DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
12 April 2017 Asia Pacific/India Equity Research
Computer Services & IT Consulting
Cyient Limited (CYIE.BO) Rating OUTPERFORM Price (10-Apr-17, Rs) 473.05 Target price (Rs) 625.00 Upside/downside (%) 32.1 Mkt cap (Rs/US$ mn) 53,250 / 824.55 Enterprise value (Rs mn) 46,361 Number of shares (mn) 112.57 Free float (%) 77.8 52-wk price range (Rs) 539-451 ADTO-6M (US$ mn) 0.8 Target price is for 12 months.
Research Analysts
Nitin Jain
91 22 6777 3851
Anantha Narayan
91 22 6777 3730
INITIATION
Structurally well placed, with solid momentum Erratum: Due to an internal database error, our revenue and margin numbers
were incorrect in the earlier version. All other numbers were correct.
■ We initiate coverage on Cyient with OUTPERFORM and TP of Rs625.
■ Structurally well placed in the fast changing industry. Cyient is among
the few Indian companies with a large exposure to faster growing engineering
services (or engg. svcs.) with 54% share, and has niche capabilities in rapidly
expanding network engineering (telecom) and utility/GIS practices. These
segments are relatively immune from the difficult transition that the traditional IT
companies are undergoing. Cyient is also possibly the least H-1B/L-1 visa
dependent among its Indian IT peers, with below 15% exposure.
■ Gearing-up for integrated offerings. Cyient has gone through several
strategic changes in the last three years, including verticalisation, broadening
of service portfolio (through several M&As) and venturing into design led
manufacturing. The company is gearing-up to offer integrated services,
ideation-design-prototype-maintenance in case of engineering, and plan-
build-operate for telecom and utility verticals. Management has indicated a
healthy pipeline build-up, and such deals can have higher margins.
■ Solid business momentum, some scope for margin expansion. The top
clients' momentum is solid (high correlation with the overall growth), trends
are stable to positive in all the key verticals, and order intake is healthy. We
expect the company to report over 13% revenue CAGR (organic, constant
currency) over FY17-19—among the best in the industry. Margins can
expand too from the current 13.5% levels to 14.6% by FY19 (better G&A
leverage, pyramid correction and recovery in acquired companies' margins).
■ Initiate with OUTPERFORM. We value Cyient at 14x FY19E P/E (over 15%
FY17-19E EPS CAGR). Its engg. svcs. peers trade at 14-18x CY17E P/E
(single to low double digit EPS CAGR), while the mid-cap Indian IT peers
trade at 12-17x CY17 P/E (average EPS CAGR of 11%). Key risks include
adverse currency moves, client-specific issues and acquisition indigestion.
Share price performance
The price relative chart measures performance against the
S&P BSE SENSEX IDX which closed at 29,575.74 on
10/04/17. On 10/04/17 the spot exchange rate was
Rs64.58/US$1
Performance 1M 3M 12M Absolute (%) 0.9 -4.3 3.4 Relative (%) -2.0 -14.1 -15.7
Financial and valuation metrics
Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 30,955.5 36,061.8 40,736.0 46,260.2 EBITDA (Rs mn) 4,247.0 4,896.5 5,683.3 6,735.3 EBIT (Rs mn) 3,353.8 3,949.3 4,650.8 5,640.4 Net profit (Rs mn) 3,348.6 3,631.6 4,335.2 4,885.1 EPS (CS adj.) (Rs) 29.06 32.33 38.72 43.63 Change from previous EPS (%) n.a. (0.0) 0.0 0.0 Consensus EPS (Rs) n.a. 32.41 38.43 43.34 EPS growth (%) (7.7) 11.3 19.8 12.7 P/E (x) 16.3 14.6 12.2 10.8 Dividend yield (%) 1.5 2.2 2.1 2.3 EV/EBITDA (x) 11.4 9.5 7.8 6.2 P/B (x) 2.78 2.44 2.13 1.86 ROE (%) 17.8 17.8 18.6 18.3 Net debt/equity (%) Net cash Net cash Net cash Net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates
12 April 2017
Cyient Limited (CYIE.BO) 2
Focus charts and table
Figure 1: Structurally well placed with niche
capabilities in engineering services, communication
and utility/GIS segments; unique DLM approach
Figure 2: As per Zinnov estimates, the engineering
services market (services providers segment) is
expected to grow at 14% CAGR over 2016-20
Source: Company data, Credit Suisse estimates Source: Zinnov, Credit Suisse
Figure 3: Cyient is among the few Indian firms with
scale and significant exposure to engg. services
Figure 4: It has possibly the least visa exposure to
H-1B/L-1 visa among the Indian IT firms
Source: Company data, Credit Suisse estimates. # L&T Technology Services Source: Company data, Credit Suisse estimates
Figure 5: Business momentum solid: Stable to positive trends across the verticals
Industry units % of revenue Revenue growth* Growth
outlook
Change in outlook
(vs. a year back) 16-Mar 16-Dec
Aerospace and Defense 36% 7% 7% ▲ ◄►
Communications 23% 10% 25% ▲ ◄►
Utilities and geospatial 17% -18% 5% ▲ ▲
Transportation 9% -3% 1% ^ ◄► ◄►
Industrial, Energy and Natural Resources) 9% -8% -9% ▼ ▲
Semiconductor 4% -17% -13% ◄► ◄►
Medical and Consumer Electronics 2% 6% 36% ▲ ▲
Source: Company data, Credit Suisse estimates. * LTM, YoY, US$, organic ^ growing at 6% rate in constant currency
Figure 6: Momentum is strong among the top
accounts as well ++++++ +++++++ +++++ ++++
+++++ +
Figure 7: With decent growth in both services and
DLM business, and margin expansion, we expect
15% EPS CAGR over FY17-19
Source: Company data, Note: Numbers in the boxes represent client share in revenue Source: Company data, Credit Suisse estimates
Engineering services
54%
Communication (networking)
20%
Utility and GIS15%
Design led manufacturing
(DLM)11%
7.98.9
15.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2015 2016 2020
US$ bn
0%
50%
100%
150%
0
500
1,000
1,500
HCLT* TCS Wipro LTTSL # QuEST Infosys Cyient TataElxsi
Mindtree
Engineering services revenue (US$ mn) % share [RHS]0% 10% 20% 30% 40% 50% 60% 70%
Tech Mahindra
L&T Technology Services
Hexaware
Wipro
Persistent Systems
HCL Tech
Cyient
% of US employees on visa
-10%
0%
10%
20%
30%
Top 5 Top 10 Top 6-10
Revenue growth (LTM, YoY, US$)
Mar-16 Dec-16
44% 58% 15%
14.0%
14.5%
15.0%
15.5%
16.0%
0%
5%
10%
15%
20%
FY15 FY16 FY17 FY18 FY19
Services business
Revenue growth (cc, organic)
EBITDA margins [RHS]
0.0%
2.0%
4.0%
6.0%
8.0%
0%
20%
40%
60%
FY16 FY17 FY18 FY19
DLM
Revenue growth (cc, organic)
EBITDA margins [RHS]
12 April 2017
Cyient Limited (CYIE.BO) 3
Structurally well placed, with solid momentum
Structurally well placed in the fast changing industry Cyient is among the few Indian companies with a large exposure (about 54%) to relatively
underpenetrated engineering services, with leadership in aerospace and transportation
verticals and some very strong client relationships. In communication (20% of revenue), there
are opportunities in the new network roll-out/upgradation, and Cyient has built some strong
capabilities in this area, with an expanding client base and wallet share. In utilities and
geospatial, Cyient's business has been growing in smart grid/smart meters and analytics.
