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Cyient – Exposure to ITeS minus commoditized body shopping

Cyient is a Hyderabad based Engineering Services organization. Founded in 1992 (as Infotech Enterprises) by BVK Mohan Reddy (recently awarded the Padma Shri), it has grown from a GIS data processor to a complete Engineering Services player. They claim to be the pioneers in Engineering Services Outsourcing and the de facto leader in pureplay Engineering services in India. Chief industries of focus are Aerospace & Defence, Utilities and Communication, with primary clients in the US. The company has been focusing increasingly on Design Led Manufacturing, so broadening the service delivery expertise from Engineering Design to include Pilot Manufacturing.
Having started off with digitizing maps, Cyient really got its ESO credentials only in 2000, with some wins in Aerospace. Pratt & Whitney was one of their first customers and actually invested in Cyient in the early 2000s (and recently exited).
Some facts & figures:
Revenue ₹3600 Cr, up 16% y-o-y
PAT ₹370 Cr, up 10% y-o-y
Operating Profit Margin 13%, NPM 10%
11,000 employees
A&D, Communication and Utilities contribute 75% of revenues
Americas and Europe contribute 77% of revenues

Numbers:
Market Cap of ₹6100 Cr at CMP of ₹545, trailing P/E of 16
Cash of ₹900 Cr, so approximately ₹90 per share of cash.
Debt to Equity of 0.1
Receivable Days reducing from high 70s to 66 now.
Net Profit to CFO conversion also seems alright, with CFO slightly greater than Net Profits.

Concerns:
The company is in acquisition mode, with 3 acquisitions in the last year. Their 2020 strategy clearly lays out inorganic mode as a growth driver. While not a concern per se, how these acquisitions pan out is an unknown.
Sales and PAT growth rates are on a downward trend, from late teens to low double-digits. Same with dividend payouts
Low promoter holding of 22%. FIIs hold 45% and MFs 6%

Analyst Coverage: IDBI named Cyient as one of its 4 Diwali picks. Brief from an interview -

_What about Cyient? There was a big block deal in Cyient today. It is the second Diwali pick. Currently it is at Rs 500 odd and you believe Rs 645 can be achieved on Cyient. There was a big block deal today after which the stock shot up 5-6%. What is the rationale here, what are the growth triggers here? _

_In IT stocks, this midcap IT stock has been growing in double digits and the management is confident that the growth will be continuing in double digit and they had … _

Read more at:
//economictimes.indiatimes.com/articleshow/61067476.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Disclosure: Invested 4% of portfolio at around CMP

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If I’m not mistaken Amanda capital is invested in Cyient. They have a good track record of identifying multibaggers.

Disc; invested at cmp

Just checked on bajaar.me - Amansa has 6.5% stake

I too tracking this company for almost one year and have good quantity from 490 level and have faith on double digit growth in top and bottom lines and my concern is low promoter holding(22%).

The recent quarterly result and investor presentation will give some knowledge

http://kcpl.karvy.com/images/2017/IEL_6369/Investor%20Update%20-%20Q2%20FY18.pdf

i really appreciate if someone compare it with L & T Infotech because both are doing well and have good future prospectus .

Hi, from what I understand cyient and l&t infotech are completely different businesses - the former provides design and product development related services to sectors like aerospace, defense, telecom and other advanced manufacturing businesses, whereas the latter is a more cookie cutter IT services + consulting company. With Rangsons, it now also has a manufacturing arm, which I think is for prototypes.

To address the risk of inorganic route, imo this will be the value driver for the stock, management has indicated that acquisitions will be in the $20-30 mm range so after Rangsons, so hopefully nothing v large to digest, just an accretive build up of revenues and capabilities. Cyient aims to cross sell acquired offerings across their existing client Base rather than acquire new client bases, so this should result in significant cost savings on acquired businesses. With $150 mm of cash and little to no debt, imo this leaves the company in a solid position for inorganic expansion.

