Cyient 1QFY18

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Anand Rathi Research India Equities
Technology
Company Update
India I Equities
Mohit Jain
Research Analyst
+9122 6626 6531
mohitjain@rathi.com
Shobit Singhal
Research Associate
+9122 6626 6511
shobitsinghal@rathi.com
Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e
Sales (` m) 27,359 30,956 36,066 37,944 41,384
Net profit (` m) 3,533 3,262 3,699 3,805 4,231
EPS (`) 31.5 29.1 32.9 33.9 37.7
Growth (%) 32.8 -7.7 13.4 2.9 11.2
PE (x) 16.6 18.0 15.9 15.4 13.9
PBV (x) 3.2 3.1 2.8 2.5 2.2
RoE (%) 20.6 17.4 18.4 16.9 16.7
RoCE (%) 25.2 21.0 21.4 21.2 21.4
Dividend yield (%) 1.5 1.3 1.5 1.6 1.8
Net debt / equity (x) -0.3 -0.3 -0.4 -0.5 -0.5
Source: Company, Anand Rathi Research Note: FY15 figures are based on IND GAAP, hence not comparable
`
,
Rating: Buy
Target Price: `610
Share Price: `523
Key data CYL IN / CYIE.BO
52-week high / low `565 / `405
Sensex / Nifty 32037 / 9892
3-m average volume $1.4m
Market cap `58bn / $895.8m
Shares outstanding 113m
Shareholding pattern (%) Mar'17 Dec'16 Sep'16
Promoters 22.2 22.2 22.2
- of which, Pledged - - -
Free float 77.8 77.8 77.8
- Foreign institutions 57.3 57.5 57.1
- Domestic institutions 7.0 7.2 4.5
- Public 13.6 13.2 16.2
13 July 2017
Cyient
Resilient margin despite currency headwinds; retaining a Buy
For Q1 FY18 Cyient reported $141m revenue, flattish qoq, up 13.4% yoy
(~2% inorganic). This was driven by IT services revenues of $129m, up
3% qoq, and DLM revenue of $11.8m, down 26.5% qoq due to
seasonality. The operating margin was down 46bps qoq, despite a
wage-hike impact of 90bps and 3% rupee appreciation. The business
outlook for FY18 has been maintained at double-digit growth both in
revenue and earnings, with effective hedging offsetting the currency
impact and higher tax rates. We retain our Buy recommendation.
Stable quarter, reiterated double-digit growth for the full year. Cyient
had a stable quarter with growth in IT services driven by the communication
(up 9.8% qoq), transportation (up 11.5% qoq) and semiconductor (up 10.4%
qoq) business units. Aerospace, the flagship vertical, was soft, with just 1.7%
qoq (up 2.1% yoy) but is expected to recover in FY19. On the DLM side,
business grew 26% yoy and is on track to meet the guidance of 20% growth.
EBITDA margin at 12.8%; offshore mix and utilisation to be key levers.
The IT service margin (92% of revenue) was 14.6%, while DLM margin (8%
of revenue) came at -6.9%. The former can improve through better utilisation
(74.1%, -330bps qoq, scope for 3-4% betterment) and offshore mix (40.4%,
up 120bps qoq, scope for 2-3% betterment). DLM is likely to break even this
year, which would result in expanding the company’s margins. Net profit at
`825m (up 19% yoy, down 17.3% qoq) benefitted from the higher other
income(up `86m qoq) affected by the higher tax rate (down `50m qoq).
Differentiated offerings render Cyient a Buy. We have slightly reduced
our FY18e/19e earnings, factoring in the rupee at 64.5 to the dollar. The
stock trades at a PE of 13.7x FY19e, reasonable as the company is growing
faster than the industry and is more into engineering services. Our new target
price at `610 (earlier `625) is based on 16x FY19e. Risk: Sharp rupee
appreciation.
Relative price performance
Source: Bloomberg
CYL
Sensex
440
460
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520
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580
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Aug-16
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Estimates revision (%) FY18e FY19e
Sales ($) 0.6 0.5
EBITDA (3.9) (2.2)
PAT (1.5) (3.2)
Change in Estimates  Target  Reco 

2. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 2
Quick Glance – Financials and Valuations
Fig 1 – Income statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Net revenues 27,359 30,956 36,066 37,944 41,384
Revenue growth (%) 24 13 17 5 9
- Oper. expenses 23,346 26,709 31,218 32,801 35,333
EBIDTA 4,014 4,247 4,848 5,143 6,050
EBITDA margins (%) 15 14 13 14 15
- Interest 80 199 189 154 92
- Depreciation 713 893 953 1,074 1,168
+ Other income 1,236 978 874 1,133 886
- Tax 1,096 986 1,047 1,354 1,533
Effective tax rate (%) 24 23 22 26 27
+ Associates / (minorities) 173 115 166 110 87
Adjusted PAT 3,533 3,262 3,699 3,805 4,231
+ Extraordinary items 0 0 0 0 0
Reported PAT 3,533 3,262 3,699 3,805 4,231
Adj. FDEPS (` / sh) 31.5 29.1 32.9 33.9 37.7
Adj. FDEPS growth (%) 32.8 -7.7 13.4 2.9 11.2
Source: Company, AnandRathi Research
Fig 3 – Cash-flow statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Adjusted PAT 3,533 3,262 3,699 3,805 4,231
+ Non-cash items 713 893 953 1,074 1,168
Cash profit 4,247 4,155 4,652 4,878 5,398
- Incr. / (decr.) in WC 154 1,094 -1,090 -393 681
Operating cash-flow 4,092 3,061 5,742 5,271 4,718
- Capex 5,258 -297 1,936 1,003 1,094
Free cash-flow -1,165 3,357 3,806 4,268 3,624
- Dividend 1,051 919 1,078 1,109 1,233
+ Equity raised 196 -1,678 -649 0 0
+ Debt raised 1,422 538 122 -300 -600
- Investments 86 575 371 388 448
- Misc. items 0 0 0 0 0
Net cash-flow -684 722 1,830 2,472 1,343
+ Op. cash & bank bal. 6,913 6,229 6,951 8,781 11,253
Cl. Cash & bank bal. 6,229 6,951 8,781 11,253 12,596
Source: Company, AnandRathi Research
Fig 5 – Price movement
Source: Bloomberg
Fig 2 – Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Share capital 562 562 563 563 563
Reserves & surplus 17,879 18,537 20,610 23,306 26,304
Net worth 18,441 19,099 21,173 23,869 26,867
Total debt 1,474 2,142 1,918 1,618 1,018
Minority interest 122 128 26 26 26
Def. tax liab. (net) -15 -146 201 201 201
Capital employed 20,022 21,224 23,318 25,714 28,112
Net fixed assets 3,252 3,237 3,282 4,426 4,352
Intangible assets 4,729 3,555 4,493 3,278 3,278
Investments 1,012 1,586 1,957 2,345 2,793
- of which, Liquid 336 790 925 1,203 1,563
Working capital 4,801 5,895 4,805 4,412 5,093
Cash 6,229 6,951 8,781 11,253 12,596
Capital deployed 20,022 21,224 23,318 25,714 28,112
Working capital (days) 64 70 49 42 45
Book value (` / sh) 164 170 189 213 239
Source: Company, AnandRathi Research
Fig 4 – Ratio analysis @ `523
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
P/E (x) 16.6 18.0 15.9 15.4 13.9
Cash P/E (x) 13.8 14.1 12.6 12.0 10.9
EV / EBITDA (x) 13.4 12.5 10.5 9.3 7.6
EV / sales (x) 2.0 1.7 1.4 1.3 1.1
P/B (x) 3.2 3.1 2.8 2.5 2.2
RoE (%) 20.6 17.4 18.4 16.9 16.7
RoCE (%) 25.2 21.0 21.4 21.2 21.4
Dividend yield (%) 1.5 1.3 1.5 1.6 1.8
Dividend payout (%) 29.7 28.2 29.1 29.1 29.1
Net debt / equity (x) -0.3 -0.3 -0.4 -0.5 -0.5
Debtor (days) 90.8 92.1 84.2 86.2 86.2
Inventory (days) 0.0 0.0 0.0 0.0 0.0
Payables (days) 43.1 42.5 47.0 46.0 45.0
CFO:PAT % 102.4 85.4 113.5 109.9 90.7
CFO:EBITDA % 90.1 65.6 86.6 81.3 63.4
Source: Company, AnandRathi Research
Fig 6 – Cyient’s performance
Source: Company
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CYL
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1QFY18
(%)
($m)
Revenue EBITDA Margin (RHS)

3. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 3
Result Highlights
Q1 FY18 Results at a glance
Fig 8 – Quarterly result
Year-end: Mar Q1 FY18 % qoq % yoy FY17 FY16 % yoy
Sales ($ m) 141 (0.3) 13.4 537 472 13.8
Sales (` m) 9,070 (3.6) 8.6 36,066 30,956 16.5
EBITDA (` m) 1,160 (7.0) 6.4 4,848 4,247 14.1
EBITDA margin (%) 12.8 -46 bps -27 bps 13.4 13.7 -28 bps
EBIT (` m) 899 (9.4) 3.7 3,895 3,354 16.1
EBIT margin (%) 9.9 -63 bps -47 bps 10.8 10.8 -4 bps
PBT (` m) 1,198 (1.7) 28.8 4,580 4,133 10.8
Tax (` m) (373) 68.8 57.4 (1,047) (986) 6.2
Tax rate (%) (31.1) -1301 bps -565 bps (22.9) (23.8) 99 bps
Net Income (` m) 877 (16.1) 18.5 3,699 3,262 13.4
Source: Company
Fig 7 – Segment-wise results
Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 QoQ YoY%
Revenues ($ m) 124 137 136 141 141 -0.3 13.4
Growth YoY % 8 15 15 17 13 -314bps 490bps
Volume growth % NA NA NA NA NA
Revenues (` m) 8,349 9,136 9,171 9,410 9,070 -4 9
Eff. exchange rate 67.3 66.9 67.5 66.7 64.5 -3 -4
Employees (EoP) 12,965 13,216 13,094 13,084 13,206
Revenue Productivity ($ ‘000 / employee) 9.56 10.33 10.37 10.78 10.65 -1 11.3
Gross Utilization (IT services) 73.5 78.0 78.3 77.4 74.1 -330bps 60bps
Attrition 19.9 22.7 22.6 15.6 16.6 100bps -330bps
CoR (excluding D&A) 7,259 7,853 7,943 8,163 7,910 -3 9
As % of revenue 87 86 87 87 87 46bps 27bps
SG&A 1,835 1,863 1,887 1,985 2,006 1 9
As % of revenue 22 20 21 21 22 102bps 14bps
EBITDA 1,090 1,283 1,228 1,247 1,160 -7 6
EBITDA margin % 13 14 13 13 13 -46bps -27bps
EBIT 867 1,051 985 992 899 -9 4
EBIT margin % 10 12 11 11 10 -63bps -47bps
Other Income 116 184 309 265 351 0 2
Forex gain / loss 4 34 125 105 202 92 4598
PBT 930 1,183 1,248 1,219 1,198 -2 29
PBT margin % 11 13 14 13 13 25bps 207bps
Taxes (237) (267) (322) (221) (373) 69 57
ETR % -25 -23 -26 -18 -31 -1301bps -565bps
PAT 693 916 926 998 825 -17 19
PAT margin % 8 10 10 11 9 -151bps 80bps
Source: Company, Anand Rathi Research

4. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 4
Fig 9 – Change in estimates
FY18 FY19
New Old Chg % New Old Chg %
Revenues ($ m) 588 584 0.6 642 639 0.5
Revenues (` m) 37,944 39,004 (2.7) 41,384 42,620 (2.9)
EBITDA (` m) 5,143 5,351 (3.9) 6,050 6,188 (2.2)
EBITDA margin % 13.6% 13.7% -16 bps 14.6% 14.5% 10 bps
EBIT (` m) 4,069 4,276 (4.8) 4,883 5,016 (2.7)
EBIT margin % 11% 11% -24 bps 12% 12% 3 bps
PAT (` m) 3,805 3,861 (1.5) 4,231 4,369 (3.2)
Source: Anand Rathi Research

5. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 5
Concall highlights
 Cyient’s order intake was lower in Q1 FY18 due to the cyclicality of its
business and is likely to improve from Q2 FY18.
 Half of the wage hike (90bps) and currency impact has come in Q1 FY18;
the other half will come in Q2.
 DLM performance was in line with the seasonality and the guidance.
 ETR for Q1 FY18 was 31%; on a recurring basis, it is is expected to be in
the range of ~26-28% from the earlier ~24% guidance, due to the slower-
than-anticipated ramp-up of people in SEZ.
 The yoy increase in the tax rate was mainly due to SEZ units moving from
the 100% tax-exemption bracket to 50% tax exemption.
 Other income gains will continue for most of FY18 as hedges are effective
($6.2m to be booked in FY18 at current rates).
Operating parameters
 Growth was not broad-based. Within regions, the US grew 0.7% qoq,
APAC 1.9% qoq. Europe delivered 9% qoq growth.
 Within verticals, Communications grew on the back of the strong
broadband plans rolled out in various regions (including the Liberty
Global deal ramp-ups).
 The company benefited from the one-month additional consolidation
(~$0.5m monthly rate) of Certon.
 Two verticals which stand out in growth outlook were Transportation
(Bombardier is doing very well for the company) and Semiconductors.
Both are seeing greater traction in FY18 and Cyient is poised to benefit
from the increased spending.
Outlook
 The outlook for FY18 is unchanged. Management expects ~10% growth
in services in FY18, and 20%+ in DLM.
 The operating margin in FY18 is expected to improve by 50 basis points,
driven by further improvements in operational efficiencies (utilisation and
offshore mix).
 Earnings growth is expected to come in double digits.

6. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 6
Factsheet
Fig 10 – Revenue, area-wise (%)
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
US 60 59 58 57 56
Europe 25 24 24 25 27
APAC 15 17 18 18 18
Source: Company
Fig 11 – Revenue by industry (%)
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Aerospace &Defence 39 37 36 36 35
Transportation 10 9 9 10 11
Off-highway equipment 5 5 5 5 5
Semiconductors 4 4 4 4 5
Medical and consumer electronics 2 2 2 2 2
Utilities 8 8 8 8 8
Communications 19 22 23 21 23
Energy and natural resources 6 5 5 4 4
Commercial and geospatial 8 9 10 11 9
Others 0 - - - -
Source: Company
Fig 12 – Billing-rate growth, yoy, %
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
ENGG % 13 10 5 (0) 4
UT&C % (6) (2) 5 13 21
Source: Company
Fig 13 – Onsite-offshore revenue mix %
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Offshore 41 40 40 39 40
On-site 59 60 60 61 60
Source: Company
Fig 14 – Client concentration %
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Top-5 40 43 44 43 41
Top-10 56 57 58 57 55
Source: Company
Fig 15 – Client growth (yoy)
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Top-5 19 38 41 38 15
Top 6-10 6 10 11 4 0
Beyond the Top-10 -4 -2 -7 1 15
Source: Company

7. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 7
Fig 16 – Number of employees
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
ENGG 5,600 5,600 5,600 5,550 5,500
UT&C 6,673 6,900 6,764 6,779 6,916
IT Services 0 0 0 0 0
Support Functions 692 716 730 805 790
Total 12,965 13,216 13,094 13,084 13,206
Source: Company
Fig 17 – Employee Metrics
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Attrition % 20 23 23 16 17
Utlization %
ENGG 68 73 73 73 72
UT&C 80 82 83 81 77
Company 74 78 78 77 74
Source: Company

8. 13 July 2017 Cyient – Resilient margin despite currency headwinds; retaining a Buy
Anand Rathi Research 8
Valuations
The stock trades at 13.7x FY19e EPS of `37.7. This, we think, is attractive,
given that Cyient is a uniquely-positioned engineering business with
considerable potential (the fastest-growing service line according to Nasscom
estimates). The company exhibits cyclicality but that can work upward as well.
After a year of specific headwinds it is poised for a upward trajectory.
With several issues now behind, we expect revenue growth to clock a 9%
CAGR in FY17-19.
Margins were flattish for FY17, despite headwinds such as cross-currency and,
toward the year-end, an appreciating rupee, which is commendable. The
company is now looking to expand its margin further in FY18.
With it set to benefit from opportunities in engineering and Defence (offset),
we value Cyient based on a target PE of 16x FY19e EPS.
Fig 18 – PE band
Source: Bloomberg, Anand Rathi Research
Risks
 Sharp rupee appreciation.
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9. Appendix
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compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
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Important Disclosures on subject companies
Rating and Target Price History (as of 13 July 2017)
Date Rating
TP
(`)
Share
Price (`)
1 30-Sep-14 Buy 520 450
2 05-Jan-15 Buy 575 512
3 07-Jan-15 Buy 600 575
4 16-Jan-15 Buy 660 575
5 09-Apr-15 Buy 650 506
6 24-Jun-15 Hold 650 606
7 17-Jul-15 Hold 600 534
8 19-Jan-16 Hold 520 432
9 22-Apr-16 Buy 570 482
10 14-Oct-16 Buy 625 539
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%
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