Each of these segments are relatively immune from the difficult transition that the traditional IT
companies are undergoing (deflationary impact of cloud and automation, and shifting client
spends towards new areas). Also, with <15% of the US employees on visa, Cyient possibly
has the least exposure (by a wide margin) to the H-1B/L-1 visa, among Indian IT firms.
Gearing-up for integrated offerings Cyient has undergone several strategic changes in the last three years. Mr. Krishna
Bodanapu was elevated as the MD and CEO in 2014 and the company moved to a vertical
organisational structure. As part of its strategy to serve the client across the value chain
(called the S3 strategy), Cyient made several acquisitions. Rangsons, being a
manufacturing company, has been the most unique acquisition (rebranded as design led
manufacturing or DLM). The intention behind the S3 strategy is to offer integrated
services, ideation-design-prototype-maintenance in case of engineering and plan-build-
operate for telecom and utility verticals. For example, the aerospace business is much
diversified now, with over 50% non-design vs 30% a couple of years back. Cyient has
been able to win some contracts led by integrated offerings and management has
indicated a decent pipeline build-up. These deals can also have a higher margin profile.
Solid momentum in the business, some scope for
margin expansion Cyient's last three years have been volatile, due to client issues and low margins
predictability. However, management has been more confident on its business in the recent
quarters and this is backed by the numbers as well. With momentum by its side in the key
verticals and larger accounts, Cyient may report close to 13% revenue CAGR (organic,
constant currency) over FY17-19 in the services business (an incremental 2% inorganic
contribution in FY18). Rangsons can grow at 20% CAGR. The margins can also expand from
the current levels and operate in the 14-15% range at the company level (13.6% in FY17). In
the services business, we expect the EBITDA margins to slightly expand from the current
15% to 15.7% by FY19, helped by better G&A leverage, employee pyramid correction and
some recovery in Softential's margins. For the DLM (Rangsons) business, we expect margins
to recover from the current (FY17) 1% levels to 6% by FY19. We expect an impressive 15%
EPS CAGR over FY17-19, with a decent cash generation.
Initiate with OUTPERFORM We initiate coverage on Cyient with a 12 month forward target price of Rs625, which offers
32% potential upside. Cyient is likely to have the best in class earnings CAGR over the
next two years, and given the structurally strong positioning, and solid business
momentum, we value the company at 14x FY19E P/E. Its engg. svcs. peers trade at 14-
18x CY17E P/E (single to low double-digit EPS CAGR), while the mid-cap Indian IT peers
trade at 12-17x CY17E P/E (average EPS CAGR of 11%).
The key risks include any significant appreciation in INR or adverse cross-currency moves,
client-specific issues (high client concentration), acquisition indigestion and execution risks
on the outcome based projects.
Cyient is relatively immune to the
structural changes that the IT industry is facing
Possibly the least
exposed (by a wide margin) to the H-1B/L-1
visa
Expanding service capabilites to offer
integrated services; M&A—a key
component of the strategy; some initial
signs of success
Solid momentum in the key verticals and larger
accounts; >13% revenue CAGR
(organic, constant currency) over FY17-19, 15% EPS CAGR helped
by margin expansion
TP of Rs625, 32% potential upside
12 April 2017
Cyient Limited (CYIE.BO) 4
Cyient Limited (CYIE.BO / )
Price (10 Apr 2017): Rs473.05; Rating: OUTPERFORM; Target Price: Rs625.00; Analyst: Nitin Jain
Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E
Sales revenue 30,956 36,062 40,736 46,260 Cost of goods sold 20,083 23,653 26,701 30,189 EBITDA 4,247 4,897 5,683 6,735 EBIT 3,354 3,949 4,651 5,640 Net interest expense/(inc.) (121) (183) (270) (360) Recurring PBT 4,220 4,592 5,481 6,240 Profit after tax 3,234 3,483 4,220 4,805 Reported net profit 3,262 3,632 4,335 4,885 Net profit (Credit Suisse) 3,349 3,632 4,335 4,885
Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E
Cash & cash equivalents 6,951 8,339 10,446 12,834 Current receivables 6,145 7,045 7,958 9,037 Inventories 979 939 1,193 1,402 Other current assets 3,872 4,214 4,673 5,216 Current assets 17,947 20,537 24,269 28,489 Property, plant & equip. 4,084 4,429 4,415 4,476 Investments 796 1,024 1,144 1,264 Intangibles 2,708 3,260 3,260 3,260 Other non-current assets 1,835 1,786 1,786 1,786 Total assets 27,370 31,036 34,874 39,275 Current liabilities 6,676 7,705 8,412 9,232 Total liabilities 8,144 9,177 9,884 10,704 Shareholders' equity 19,098 21,765 24,891 28,432 Minority interests 128 94 99 139 Total liabilities & equity 27,370 31,036 34,874 39,275
Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E
EBIT 3,354 3,949 4,651 5,640 Net interest 0 0 0 0 Tax paid (1,024) (767) (1,261) (1,435) Working capital (931) (181) (919) (1,011) Other cash & non-cash items 1,386 947 1,033 1,095 Operating cash flow 2,785 3,948 3,504 4,289 Capex (1,287) (1,292) (1,018) (1,157) Free cash flow to the firm 1,497 2,655 2,486 3,132 Investing cash flow (848) (999) (18) (397) Equity raised 22 (1) 0 0 Dividends paid (1,619) (747) (1,209) (1,344) Financing cash flow (1,107) (1,560) (1,379) (1,504) Total cash flow 829 1,388 2,106 2,389 Adjustments 0 0 0 0 Net change in cash 829 1,388 2,106 2,389
Per share 03/16A 03/17E 03/18E 03/19E
Shares (wtd avg.) (mn) 112 112 112 112 EPS (Credit Suisse) (Rs) 29.06 32.33 38.72 43.63 DPS (Rs) 7.00 10.50 10.00 11.00 Operating CFPS (Rs) 24.81 35.15 31.30 38.31
Earnings 03/16A 03/17E 03/18E 03/19E
Growth (%) Sales revenue 13.1 16.5 13.0 13.6 EBIT 1.6 17.8 17.8 21.3 EPS (7.7) 11.3 19.8 12.7 Margins (%) EBITDA 13.7 13.6 14.0 14.6 EBIT 10.8 11.0 11.4 12.2
