6 May 2016
Update
| Sector:
Technology
Cyient
Buy
BSE SENSEX
25,229
S&P CNX
7,733
CMP: INR468
TP: INR550(+18%)
S3 strategy, DLM to drive next leg of growth
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)
Free float (%)
Elevated focus on profitability revival
CYL IN
112.5
641/371
2/-6/7
52.6
0.8
46.3
77.8
Financials Snapshot (INR b)
Y/E Mar
2016 2017E 2018E
Net Sales
31.0
35.8
41.6
EBITDA
4.2
5.1
6.1
PAT
3.3
4.0
4.7
EPS (INR)
30.7
35.5
42.2
Gr. (%)
-1.9
15.5
19.0
BV/Sh (INR)
186.6 211.5 241.0
RoE (%)
16.5
16.8
17.5
RoCE (%)
15.1
16.5
17.1
P/E (x)
15.7
13.6
11.4
P/BV (x)
2.6
2.3
2.0
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
22.2
25.5
39.1
13.3
22.2
11.1
38.7
28.0
22.2
13.4
35.8
28.6
We attended CYL’s analyst meet, where the company elaborated on its aim to
become a major tier-I supplier in select verticals in the next ten years. It expects to
drive accelerated, non-linear growth through the execution of its S3 strategy and
design-led manufacturing (DLM).
It has taken several steps for executing this strategy – reorganization, investments in
specific areas, and differentiated strategy for focus verticals.
While the implementation of this strategy is not an immediate factor, CYL expects a
revival in core business in FY17 to double-digit revenue growth compared to flat
revenue previously. At the same time, it expects margin expansion, leading to a
guidance of 15%+ earnings growth for FY17.
Focus on S3 strategy
CYL’s S3 strategy (or the design-build-maintain continuum) applies to both its
segments. In Engineering, it spans across Design & Engineering, Electronics &
Mechanical Manufacturing, and Aftermarket & Operations Support. In DNO, the
services that coincide with the continuum are Network & Operations, Systems &
Applications, and Analytics. In accordance with this strategy, CYL has acquired four
companies to fill capability gaps and pace towards customer lifecycle ownership.
Reorganization to aid strategy execution
To get closer to the S3 strategy and 2020 aspiration, CYL recently reorganized its
structure into industry-focused business units (BUs). Eight BUs (Aerospace &
Defense, Transportation, Medical & Healthcare, Utilities & Geospatial,
Semiconductor, Communications, Industrial & ENR, and DLM) will drive business.
These will be supported by the four enabling units of Finance, Strategy, Marketing
& Communications, Corporate HR, and Business Excellence.
FII Includes depository receipts
Stock Performance (1-year)
Cyient
Sensex - Rebased
650
575
500
425
350
Investments directed towards the long-term
The company has been making several investments in line with its strategy. These
are directed towards building: [1] technology capability (IoT, MedTech), [2]
geographic capability (opening of center in Prague and commencement of JV in
Israel for defense offsets), and [3] domain capability (Bogies technical center and
inorganic growth). Investments are currently underway and are expected to start
yielding results, going ahead.
Signs of strategy execution – a key positive
CYL has articulated 18 key actionable areas across key verticals, with well-defined
plans and timelines. Several of these areas have started to see progress, while
some remain untouched. However, this provides for some additional indicators of
progress, besides CYL’s acquisitions over the last few quarters. Moreover, there has
been a significant shift in pipeline, indicating a conscious move towards higher
proportion of revenue from Systems and Solutions compared to Services. The
Design:Build:Maintain ratio of the pipeline has changed from 61:14:25 in FY16 to
42:35:23 in FY17.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585

