted EPS (INR) 29.8 33.0 36.8 40.8 46.7

Diluted EPS Growth -5.3% 10.5% 11.5% 10.9% 14.4%

Total Dividend + Tax 0 1,215 1,215 1,350 1,620

Dividend Per Share (INR) 0.0 9.0 9.0 10.0 12.0


Cash Flow Statement (INR mn)


Profit before Tax 4,221 4,582 5,407 5,986 6,890

Depn. & Amort. 893 953 1,072 1,179 1,313

Net Interest Exp. / Inc. (-) -954 -946 -1,031 -893 -833

Inc (-) / Dec in WCap. -512 814 25 -348 -311

Others 0 0 0 0 0

Taxes Paid -1,117 -700 -1,568 -1,616 -1,860

Operating Cash Flow 2,531 4,703 3,905 4,307 5,198

Capex 297 -1,936 -1,980 -1,468 -1,839

Free Cash Flow 2,828 2,767 1,925 2,839 3,359

Inc (-) / Dec in Investments -120 -236 -25 0 0

Others 651 749 867 637 525

Investing Cash Flow 828 -1,424 -1,138 -831 -1,314

Inc / Dec (-) in Capital 1 1 0 0 0

Dividend + Tax thereon -2,599 -1,468 -1,372 -1,348 -1,618

Inc / Dec (-) in Loans 302 -12 -165 0 0

Others 115 166 208 208 208

Financing Cash Flow -2,182 -1,314 -1,329 -1,140 -1,410

Inc / Dec (-) in Cash 1,177 1,965 1,438 2,336 2,475

Opening Cash Balance 6,565 7,741 9,706 11,144 13,480

Closing Cash Balance 7,741 9,706 11,144 13,480 15,955


Balance Sheet (INR mn)


Shareholders’ Fund 19,227 21,199 23,954 27,184 30,803

Share Capital 562 563 563 563 563

Reserves & Surplus 18,665 20,636 23,391 26,621 30,240

Preference Share Capital 0 0 0 0 0

Minority Interest 0 0 0 0 0

Total Loans 771 759 594 594 594

Def. Tax Liab. / Assets (-) -146 201 122 122 122

Total - Equity & Liab. 19,853 22,159 24,670 27,900 31,519

Net Fixed Assets 6,792 7,775 8,683 8,973 9,498

Gross Fixed Assets 7,748 8,360 4,834 5,124 5,649

Intangible Assets 2,708 3,278 3,849 3,849 3,849

Less: Depn. & Amort. 3,670 3,955 0 0 0

Capital WIP 6 92 0 0 0

Investments 796 1,032 1,057 1,057 1,057

Current Assets 19,594 22,456 24,650 28,600 32,912

Inventories 0 0 0 0 0

Sundry Debtors 6,145 6,496 6,184 7,002 7,989

Cash & Bank Balances 7,741 9,706 11,144 13,480 15,955

Loans & Advances 0 0 0 0 0

Other Current Assets 5,708 6,254 7,323 8,118 8,968

Current Liab. & Prov. 7,329 9,104 9,720 10,730 11,949

Current Liabilities 654 813 838 838 838

Provisions & Others 6,676 8,291 8,882 9,892 11,111

Net Current Assets 12,265 13,352 14,930 17,870 20,964

Total – Assets 19,853 22,159 24,670 27,900 31,519


Dupont Analysis


Net Margin 10.8% 10.3% 10.6% 10.4% 10.4%

Asset Turnover (x) 1.5 1.6 1.6 1.6 1.6

Leverage Factor (x) 1.1 1.1 1.1 1.1 1.1

RoE 17.7% 18.3% 18.3% 17.9% 18.1%

Key Ratios


BV/Share (INR) 171.3 188.5 213.1 242.3 274.6

ROIC 22.1% 26.5% 26.9% 29.1% 32.0%

ROE 17.7% 18.3% 18.3% 17.9% 18.1%

Net Debt/Equity (x) -0.4 -0.4 -0.4 -0.5 -0.5

P/E (x) 17.2 15.5 13.9 12.5 11.0

P/B (x) 3.0 2.7 2.4 2.1 1.9

EV/EBITDA (x) 11.9 10.0 8.6 7.1 5.7

EV/Sales (x) 1.6 1.3 1.2 1.0 0.8

Debtor days 73 66 58 58 58

Inventory days 0 0 0 0 0

Creditor days 0 0 0 0 0


Cyient


APPENDIX I

JM Financial Inst itut ional Secur it ies Limited

Corporate Identity Number: U65192MH1995PLC092522 Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.

SEBI Registration Nos.: BSE - INZ010012532, NSE - INZ230012536 and MSEI - INZ260012539, Research Analyst – INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.

Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com

Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings

Rating Meaning

Buy Total expected returns of more than 15%. Total expected return includes dividend yields.

Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.

Sell Price expected to move downwards by more than 10%

Research Analyst(s) Certification The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.

JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst, Merchant Banker and a Stock Broker having trading memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the investor.

JM Financial Institutional Securities provides a wide range of investment banking services to a diversified client base of corporates in the domestic and international markets. It also renders stock broking services primarily to institutional investors and provides the research services to its institutional clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management, brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies) covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services.

JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to, or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in, it may have potential conflict of interest at the time of publication of this report on the subject company(ies).

Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.

The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report. The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right

to make modifications and alterations to this statement as they may deem fit from time to time.

Cyient


Analyst Certification.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.

This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions.

Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1888 in respect of any matters arising from, or in connection with, this report. Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").

This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM Financial Institutional Securities or to JM Financial Securities.

This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.

Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is avai lable only to relevant persons and will be engaged in only with relevant persons.

Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you based on your representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of

this research report or the information contained herein.

Growth story at a discountstatic-news.moneycontrol.com/static-mcnews/2017/09/... · 2017-09-26 ·...

Documents

Transcript of Growth story at a discountstatic-news.moneycontrol.com/static-mcnews/2017/09/... · 2017-09-26 ·...