Valuation (x) 03/16A 03/17E 03/18E 03/19E
P/E 16.3 14.6 12.2 10.8 P/B 2.78 2.44 2.13 1.86 Dividend yield (%) 1.5 2.2 2.1 2.3 EV/sales 1.6 1.3 1.1 0.9 EV/EBITDA 11.4 9.5 7.8 6.2 EV/EBIT 14.4 11.8 9.5 7.4
ROE analysis (%) 03/16A 03/17E 03/18E 03/19E
ROE 17.8 17.8 18.6 18.3 ROIC 18.5 20.5 23.0 26.1
Credit ratios 03/16A 03/17E 03/18E 03/19E
Net debt/equity (%) (26.2) (31.2) (35.7) (39.6) Net debt/EBITDA (x) (1.19) (1.39) (1.57) (1.68)
Company Background
Cyient is a leading player in engineering services (large presence in aerospace/defence, transportation), network engineering (communication vertical) and operations management (verticals such as utilities).
Blue/Grey Sky Scenario
Our Blue Sky Scenario (Rs) 740.00
Stronger momentum in the top accounts supplemented by significant new account additions, and synergies from the recent acquisitions. EBITDA margins expand beyond the management's target of 14-15%. There can be upgrades to the earnings estimates and stock can re-rate significantly.
Our Grey Sky Scenario (Rs) 430.00
Issues in the top accounts drag the growth and acquisitions do not yield the desired results. Margins fall below tne target range. This can lead to earnings estimate downgrades and derating in the stock
Share price performance
The price relative chart measures performance against the S&P BSE SENSEX
IDX which closed at 29,575.74 on 10-Apr-2017
On 10-Apr-2017 the spot exchange rate was Rs64.58/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
12 April 2017
Cyient Limited (CYIE.BO) 5
Structurally well placed in the fast changing IT industry With an exposure in niche segments—engineering services (about 54% of revenue),
network engineering (20% of revenue) and utility/geospatial (15% of revenue)—Cyient is
structurally well placed in an otherwise fast changing IT industry. Engineering services is a
large and relatively underpenetrated market and is expected to grow slightly faster than
the Indian IT and BPO exports. Cyient has leadership positioning in the aerospace and
transportation verticals (together, they account for 75% of the engineering services
revenue), with some very strong client relationships. Indeed, it is among the few Indian IT
companies with such a large exposure to engineering services. In communications, there
are opportunities in the new network roll-out/upgradation and Cyient has built some strong
capabilities in this area, with an expanding client base and increasing wallet share. In
utilities and geospatial, Cyient's business has been growing in areas such as smart
grid/smart meters, analytics and asset utilisation.
Each of these segments are relatively immune from the transition that the traditional IT
companies are undergoing (deflationary impact of cloud and automation, and shifting client
spends towards new areas). Cyient has been witnessing new opportunities driven by IoT
and digital in its communication and utility business. Also, with less than 15% of the US
employees on visa, Cyient has possibly the least exposure to the H-1B/L-1 visa (the IT
services companies have visa dependency in the range of 45-65%). This makes Cyient
relatively immune from the regulatory overhang in the US.
Among the few players with a large exposure to the
structurally attractive engineering services market
Engineering services is among the fastest growing sub-segments of the overall Indian IT
services market as per NASSCOM. It involves the design, development, testing, rollout
and maintenance aspects of the product and process development chain (excludes mass
manufacturing) across the industries including automotives, hi-tech, aerospace/defense
and healthcare.
The global engineering services spend was over US$1 tn in 2016. and of this, US$232 bn
is the addressable market for the Indian players as per the management consulting firm,
Zinnov. The current Indian engineering services exports market size is over US$22 bn and
service providers (such as Cyient) have about 40% share in this (the in-house captives of
the global companies account for the remaining 60%).
There have been several structural factors driving this segment's growth including
shortening product life cycles (faster time-to-market), pressure on R&D budgets and talent
availability in India (with mechanical engineering capabilities). Indian engineering services
firms have, over a period, built onsite delivery facilities and have been incrementally
participating in innovation (with involvement in several IP creation).
Given low penetration and several structural drivers, this market is likely to grow at a
CAGR of 14% over 2016-20 to reach over US$35 bn in 2020 as per Zinnov's estimates, at
a pace slightly higher than the growth in the Indian IT services and BPO industry. Service
providers are likely to grow at a slightly higher pace than the captives.
Indian Engineering services market is
likely to grow at 14% CAGR over 2016-20
12 April 2017
Cyient Limited (CYIE.BO) 6
Figure 8: Engineering services is a large market globally; US$232 bn addressable market for the Indian IT
firms
Source: Zinnov, Credit Suisse. Note: The above numbers are for 2016
Figure 9: As per Zinnov estimates, the engineering services market (services providers segment) is
expected to grow at 14% CAGR over 2016-20
Source: Zinnov
Cyient is among the few pure-play players, with leadership in aerospace/defense and transportation
Cyient has a strong engineering services practice with some very solid client relationships
(such as Pratt and Whitney, Bombardier, etc.). Cyient is among the few Indian IT firms that
have a prominent exposure to the structurally attractive engineering services segment. As
per our estimates, about 54% of Cyient's overall revenue comes from engineering services
(engineering design). Among the listed Indian IT firms (with significant scale), only L&T
Technology Services has larger scale and exposure to the engineering services segment.