Cyient
Acceptance of strategic direction by customers
At the Analyst Meet, a few clients articulated their experience of working with CYL.
While the common theme of satisfaction with work performed existed across the
board, clients also highlighted some areas of opportunity for CYL. These stemmed
out of CYL’s existing capabilities, presence in multiple verticals, and additional areas
the company has opened up following recent acquisitions. The intent of customers
wanting to partner with CYL in wider areas in the future reflects strong relationships
and their acceptance of its strategy.
Revenue growth revival expected in FY17
CYL expects a revival in revenue growth in its core business. Excluding Rangsons, the
Services business is likely to clock double-digit revenue growth compared with flat
CC revenue in FY16. Rangsons had reported revenue of USD38m in FY16 –
disappointing, given the initial guidance of USD70m. This was due to delays in
conversion of the order book to revenue. Based on executable order book, the
management is confident of delivering 50% growth in DLM in FY17.
Confidence lent by key customers and deal pipeline
CYL faced headwinds in several of its top clients in FY16, leading to subdued revenue
performance. With most customer-specific issues behind, it saw a revival in
momentum in 4QFY16. This should continue in the year ahead, aided by the highest-
ever deal pipeline CYL has seen. As at the end of FY16, CYL’s deal pipeline stood at
USD1,021m against USD799.8m at the end of FY15. This lends confidence to
achieving FY17 targets, given the project-based nature of CYL’s revenue.
Elevated focus on revival of profitability
After two years of disappointing margins, the management is focusing more on
recouping profitability. It expects operating margin to expand to 15% in FY17,
mitigating the wage hike impact through various operational levers. While shift in
revenue mix towards onsite (which cannot be reversed) contributed to the decline,
available levers are productivity, utilization, automation and employee pyramid.
6 May 2016
2

Cyient
Aerospace – creating a differentiated position
Aerospace & Defense, CYL’s largest vertical, has been going through a shift in spend
from Design to Manufacturing, as product development cycles across players come
to an end. However, Design is not the only capability with CYL, and it can play a
major role in Manufacturing Engineering and Aftermarket Services. In fact, there has
been an underlying shift in CYL’s revenue composition from Aerospace, away from
Design, without affecting overall revenue growth in the vertical.
The key trends in the industry are:
Supply chain constraints
Legacy program sustenance
Cost/weight reduction, and thus, efficiency enhancement
Technology refresh in Avionics
Offsets/Make in India
The key areas CYL is tapping to create a differentiated positioning are:
1.
Cross selling in the core:
a. Cross-selling services of Value Engineering, Process Planning, FAI, and
Inventory Management to existing customers; has tapped 7 OEMs so far
b. Begun risk-reward sharing programs with two customers; CYL intends to
expand to three more clients in 12 months, and to 10 in two years
c. Expansion of repair engineering services through the acquisition of GSE-Asia
d. Initiated PMA certification effort
2.
Avionics: Building
consulting layer and a strong partner ecosystem
3.
Offsets and Make in India:
Israel JV formed to aid progress in offset discharge
and Make in India
4.
Extension
of DLM, Repair Engineering and Analytics to existing customers
Aided by (a) changing spend pattern in Aerospace, (b) opening up of additional
opportunities through acquisitions, and (c) investments, CYL expects over 3x growth
in Aerospace & Defense over the next 4-6 years.
Medical – in investment mode
Medical & Healthcare currently contributes ~2.5% of CYL’s total revenue. However,
CYL sees tremendous potential for growth and scalability in this vertical. It has been
studying this vertical, defining its positioning, and making investments over the last
few quarters.
The trends prevailing in the Medical & Healthcare vertical are:
Cost pressures in the market (higher than average operating costs in the
industry)
New growth frontiers (emerging markets)
Difficult regulatory and innovation environment
Digital revolution (IoT, big data, etc)
CYL can add value in the industry with the combination of its services and by
leveraging its S3 strategy. While it has capabilities in designing medical equipment,
Rangsons has the manufacturing ability and acquisitions can extend the scope to
Value Engineering and Predictive Analytics.
6 May 2016
3

