Cyient Q1 Result Review: Stock tanks 9% on weak earnings, target price cuts

Shares of IT services firm Cyient fell 9 percent in intra-day trading on Friday after the company posted weak numbers for the quarter ended June 2024 (Q1FY25). The earnings came below estimates on all fronts. Moreover, cuts in target prices and earnings estimates by brokerages also kept the sentiment cautious.

The firm reported a 23.8 percent sequential drop in net profit to ₹144 crore. On a year-on-year (YoY) basis, the profit declined by 18.6 percent. Meanwhile, Cyient's revenue decreased by 0.6 percent YoY and 9.9 percent sequentially, totaling ₹1,675.7 crore in the June quarter.

Revenue for the quarter in US Dollar terms also fell 10.3 percent from last year to $200.9 million. EBIT margin for the quarter rose to 15.8 percent from 14.4 percent last year.

Cyient's management cut its FY25 DET (digital, engineering, and technology) revenue growth guidance sharply to flat YoY from high single-digit growth.The cut in guidance came on the back of a delay in project ramp-up in telecom and continued weakness in the railway business.

The stock shed as much as 8.99 percent to its day's low of ₹1,724.00. It is now 30 percent away from its record high of ₹2,457.00, hit in December 2023. Meanwhile, the scrip has still advanced 21 percent from its 52-week low of ₹1,424.30, hit in July last year. The IT stock has gained almost 30 percent in the last 1 year and lost 22 percent in 2024 YTD.

The digital, engineering, and technology (DET) segment, which constitutes over 80 percent of the company's revenue, was ₹1,414 crore, a decline of 5 percent quarter-on-quarter and 2.8 percent year-on-year.

The DET segment’s earnings before interest and tax (EBIT) margin stood at 13.5 percent, down 260 basis points year-on-year.

“We had a challenging Q1, however we remain confident that with our balanced portfolio and investment in technology solutions, we will achieve growth in the mid-to-long term to deliver value to stakeholders,” said Karthikeyan Natarajan, executive director and chief executive officer, Cyient.

The management also stated that it is eyeing flat DET revenue growth for FY25 in constant currency terms due to the Q1 FY25 impact. However, they were optimistic about a turnaround in the second half of the current fiscal.

“Our top customer engagement grew double-digit YoY and our FY24 exit order intake was also double-digit higher YoY. We won five large deals in DET with a total contract potential of $52.4 million in this quarter. With this, we are confident that we have taken steps to align the supply to the demand. We believe this will translate into improved revenue realization and drive a sharp recovery of growth through the coming quarters,” stated Krishna Bodanapu, executive vice chairman and managing director, Cyient.

Brokerage Views

Despite the recent underperformance and weak Q1 results, brokerage houses have maintained their ‘buy’ ratings on Cyient's stock, albeit with cuts in target prices and earnings estimates. The consistent ‘buy’ calls reflect confidence in Cyient's potential for medium to long-term growth, particularly due to its strategic exposure to high-growth verticals like aerospace, defence, and sustainability. However, execution issues and the recent sharp guidance cut remain points of concern that could impact short-term performance.

Motilal Oswal: Brokerage house Motilal Oswal has retained its ‘buy’ call on Cyient's stock, primarily due to undemanding valuations and the company’s exposure to structurally strong verticals such as aerospace and sustainability. Motilal Oswal has set a target price of ₹2,070, implying a 9 percent upside.

"CYL’s underperformance in the recent past is surprising, considering that its portfolio, which has been assiduously realigned by the current management in the past three years, stands to benefit from several sectoral tailwinds. Its presence in high-growth areas (such as aerospace, defense, and sustainability) and its investments in new growth areas (such as autos) should ideally have led to a much smoother revenue runway. While the remainder of the year implies a CQGR of 3%+, we believe a flat YoY revenue growth trajectory is disappointing. We expect weak 1Q results to weigh on CYL’s performance, but we believe that if CYL can fix execution issues, it is aligned to the right vertical exposures and has potential to grow in high-single digits in FY26," Motilal Oswal stated.

Kotak Institutional Equities: Similarly, brokerage firm Kotak Institutional Equities has maintained its "buy" rating on Cyient's stock, citing the medium-term growth opportunity and reasonable valuations. However, Kotak has cut its price target to ₹2,050 from ₹2,275.

Kotak commented that the lowered revenue guidance from Cyient is also aggressive. The brokerage has revised its earnings estimate downward by 14% to 18% for the financial years 2025 to 2027.

Emkay: Emkay has also maintained its ‘buy’ call on Cyient but has reduced its target price to ₹2,300.

"We cut FY25E-27E EPS by 5%-13%, factoring in the Q1 miss, sharp guidance cut, and gradual recovery in DET margin. We cut the target multiple to 25x (from 27x), given the sharp guidance cut within only a quarter raising concerns on growth predictability. A big earnings miss will weigh on the near-term stock performance, but valuations remain fairly undemanding," Emkay stated.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.