Corporate ER&D spend (US$1 tn)
G500 ER&D spend (US$621 bn)
Addressable Engineering Outsourcing (US$232 bn)
Global addressed market (>US$85 bn)
Market addressed from India (US$22
bn)
Market addressed by Indian service
providers (US$9 bn)
7.9
12.3
8.9
13.4
15.1
22.4
0
5
10
15
20
25
Engineering services - Service providers Captives
US
$ m
n
India engineering services market
2015 2016 2020
Engineering services account for about 54%
of Cyient's revenue
12 April 2017
Cyient Limited (CYIE.BO) 7
Cyient is a mature player in the aerospace/defense and transportation verticals
(particularly rail transportation) and has been consistently recognised as a leader in these
verticals by the industry analyst Zinnov. These verticals account for about 59% and 16% of
Cyient's engineering revenue, respectively.
Aerospace/defense manufacturing behemoth Pratt and Whitney (United Technologies
Corporation's subsidiary manufacturing aircraft engines that are used in both civil and
military aviation) is Cyient's largest client. Cyient has strengthened its relationship over the
years with UTC by broadening the service portfolio and has been recognised as the most
innovative supplier for three years in a row. Pratt and Whitney is also a strategic investor
in the company with 14% stake (held through its parent UTC group).
In transportation, Cyient works very closely with Bombardier in its rail segment, particularly
in rail signaling and electrification. The company has a pool of 450 signal design engineers
and this is a Europe dominated business. The semiconductor segment's share has come
down over the years, given industry consolidation and client specific factors; however, the
company believes this segment has bottomed-out. Medical and consumer electronics is a
small but high potential segment as per management.
Cyient's offerings in engineering services
Cyient has strong mechanical and evolving electronic capabilities. In aerospace/defense, it
offers services ranging from new engine/engine component design (mechanical design
using computer aided tools), avionics solutions (communication system, cockpit display
and navigation, etc.), manufacturing engineering solutions (such as process planning,
assembly engineering), and MRO (preparing repair schedules, predictive maintenance,
etc.). In the transportation segment, Cyient provides services including 3D design for rail
electrification, signaling design, and installation, testing and commissioning support. It also
has a large pool of employees with certain pre-requisite certifications such as IRSE.
Besides these, Cyient also provides semiconductor chip design services to the leading
semiconductor companies and services around embedded software (software to control
machines) across aerospace/defense, transport, medical and semiconductor industries.
Figure 10: Engineering services account for 54% of
Cyient's revenue
Figure 11: Cyient is among the few players with
scale and significant exposure to engg. svcs.
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates. * Includes revenue from Geometric # L&T Technology Services
Engineering services, 54%
Communication (networking) and Utility & GIS, 36%
Design led manufacturing,
11%
0%
20%
40%
60%
80%
100%
120%
0
200
400
600
800
1,000
1,200
1,400
1,600
HCLT* TCS Wipro LTTSL # QuEST Infosys Cyient TataElxsi
Mindtree
Engineering services revenue (US$ mn) % share [RHS]
Cyient has leadership positioning in the
aerospace/defense and transportation verticals
12 April 2017
Cyient Limited (CYIE.BO) 8
Figure 12: Cyient is a leading player in its largest vertical in engg. services—aerospace
Source: Zinnov
Figure 13: Similarly, it is a leading player in transportation, its second largest vertical in engg. services
Source: Zinnov
12 April 2017
Cyient Limited (CYIE.BO) 9
Some niche capabilities in telecom and utility
segments
Capabilities on the network side in communication
Communication is the second largest segment for Cyient (23% of the services revenue)
and it has built some strong capabilities on the network side. Cyient works with telecom
service providers on the network side (services such as network planning and design,
network optimisation, GIS, physical and logical inventory solutions). This segment has
scaled-up at a rapid pace in the last couple of years, led by fiber deployment through CAF
II (Connect America Fund) initiatives in the US, and shift from FTTP to FTTN and
opportunities for HFC (Hybrid Fiber Coaxial) networks in Australia and New Zealand.
Cyient's client base includes some of the leading telecom service providers (for example,
Telstra in Australia has witnessed significant traction for Cyient). Besides these, LTE
Broadcast is also an opportunity for the company as per management. The company
believes this segment can sustain the strong growth momentum built-up over the recent
quarters.
Cyient's offerings in communication
Cyient helps the telecom service providers with new network roll-outs (including fiber
deployment and network optimisation). Its services include planning, designing and
managing wireless and wireline networks, tools that automate error detection in network
design and help correct the error, and data analytics, besides business operations
management. It also has geospacial offerings for the communication vertical.
Utility and geospatial is another niche
Utility and geospatial (U&G) accounts for 17% of the company's services revenue and has
picked-up momentum in the recent quarters. The growth is primarily driven by increasing
work on smart meters, smart grids (upgradation of grids that have been in service for
many years), smart cities and incremental focus of utilities to optimise cost by better asset
utilisation. From spatial data creation, this business has graduated to generating insights
from the data. With smart meters and grids, Cyient is also incrementally witnessing
opportunities on the data analytics side. Some of the key clients in this segment include
Southern California Edison and TomTom. This is one of the key growth verticals for the
company in the medium term, besides communication.
Cyient's offerings in utility and GIS
Cyient's offerings for utility industry include data analytics (data maintenance and
cleansing – a significant part of the business), field engineering (tie-ups with several field
contracting agencies for this—it includes field survey, pole data digitalisation, data
analytics, predictive maintenance), meter data management system (systems
implementation, integration with upstream and downstream applications), and outage
management system implementation and integration. It also provides location based
services (GIS) for navigation (TomTom a key client), and utility customers.
Business model is different from IT services;
structural shifts not equally relevant in engg. svcs.
Indian IT firms going through a structural shift…
The traditional IT business has been going through several structural shifts at the moment.
While the overall IT spends are likely to increase, there is a shift in mix from old to new.