Cyient
In the Medical & Healthcare space, CYL will focus on Diagnostic Imaging, In-vitro
Diagnostics and Cardiology, which together constitute ~50% of the market
opportunity. It will serve global R&D and manufacturing operations as well as local
captives of large MedTech organizations.
To aid the tapping of this addressable market, CYL has been investing in
1. Enhancing delivery capabilities (senior management with 20-30 years of
experience, domain specialists, structuring teams like OEMs are set up)
2. Expanding sales footprint (to cater to large customers, key geographies)
3. Partner ecosystem (academia, universities, startups)
4. Actively assessing inorganic growth avenues
Valuation and view – revival in organic business playing out as expected
CYL is a market leader in Engineering Services in the Aerospace and Railways
verticals, which contribute 50% of its total revenue. Its relationships with
marquee clients, years of experience, and partnering with customers in critical
parts of their development programs have helped CYL sustain its leadership.
To further boost its positioning, CYL is geared to tap the potential in three areas
that are all at the cusp of a multi-year growth trajectory: [1] Electronic
Manufacturing Services, [2] MRO, and [3] Defense. Together, these three areas
increase its addressable market by ~12x (from USD1b in Aerospace Engineering
Outsourcing to USD12.3b in the three additional areas).
This should help turn around growth performance going ahead, following two
years of subdued numbers caused by client-specific headwinds. With most
issues behind, we expect revenue growth to bounce back, leading to 11% CAGR
over FY16-18 in the core business, and 12% CAGR in overall revenue. Revival of
growth has showed up in 4QFY16 performance, and validates the expectation of
continued improvement over the course of FY17.
Margins declined by ~400bp in FY15 – thanks to pricing pressure, change in
business mix, reinvestments in restructuring, and acquisition of lower margin
business – and a further 100bp in FY16. While we see challenges to CYL’s 150bp
margin expansion target in FY17, we expect margin recovery to be gradual and
play out over time – expansion of 100bp over FY16-18 on the back of revenue
growth revival, turnaround in Rangsons, higher offshoring, improved utilization,
and lower subcontracting costs. Upside risk to our margin estimates could come
from sharper uptick in Engineering segment’s utilization.
Although the margin recovery story seems to be taking longer than earlier
anticipated, revenue visibility suggests CYL’s turnaround on that front is playing
out on expected lines. It remains well placed to address opportunities in the
Engineering and Defense segments. Our target price of INR550 discounts
forward earnings by 13x, at a discount to peers such as PSYS and MTCL (which
demonstrate potential in newer services), but at a premium to peers such as
MPHL, KPIT, and NITEC (given strong competitive positioning, well defined niche
and strategy to drive next leg of growth).
6 May 2016
4

Cyient
Key triggers
Continued momentum in organic revenue growth
Revival in Softential and improved outlook for Rangsons
Uptick in margins, led by operational efficiency
Key risk factors
Prolonged client specific issues leading to a pause in recovery
Dampening of outlook in Rangsons hampering confidence in S3 strategy
Delayed recovery in margins
Exhibit 2: 1-year forward P/B band
Avg(x)
24.1
Min(x)
4.0
3.0
PB (x)
Peak(x)
Avg(x)
Min(x)
3.7
Exhibit 1: 1-year forward P/E band
PE (x)
26
20
13
7
0
11.7
12.2
2.8
Peak(x)
2.0
1.0
0.0
0.5
1.9
2.1
Source: MOSL
Source: MOSL
6 May 2016
5

Cyient
Story in charts
Exhibit 3: Expect revenue growth to pick up
Revenue (USDm)
23.0
527
447
472
5.7
5.3
363
FY14
11.6
12.7
Growth (YoY, %)
594
Exhibit 4: S3 strategy to propel positioning
FY15
FY16
FY17E
FY18E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Most client specific issues now behind
FY16 Growth (YoY, %)
10.7
0.5
-3.1
-17.2
-19.2
6.4
9.8
Exhibit 6: Margin recovery expected over FY7-18…
EBITDA margin (%)
18.2
18.6
-13.7 -17.6
-36.0
14.7
13.7
14.2
14.7
FY13
Source: Company, MOSL
FY14
FY15
FY16
FY17E
FY18E
Source: Company, MOSL
Exhibit 7: …led by utilization
Utilisation: Engineering (%)
84 85 83
80
83
80 81 81
Utilisation: DNO (%)
81
75
80 80
78 79
Exhibit 8: …and reduction in subcontracting, apart from
other levers
Subcontracting costs (% of revenue)
8.1
6.1
4.7
3.2
66
3.1
9.1
7.0
6.7
6.8
8.5
7.9
76
78
71
73
71
68 66 68
73 73
71 71 72 71 71 72 73
Source: Company, MOSL
Source: Company, MOSL
6 May 2016
6