Disclosure: invested

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i think you meant L&T Technology services as both are in ERD domain. there was a philps capital report dated June 1st 2017 - IT Services Engineering R&D that compares the two and also about the scope of the broad ERD domain.
Disclosure: tracking but not invested yet

Thanks for pointing it. i found the report
http://backoffice.phillipcapital.in/Backoffice/Researchfiles/Researchfilesmove/PC_-_LTTS_-_Initiating_coverage_-_June_2017_20170601164827.pdf

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Thanks @ajay81, this is a very good report. Now thinking if I should follow the Philips Capital thesis and invest in LTTS instead :wink:

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Today Cyient jumped over 12% after its decent results yesterday.

Here are some latest reports from HDFC securities and ICICI direct on Cyient released today :

http://content.icicidirect.com/mailimages/IDirect_Cyient_Q3FY18.pdf

DIscl: Invested

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Company wish to reduce aggregate investment limit of NRI from 100% to 49%. What could be the reason for that?

I am trying to look at cyient with eagle eye . I have invested and profited. This company financial are perfect and fit the best possible dream screens … no doubt this stock will come in top of any funds and this is the reason why it’s jumping so fast.

But when something is perfect , it’s good to check what’s not correct and keep track of them. I am starting to review it’s last annual report, I have following observations, can you please add more points of concern and your views on them.

  • This company has 4 Indian and 20 foreign subsidiaries. 2/3rd revenue and profits are via subsidiaries in consolidated financials that everyone see.

  • I am aware of IT and electronics businesses and I do not think keeping such large number of subsidiaries is normal.

  • It’s normally easier to cook financials once you have so many subsidiaries in so many different countries , so if company show perfect financial growth , i will doubt if data is correct. Auditors are normally different for different countries and it’s very easy to impact consolidated financials with adjustments in just one subsidiary.

  • even inter company deals are easy … they are only monitored from subsidiaries to Indian parent in report but I think foreign subsidiary to other foreign subsidiary is not well monitored.

  • Company further also doing regular acquitions and it seems lot of their growth is related to this. I also saw an keen interest from company to push good news to market when things are good, like announcing acquitions etc. recently. I also saw certain awards/recognitions mentioned in their reports that are well known to be acquired easily with money in business circles.

  • I find that they are not competing in projects in India for the technologies they claim are industry leaders. Even tcs, Infosys and most top it companies compete in Indian market.

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Excellent Results Today

This may be due to requirement of being treated as Indian company. That may be requirement for getting Defense offset projects. Need to verify.

After the 12% spurt due to yearly results the stock is in southward direction in last 3 months.

Valuations are looking quite attractive at PE of 12.5 with Dividend yield > 2.5% and steady Sales Growth for last 5 years.

What is dragging this stock now?

Boeing and its dangerous. Revenue part its 50% from aviation and Rail.

Cyient’s growth engine is challenged given client specific issues. Large verticals, Aerospace and Communications are taking longer than expected to recover. Further margins expansion will be difficult considering investments required in the business and tight labour market.
Cyient’s higher mix of mechanical engg services explains the slow growth and lower margin. According to Zinnov, Non-Digital ER&D services (mostly mechanical) are expected to grow at just ~3% over the next five years.
As much as 15% of US exports to China comprises aircraft. Hence, ongoing trade friction between US and China adds risk to Cyient’s core vertical, Aerospace & Defense.
Ref:
https://www.hdfcsec.com/hsl.docs//Cyient%20-%204QFY19%20-%20HDFC%20sec-201904260931335234053.pdf
https://www.hdfcsec.com/hsl.docs//Cyient%20-%20Update%20-%20May19%20-%20HDFC%20sec-201905270914583947935.pdf

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Cyient has reported a rise of 9.7% year-on-year (YoY) in its consolidated profit after tax for quarter ending June 30 at ₹90.5 crore against ₹8.25 crore for the same quarter last year. There has been a growth of 0.8% YoY in consolidated revenue at ₹1,089 crore and de-growth of 6.3% QoQ. Bloomberg survey of 17 analysts had estimated profit and revenue of ₹170 crore and ₹1,167.1 crore respectively.

HDFC Sec Report

Looks like no immediate problem, I find the valuations very compelling at this CMP of 478

Disc : Invested

When Boeing is down means business is down. See how many orders Boeing has got/lost in last quarter if Boeing is not able to sell the plane then how it will give business to cyient.

True valuations are attractive.

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