Cloud, automation, and overall cost pressure are having a somewhat deflationary impact
on the traditional IT spends of the clients. This saving is being diverted to the new areas,
collectively termed as digital (including modernising the front-end, back-end, and use of
IoT, Big Data). Indian IT services companies are also going through this structural shift—
Communication is 23% of Cyient's revenue;
network roll-out/upgradation
initiatives by telecom service provider driving
Cyient's business
Smart meter, smart grid, analytics, etc., are
driving growth in utility/geospatial
For the traditional IT firms, Cloud and
automation are having a somewhat
deflationary impact on client spends
12 April 2017
Cyient Limited (CYIE.BO) 10
they have to cannibalise their existing revenue streams (by offering the
automation/productivity gains to the clients). To capture the increasing digital spends (to
compensate for the cannibalisation in the traditional business and for the incremental
revenue), they need to build new services capabilities and retrain the existing large
employee base.
… Cyient's business is relatively immune from this changes
Unlike the IT services, the engineering services business is relatively immune to the cloud
cannibalisation, and scope for automation is also limited. Also, the ER&D budget in the
organisations is separate from the IT budget—engineering services companies deal with
different people in the client organisation (unlike CIOs in the case of traditional IT). The
employee profile too is different—a major chunk of Cyient’s employees in the engineering
business have a mechanical engineering (and increasingly also in electronic and
aeronautical engineering) background. On the other hand, similar to IT services, spends
on digital (particularly IoT) is a net positive for the engineering services players.
The other niche offerings on the network and GIS are also relatively immune to these
structural shifts. Indeed, with the incremental focus on smart meters/smart grids and
upgradation in telecom networks to support the data usage, the digital shift has been
driving the company's business in the utility and telecom segments.
Similar to pure IT services, engineering services firms are too adopting models such as
risk sharing with the clients, which are more complex than the traditional time and material
and fixed price models.
Among the least visa dependent Indian IT firms
Cyient employs a significant number of local employees in the US, given the nature of
some of its businesses such as defense, and also several acquisitions made by the
company. As per the company, the share of US employees on visa is currently below
15%, which would effectively mean it is not a visa dependent employer (the typical
definition of a visa dependent employer is one with more than 15% US employees on
visa). Among the IT services companies that have shared their visa dependency, it ranges
from 45-65%).
Given the current uncertainties on the potential changes in the visa rules (change in
allocation methodology, minimum wage, etc.), particularly aimed at the visa dependent
employers, we believe a significantly low visa exposure bodes well for Cyient, making it
relatively immune to this overhang.
Figure 14: Cyient has a very low exposure to visa, possibly the lowest among
the Indian IT and engineering services players
Source: Company data, Credit Suisse estimates
0% 10% 20% 30% 40% 50% 60% 70%
Tech Mahindra
L&T Technology Services
Hexaware
Wipro
Persistent Systems
HCL Tech
Cyient
% of US employees on visa
Cyient's business is relatively immune to
the cloud cannibalisation, and
scope for automation is also limited
Cyient's H-1B/L-1 visa dependence is below
15% vs 45-65% for the Indian IT peers
12 April 2017
Cyient Limited (CYIE.BO) 11
Gearing-up for integrated offerings Cyient has undergone several strategic changes in the last three years. Mr. Krishna
Bodanapu was elevated as the MD and CEO in 2014 (after spending several years with
the company). Cyient moved to a vertical (business unit) organisation structure (from
earlier service line driven structure), with a focus on further building domain specific
capabilities (the company added several domain experts). As a part of its strategy to
broaden the service portfolio to serve the client across the value chain (also called S3
strategy), Cyient also made several acquisitions (Rangsons, GSEA, Certon and Blom
Aerofilms). Rangsons, being a manufacturing company, has been the most unique one—
later rebranded as design led manufacturing (DLM).
The intention behind this strategy is to offer integrated services (across the value chain),
ranging from ideation, design, prototype manufacturing to maintenance in case of
engineering and plan-build-operate for telecom and utility verticals. With these initiatives,
the aerospace business is much more diversified, with over 50% of revenue outside the
design work (which is more cyclical) vs 30% a couple of years back Cyient has been able
to win some contracts led by integrated offerings and management has indicated a decent
pipeline build up. Such deals can also have higher than company average margins.
Strategic realignment of business with a sharper
focus on domain specialisation
Cyient went through a strategic restructuring in 2014. It rebranded itself (from erstwhile
Infotech Enterprises) and appointed Mr. Krishna Bodanapu (son of the founder—he spent
several years in the company in sales, marketing, account manager, and recently as
COO) as MD and CEO (the founder and then CEO Mr. BVR Mohan Reddy assumed the
role of Executive Chairman). The company moved to a vertical (business unit)
organisational structure (from earlier service line driven structure), with a focus on further
building domain specific capabilities.
The business has been divided into seven business units (aerospace and defense,
transportation, communications, medical and healthcare, utilities and geospatial (U&G);
semiconductor, and industrial, energy and natural resources), each with a separate P&L.
For the larger verticals such as aerospace/defense, transportation, communication and
U&G, the company also has separate delivery heads and geographic sales heads within
the verticals. Additionally, design led manufacturing (the Rangsons business) is a separate
business unit to address the opportunity across the seven verticals.
The company has hired some senior resources in the last couple of years. For example,
Cyient hired Mark Ewen from CSC (erstwhile Global Industry General Manager for CSC'
energy & utilities, oil & gas, and natural resources industries) as Vice President of U&G
business. Recently, it also appointed Suman Narayan as the head of semiconductor
business (he has 20 years' experience in the semiconductor industry). For design led
manufacturing business, it hired Dr. Venki Padmanabhan who has 26 years of experience
in manufacturing (senior leadership positions in companies such as Royal Enfield,
DaimlerChrysler and General Motors).
Cyient went through several strategic
changes in the last three years, including
verticalisation
12 April 2017
Cyient Limited (CYIE.BO) 12
Figure 15: Cyient has organised the business around eight business units
Source: Company data
Broadening the service portfolio to increase the
addressable market
As a part of the restructuring exercise, Cyient laid out a new strategy to broaden the
service offerings to increase the addressable market, termed as S3 (Services, Systems,
and Solutions). The underlying objective was to have capabilities to service the clients
across the value chain, right from the ideation phase to design, prototype development,
testing and maintenance, thereby helping to mine the clients better. The most significant
change in the strategy has been the addition of the manufacturing capabilities through
Rangsons acquisition (this is now rebranded as design led manufacturing).
S3 strategy has two parts. For the engineering services business, Cyient is targeting the
design-build-maintain value chain, while for the network business (telecom), the S3
strategy is based on plan-build-operate value chain.