Cyient
Exhibit 9: Operating metrics
2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16
Geographic Mix - %
Americas
Europe
Asia Pacific
Business Units - %
Engineering
DNO
Others
Vertical Mix - %
Aerospace
Transportation
Off highway products
Semiconductor
Medical & electronics
Utilities
Communications
Energy & natural resources
Commercial and geospatial
Others
Revenue Mix - %
Onsite
Offshore
Utilization - %
Engineering
DNO
Overall
Client Buckets
USD1m+
USD5m+
USD10m+
USD20m+
Client Contribution - %
Top 5
Top 10
Product Realisation Business
Geographic Mix - %
Americas
EMEA & India
Asia Pacific
Vertical Mix - %
Aerospace and Defence
Industrial
Medical
Communication
Others
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
29.2
15.5
55.3
58.2
24.7
13.1
2.6
1.4
44.6
37.0
18.4
19.0
39.0
20.3
15.3
6.4
23.5
28.7
47.8
49.5
22.4
11.0
16.1
22.3
51.0
26.7
51.3
20.7
11.6
15.0
10.5
81.0
8.5
29.7
21.0
10.1
26.2
68.0
80.0
74.5
56
17
7
4
35.3
48.2
71.0
81.0
76.4
54
17
6
3
35.8
49.8
71.0
81.0
76.3
54
19
8
4
35.9
50.7
72.3
76.3
74.4
55
19
8
3
36.2
51.3
70.7
78.0
74.7
54
20
9
3
34.4
48.7
70.9
80.6
76.0
56
20
9
4
40.3
50.1
72.4
75.2
73.8
55
20
8
4
34.9
49.5
72.5
78.2
75.4
59
22
8
4
35.7
51.2
73.3
78.9
76.1
60
21
9
4
35.3
50.1
72.9
80.4
76.7
60
19
10
2
34.7
49.4
66.1
80.0
73.3
62
20
11
2
35.7
51.1
56.1
28.3
15.6
63.0
35.6
1.4
34.4
11.4
5.9
5.2
1.5
10.2
13.6
7.4
8.9
1.5
49.7
50.3
56.5
29.2
14.3
63.1
35.7
1.2
33.2
12.5
5.4
6.1
1.5
11.0
12.7
7.0
9.3
1.3
49.1
50.9
58.0
28.9
13.1
64.1
34.8
1.1
32.8
11.8
5.2
5.9
1.7
10.6
14.6
6.8
9.6
1.0
50.7
49.3
60.9
29.3
9.8
62.2
36.9
0.9
33.9
11.2
4.8
5.8
1.7
10.1
14.2
7.2
10.2
0.9
52.2
47.8
63.9
27.4
8.7
60.8
38.3
0.9
33.3
10.4
5.1
6.1
1.3
10.9
15.4
7.1
9.4
1.0
53.5
46.5
65.0
26.8
8.2
57.5
41.6
0.9
31.2
10.1
4.5
5.9
1.2
12.1
18.3
6.9
8.8
1.0
55.2
44.8
63.7
25.8
10.5
61.8
37.4
0.8
34.5
10.4
5.0
5.6
1.5
11.0
16.4
7.0
7.8
0.8
56.7
43.3
64.0
24.0
12.0
62.8
36.4
0.8
35.8
10.4
5.2
5.6
1.4
10.6
16.2
6.6
7.3
0.9
56.1
43.9
64.1
24.1
11.8
62.8
36.4
0.8
36.2
10.6
5.2
5.3
1.5
9.1
18.4
6.2
6.7
0.8
56.3
43.7
63.6.
23.2
13.2
62.5
37.0
0.5
37.7
10.2
4.8
4.3
1.5
8.8
19.4
6.0
6.9
0.4
56.6
43.4
60.2
25.5
14.3
63.5
36.2
0.3
38.9
10.0
4.5
4.4
1.7
7.6
17.6
5.8
9.2
0.3
59.3
40.7
1.1
1.4
13.0
Source: MOSL, Company
6 May 2016
7

