21 April 2016
4QFY16 Results Update | Sector: Technology
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
54.2 / 0.8
641 / 371
Drop in profitability casts shadow over the near term
Margin disappointment as acquisitions hurt:
CYL’s 4QFY16 EBITDA margin decline of
110bp to 13% was a significant miss (estimate of 15.4%) and an overarching concern
heading into FY17. ~150bp was attributed to weak performance in Softential business,
where a shortfall of software licenses amounting to ~USD2m flow down to the
operating profit. The other acquisition’s (Rangsons) faster-than-core-business growth
contributed to another 30bp due to change in business mix. However, revenue growth
of 2.5% QoQ in Engineering and 8% QoQ in DNO (ex. Softential) validates the
commencement of recovery in revenue growth.
Meeting margin guidance may be a tall order…:
CYL expects core business to grow by
at least 10% in FY17, Rangsons to expand 50% - implying overall USD growth of ~13%.
Also, it cited expectation of 150bp uptick in margins, from 13.7% in FY16. While
visibility on revenues lends confidence, 13% exit operating margin and impact from
wage hikes in 1QFY17 would mean CYL will start to climb from ~12% EBITDA towards
its target. That is an ask rate of 200bp improvement every quarter. While CYL has
multiple levers at its disposal, we still see this as a tall order.
…but ample levers for a gradual recovery:
While we see challenges to CYL’s FY17
margin target, we expect margin recovery to be more gradual and play out over time.
We model 50bp expansion each year in FY17/18. Upside risk to our margin estimates
could come from sharper uptick in Engineering segment’s utilization. We have cut our
earnings estimates by 3%/1% for FY17/18, contributed by higher revenue expectation
from Rangsons but lower overall company margins. Revenue visibility suggests CYL’s
turnaround on that front is playing out on expected lines, and over the longer term it
remains well placed to address opportunities in the Engineering and Defense
segments. Our price target of INR550 discounts FY18E earnings by 13x. Maintain Buy.
Financials & Valuations (INR b)
2016 2017E 2018E
186.6 211.5 241.0
Quarterly Performance (Consolidated)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424