Figure 16: Focus to broaden the service portfolio and increase the addressable market
Source: Company, Credit Suisse
0
20
40
60
80
100
120
140
160
180
200
Aerospace/Defense Communication Utilities andGeospatial
Design LedManufacturing
Transportation Industrial and ENR Semiconductor Medical andHealthcare
Cyient's business units with annualised revenue run-rate (US$ mn)
BuildTest
Analyse
Connect
Operate
Maintain
Ideate
Design
Engineer
15% share in typical client’s spend across the value chain
Addressed by: Cyient core engineering
business GSEA - Pratt and Whitney
(MRO engineering)
50% share in typical client’s spend across the value chain
Addressed by: Rangsons (prototype, small
scale manufacturing) Certon (testing)
35% share in typical client’s spend across the value chain
Addressed by: Softential (monitoring the
communication network performance)
Invati Insights (Analytics) Blom Aerofilms (data analytics
for utility)
S3 strategy aimed at broadening the service
offerings to serve the client across the value
chain
12 April 2017
Cyient Limited (CYIE.BO) 13
Several acquisitions to fill the service gaps
Cyient has an active M&A strategy, and over the last three years (since the company
launched the new S3 strategy), all the acquisitions have been aligned to the S3 strategy.
For example, Rangsons acquisition in FY15 addressed the solutions part of the S3
strategy. The GSEA acquisition in FY16 was towards scaling-up the MRO practice in the
aerospace/defense verticals. Softential acquisition was on the operations side of the
telecom business, and the most recent Certon acquisition brings testing capabilities for
avionics. Besides Rangsons, all the other acquisitions have been smaller in size (US$10-
17 mn in terms of revenue).
Management follows a certain set criteria for M&A—it typically looks for 6-8 years payback
on acquisitions. The focus is on integrating the service offerings in the first year of
acquisition itself (so that the Cyient sales people should be able to sell the acquired
company's offerings and vice versa). The company witnessed some challenges in the
Softential acquisition (this business was let to run independently for two years) and is now
focusing on integrating it with rest of the business.
Cyient also has a corporate venture arm that invests in start-ups in the emerging area—
the company has identified medical technology, communication technology, IoT and
advanced avionics as the preferred area of investments.
Figure 17: Cyient's recent acquisitions have been aligned to the S3 strategy
Acquired entity Year Consideration
(US$ mn)
Revenue run-rate
(US$ mn)
Margin profile at the
time of acquisition
Particulars
Invati Insights FY15 NA 1 NA Data analytics start-up.
Softential FY15 >19 17 Above company
average
Designs, implements and manages systems and applications that monitor and
control communication network performance.
Rangsons FY15 60 (74% stake) 66 2-4% Electronics system design and manufacturing (prototype, SI/testing and small
scale production). Addresses the "Solutions" part of the S3 strategy.
Pratt & Whitney
(GSEA)
FY16 6-7 12 12-14% Engineering and repair unit of the US-based aircraft engine manufacturer Pratt
and Whitney. Strengthens the MRO practice. Got four year volumes
commitment from Pratt and Whitney.
Blom Aerofilms FY17 NA 10 10% Geospatial solutions: data modelling, data acquisition and data processing.
Complements the utility business. Has 40 employees in the UK.
Certon FY17 8 7 Low double digit A testing and validation provider for various parts of the Avionics value chain.
Source: Company data, Credit Suisse estimates
Aerospace: diversification from design to production
and MRO engineering
Traditionally, Cyient's aerospace/defense business has been dominated by its design
related services for new engine designs (Cyient has leadership in this segment). Typically
engine design cycle is followed by production cycle and this has a negative impact on the
traditional design business of the engineering services firms such as Cyient (though there
is always some work on design modification, re-engineering, production engineering, etc.).
Over the years, Cyient's management has proactively broadened the service portfolio. The
GSEA (Pratt and Whitney's arm) acquisition helped Cyient expand the repair engineering
practice. The GSEA acquisition provided Cyient with a presence in Singapore, which is a
large MRO market. At the time of acquisition, GSEA was working exclusively for Pratt and
Whitney; however, Cyient has extended the offering outside Pratt and Whitney. The
company is also expanding its presence in avionics. The recent acquisition of Certon
provides capabilities in testing and validation for various parts of the avionics value chain.
The engine design programs cycle has completed at Pratt and Whitney and there is an
increasing activity on the manufacturing side. Cyient's pro-active initiatives to broaden the
service portfolio are helping it navigate the shift of activity from design to manufacturing.
Several acquisitions in the last three years—all
aligned to the S3 strategy
In aerospace/defense, the spending has been
shifting from new engine design to
production
Cyient has realigned its business with non-
design related business now
accounting for over 50% of revenue (vs.
30% earlier)
12 April 2017
Cyient Limited (CYIE.BO) 14
From about 70% of the aerospace/defense revenue, the share of design related work has
come down to about 50% now (it still continues to grow as per management) with the
other 50% consisting of manufacturing engineering, avionics, MRO and testing.
Figure 18: Cyient has diversified its aerospace
/defense business with broadening of service
offerings
Figure 19: With estimated increase in the fleet size,
the MRO market is likely to grow at over 5% CAGR;
Cyient through its offering can play a role
Source: Company data, Credit Suisse estimates Source: Oliver Wayman, Company data, Credit Suisse estimates
Design led manufacturing: a non-conventional
approach; some signs of synergies
Cyient acquired Rangsons in 2014 and since then it has been in the process of aligning
the business in line with the design led manufacturing strategy. Rangsons also provided
access to certain certifications that are a must to work with some of the larger
aerospace/defense manufacturers, and these were hard to build internally.