Cyient
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
11,880
24.6
1,796
15.1
486
1,310
10
272
0
1,572
270
17.2
-71
1,373
1,373
-19.6
2012
15,530
30.7
2,689
17.3
494
2,195
7
175
0
2,363
835
35.3
-100
1,628
1,628
18.6
2013
18,731
20.6
3,416
18.2
635
2,780
12
398
0
3,166
967
30.5
-129
2,329
2,329
43.0
2014
22,064
17.8
4,101
18.6
720
3,381
29
187
0
3,538
1,030
29.1
-152
2,660
2,660
14.2
2015
27,359
24.0
4,014
14.7
713
3,301
80
1,236
0
4,457
1,096
24.6
-150
3,511
3,511
32.0
2016
30,955
13.1
4,247
13.7
893
3,354
199
1,065
0
4,220
986
23.4
-115
3,349
3,349
-4.6
2017E
35,816
15.7
5,083
14.2
821
4,262
234
1,147
0
5,175
1,242
24.0
-48
3,981
3,981
18.9
(INR Million)
2018E
41,567
16.1
6,123
14.7
934
5,188
230
1,209
0
6,168
1,480
24.0
-48
4,736
4,736
19.0
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2011
556
9,737
10,293
451
0
10,744
5,782
2,933
2,848
74
334
8,597
0
2,567
3,477
2,552
1,109
836
273
7,487
10,744
2012
557
11,018
11,575
486
0
12,060
6,404
3,345
3,059
198
222
10,558
0
3,675
4,496
2,387
1,976
1,499
477
8,581
12,060
2013
558
12,667
13,225
426
0
13,651
7,301
3,973
3,328
228
610
11,934
0
4,007
4,939
2,988
2,449
1,964
484
9,486
13,651
2014
560
15,325
15,885
433
0
16,318
7,976
4,634
3,342
71
400
15,652
0
4,800
6,886
3,966
3,147
2,523
625
12,505
16,318
2015
562
17,879
18,441
1,103
0
19,666
9,318
5,696
3,622
96
336
21,732
606
5,336
5,704
10,086
6,120
5,164
956
15,612
19,666
2016
562
20,382
20,944
1,504
0
22,448
10,618
6,589
4,029
70
800
23,596
819
6,191
7,716
8,870
6,138
5,538
600
17,459
22,358
(INR Million)
2017E
562
23,168
23,731
1,233
0
24,964
11,618
7,410
4,208
70
1,000
26,474
991
7,163
8,910
9,409
6,879
6,179
700
19,595
24,873
2018E
562
26,483
27,046
1,333
0
28,378
12,618
8,344
4,274
70
1,200
30,439
1,139
8,313
10,993
9,993
7,695
6,895
800
22,744
28,288
6 May 2016
8

Cyient
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Fixed Asset Turnover (x)
Debtors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
-0.3
-0.3
-0.3
-0.4
-0.2
-0.3
-0.3
-0.4
1.0
89
0
1.1
100
0
1.2
95
0
1.1
99
0
1.1
91
0
1.1
91
0
1.1
91
0
1.2
91
0
13.6
12.2
13.9
12.7
17.5
16.2
16.7
15.5
19.0
17.4
16.5
15.1
16.8
16.5
17.5
17.1
20.3
7.4
3.4
2.1
11.4
1.0
15.4
9.0
2.9
1.8
12.3
1.7
15.7
6.4
2.6
1.5
11.2
1.5
13.6
5.5
2.3
1.3
9.0
2.2
11.4
4.4
2.0
1.0
7.1
2.6
12.5
34.2
92.4
1.2
10.0
14.5
42.4
103.9
2.5
17.3
20.7
49.7
118.3
4.5
21.7
23.7
64.9
141.5
5.0
21.0
31.3
53.8
164.3
8.0
25.6
30.7
75.9
186.6
7.0
22.8
35.5
88.3
211.5
10.6
30.0
42.2
108.6
241.0
12.7
30.0
2011
2012
2013
2014
2015
2016
2017E
2018E
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2011
1,796
-89
-689
0
1,018
-647
371
878
0
231
24
-40
-91
-107
1,142
2,336
3,477
2012
2,689
-682
-749
0
1,259
-790
469
721
0
-69
17
14
-217
-187
1,003
3,492
4,496
2013
3,416
-1,018
-799
0
1,599
-922
676
-13
0
-935
29
-27
-254
-252
412
4,528
4,939
2014
4,101
-1,160
-669
0
2,272
-761
1,511
585
0
-176
52
41
-242
-149
1,947
4,939
6,886
2015
4,014
-731
335
0
3,617
-803
2,814
-4,479
0
-5,282
66
399
17
482
-1,183
6,886
5,704
2016
4,247
-746
495
0
3,995
-1,274
2,722
232
0
-1,042
1
1
-943
-941
2,013
5,704
7,716
2017E
5,083
-907
-1,214
0
2,962
-1,000
1,962
659
0
-341
(INR Million)
2018E
6,123
-1,205
-966
0
3,952
-1,000
2,952
781
0
-219
0
-230
-1,421
-1,650
2,083
0
-234
-1,194
-1,428
1,194
7,716
8,910
8,910
10,993
6 May 2016
9

CYIENT GALLERY
CYIENT
OTHER COMPANIES
SECTOR UPDATES

Cyient
NOTES
6 May 2016
11

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