At the time of acquisition, the revenue was largely driven by the isolated manufacturing
related business—the focus has since then shifted to look at more integrated
opportunities, where Cyient is also involved in design, within the focus verticals—
aerospace/defense, medical and transportation. Cyient has been able to win some
contracts led by integrated offerings and management has indicated a decent pipeline
build up. The share of pure defense offset related work has also reduced, as per
management, in favour of more strategic work.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Couple of years back Now
Cyient's aerospace/defense engineering business break-up
Design MRO, production engineering, Avionics etc
0
20
40
60
80
100
120
2015 2020 2025
MRO market size estimates (US$ bn)
Airframe Engine Component Line
5.9%CAGR
4.8%CAGR
Design led manufacturing is a
unique initiative—fits well with the S3
strategy
12 April 2017
Cyient Limited (CYIE.BO) 15
Solid momentum in business, some scope for margin expansion Cyient's last three years have been volatile due to client-specific issues and low
predictability on margins. However, things have stabilised in the recent quarters and the
company is well positioned for a decent earnings growth in the medium term. Management
has sounded more constructive on its business in the recent quarters and this is backed
by the numbers as well. Momentum is stable to positive in the larger verticals and top
accounts too are growing at a solid pace now, with both top-5 and top-10 accounts
growing at 20% or above in Dec-16 (LTM, YoY, US$) vs a flat to declining trajectory in
Mar-16.
Cyient is likely to exit FY17 with 12% revenue growth (constant currency, organic) in the
services business and 40% growth in the DLM business. With momentum by its side in the
key verticals and the larger accounts, we expect the company to report close to 13%
revenue CAGR in organic, constant terms over FY17-19 in the services business.
Acquisitions such as Certon and Blom Aerofilms will have an incremental 2% revenue
contribution to FY18 revenue. Rangsons can grow at over 20% CAGR.
We believe the margins have some scope to expand from the current levels and operate in
the 14-15% range at the company level. In the services business, we expect the EBITDA
margins to slightly expand from the current 15% to 15.7% by FY19, helped by better G&A
leverage, employee pyramid correction and some recovery in Softential's margins. For the
DLM (Rangsons) business, we expect margins to recover from the current (FY17) 1%
levels to 6% by FY19, taking the overall company margins to close to 14.6%. We expect
over 15% EPS CAGR over FY17-19, with a decent cash generation.
Last three years have been volatile; some stability in
the recent quarters
Last three years have been very volatile for Cyient, and FY16 was a low point. From mid-
teens in FY15, the organic revenue growth decelerated to low single digit in FY16. Margins
too deteriorated from 18%+ levels in FY14 to around 15% levels in FY15, and have further
come down to 14% in FY16—significantly missing management's own expectations.
Rangsons' (acquired towards the end of FY15) orderbook took longer than expected to
convert into revenue, and that resulted in FY16 actual results to be significantly different
(lower) from management's earlier expectations.
Several forces at play led to this volatility. Similar to the any other mid-sized Indian IT firm,
Cyient has a high client concentration, and hence, any significant momentum change in
the top accounts can impact the overall momentum for the company. Unfortunately, Cyient
witnessed loss of momentum in several of its top-10 accounts (clients such as TomTom,
Southern California Edison and IBM), due to client specific situations. TomTom internally
went through a change in platform from on-premise to cloud, which had a transitory impact
on Cyient's business (there was also a price re-negotiation as per the contractual terms).
Due to some profitability challenges in the Southern California Edison (utility) account,
management became selective, and the semiconductor business got impacted due to the
sale of IBM's semiconductor unit to Global Foundries. Besides these, the energy vertical
had its own challenges due to low oil prices.
Margins were even more volatile than revenue. The changing nature of services (from
traditional offshore heavy to onsite heavy) and lower predictability in the acquired entities
(Rangsons and Softential) during the initial years of acquisition, significantly hampered
management's ability to manage margins. The company missed the margin guidance for
three consecutive years (the most significant one in FY15).
Last three years were volatile for Cyient, due
to client specific issues, and changing
nature of services
12 April 2017
Cyient Limited (CYIE.BO) 16
Some stability in the recent quarter; management's targets now appear more realistic
There has been some stability in the recent quarters—the growth momentum has been
accelerating again, and margins have also stabilised at about 13.5% levels. More
importantly, management is more realistic in terms of its targets, particularly for the
acquired businesses., e.g., Softential used to have 20% + margins till FY15, which
deteriorated to single digit in FY16; its management is currently not building in return-back
to 20% levels.
Figure 20: Services business' revenue growth
momentum slightly improved; margins stable at the
last two year levels
Figure 21: Rangsons (DLM) business too has
witnessed orderbook conversion in revenue, but
margins have suffered
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 22: Onsite revenue mix increased sharply
over the last three years
Figure 23: Overall EBITDA margins came down from
18-19% in FY14 to 14% levels now
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Mar-14 Mar-15 Mar-16 Dec-16
Services business (Ex-Rangsons)
Revenue growth (LTM, YoY, cc, organic) EBITDA margin (LTM)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0
10
20
30
40
50
60
Dec-15 Dec-16
Rangsons (Design Led Manufacturing)
Revenue (LTM, INR mn) EBITDA margin (LTM)
40%
45%
50%
55%
60%
65%
Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Onsite mix
5%
7%
9%
11%
13%
15%
17%
19%
Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Overall EBITDA margin (LTM)
Revenue growth picking-up and margins
have stabilised
12 April 2017
Cyient Limited (CYIE.BO) 17
Top account momentum is solid; vertical specific
headwinds are largely behind
Management has sounded more constructive on its business outlook in the recent
quarters and this is backed by the numbers as well. Momentum is stable to positive in the
larger verticals and top accounts too are growing at a solid pace now, with the top-5 and
top-10 accounts growing at 20% or above in Dec-16 (LTM, YoY, US$) vs flat to declining
revenue in Mar-16. Order intake momentum (based on the limited historical data) also
appears strong—the order intake was US$189 mn in Dec-16 in the services business (vs
US$170 mn in Dec-15, and US$160 mn in Mar-16).
In its largest vertical—aerospace and defense, management continues to witness
momentum in production engineering, MRO and avionics offerings, and believes Europe
could offer incremental growth opportunities (the current aerospace/defense business is
largely US dominated). The top account’s (Pratt and Whitney) momentum is also strong.
Any defense-related opportunities in the US market can be an incremental driver for the
business.
The communication business' growth has picked up from barely double digit to about
25% (in LTM, YoY, USD terms) and the growth has been more broad-based, with
contribution from APAC (Australia) as well as US. The strong growth momentum is likely
to sustain as the programs are long cycle and the company sees a decent demand
environment. Softential business appears to have stabilised with a new management team
in place.
The utilities and geospatial vertical has turned positive, with re-acceleration in accounts
such as Sothern California Edison and TomTom. The business is driven by smartcity,
smartgrid, legacy grid upgradation and cost optimisation focus of clients through higher
asset utilisation. IoT is a tailwind for this business. After several quarters of decline (on
YoY basis), this business is now growing at 20% YoY rate (20% and 23% YoY growth in
2Q FY17 and 3QFY17, respectively).
The transportation vertical is growing below the company average (1% in USD, 6% in
constant currency). There is an acceleration nonetheless from Mar-16 (3% decline). The
company is exploring opportunities in Eastern Europe and Australia, and is optimistic of
returning to double-digit growth in constant currency terms.
Among the smaller verticals, the energy vertical (part of industrial, energy and natural
resources business unit) remains a headwind, while the semiconductors segment has
finally returned to a small growth (+2% YoY) in Dec-16 after several quarters of decline.
Medical and consumer electronics is a smaller vertical, but it continues to grow at a
rapid pace (36% LTM, YoY growth in Dec-16). High double-digit growth can sustain, as
per management.
After a challenging FY16, Rangsons is tracking in line with management's plans (at least
on the revenue front), with some early success on the design led deals as envisaged by
management in its S3 strategy. Management is optimistic of a strong FY18 as well.
Momentum is stable to positive in the key
verticals
Top-5 and top-10 accounts grew at 20% (LTM, YoY) in Dec-16
Production engineering, MRO and
avionics, and Europe offer incremental
growth opportunities in aerospace/defense
Communication business growing at
25%; strong momentum to sustain
Utility/geospatial has turned-around, growing
at 20% now
Transportation is growing at a slower
pace, but there is some acceleration
After challenging FY16, DLM is tracking in-line
with plans; FY18 can also be strong
12 April 2017
Cyient Limited (CYIE.BO) 18
Figure 24: Pick-up in momentum across most of the verticals; outlook is net
positive
% of revenue Revenue growth* Growth Change in outlook
Mar-16 Dec-16 outlook (vs. a year back)
Aerospace and Defense 36% 7% 7% ▲ ◄►
Communications 23% 10% 25% ▲ ◄►
Utilities and geospatial 17% -18% 5% ▲ ▲
Transportation 9% -3% 1% ^ ◄► ◄►
Industrial, Energy and
Natural Resources)
9% -8% -9% ▼ ▲
Semiconductor 4% -17% -13% ◄► ◄►
Medical and Consumer
Electronics
2% 6% 36% ▲ ▲
Source: Company data, Credit Suisse estimates. * LTM, YoY, US$, organic ^ growing at 6% rate in constant currency
Figure 25: Top account momentum has been solid; management has positive
outlook for most of the top accounts across verticals
Source: Company data, Credit Suisse estimates. Note: number in the dotted box represent revenue share of top-5, top-10 and top 6-10 accounts
Expect close to 13% revenue CAGR (organic, cc)
over FY17-19 in the services business; 20% in DLM
Cyient is likely to exit FY17 with 12% revenue growth (constant currency, organic) in the
services business and about 40% growth in the DLM business. With momentum by its side
in the key verticals and the larger accounts, we expect the company to report close to 13%
revenue CAGR in organic, constant terms over FY17-19 in the services business.
Acquisitions such as Certon and Blom Aerofilms will have an incremental 2% revenue
contribution to FY18 revenue. We expect the strong growth momentum in the
communications and utility business to sustain, aerospace/defense and transportation
business to grow at or below (for the latter) the company average, and gradual recovery in
the semiconductor and ENR verticals (both are currently in negative trajectory on LTM
basis, but have shown signs of recovery on sequential basis).
Though management expects strong growth momentum in the DLM business gaining
confidence from the FY17 performance, we build-in a relatively conservative 20% CAGR
in this segment.
-5%
0%
5%
10%
15%
20%
25%
30%
Top 5 Top 10 Top 6-10
Revenue growth (LTM, YoY, US$)
Mar-16 Dec-16
44% 58% 15%
Overall, we expect over 13% organic revenue
CAGR (constant currency) over FY17-19
We built-in a conservative 20% CAGR in the DLM
business
12 April 2017
Cyient Limited (CYIE.BO) 19
Figure 26: We expect close to 13% revenue CAGR (organic, cc) over FY17-19 in
the services business; 20% in DLM
Source: Company data, Credit Suisse estimates
Some scope for margin expansion as well
Cyient had a margin reset over the last three years. From the 17-19% range, EBITDA
margins have come down to 13-14% range. There have been two key reasons for this
margin reset—first, the onsite revenue mix increase over the years (from 50% in FY14 to
~60% in FY17). This itself could have about 300-350 bp negative impact on the margin.
Second, the Rangsons and Softential acquisitions had about 150-200 bp negative margin
impact (the former's margins have been under pressure due to Cyient's strategic
investments, and the latter's margins suffered due to revenue volatility). Additionally,
Cyient has made certain investments in terms of hiring consultants and domain experts.
We believe the margins have some scope to expand from the current levels and operate in
the 14-15% range at the company level (we expect it to improve from 13.6% in FY17 to
14.6% in FY19). In the services business, we expect EBITDA margins to slightly expand
from the current 15% to 15.7% by FY19, helped by better G&A leverage, employee
pyramid correction and some recovery in Softential's margins. For the DLM (Rangsons)
business, we expect margins to recover from the current (FY17) 1% levels to 6% by FY19.
Figure 27: Acquisitions and onsite mix shift have been the key reasons for
margin contraction in the last three years
Source: Company data, Credit Suisse estimates. * percentage points
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
FY14 FY15 FY16 FY17E FY18E FY19E
Revenue growth (cc, organic)
Services business Design led manufacturing (Rangsons) [RHS]
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
FY14 EBITDA margin Dilution due toRangsons
Dilution due toSoftential
Increase in onsite mix(10 pp*), wages, offset
by efficiency gains
Current margins
Recovery in acquired companies' margins,
G&A leverage, pyramid correction and
improvement in attrition are some of
the key margin levers
EBITDA margins likely to improve from 13.6%
in FY17 to 14.6% in FY19
12 April 2017
Cyient Limited (CYIE.BO) 20
Figure 28: With slight expansion in the services business margins, and
recovery in the DLM business, we expect the overall EBITDA margins to
improve from 13.6% in FY17 to 14.6% in FY19
Source: Company data, Credit Suisse estimates
Onsite/offshore mix could be neutral to positive
The recent sharp increase in Cyient's onsite revenue mix reflects the nature of the
business. In Aerospace projects such as manufacturing engineering, process planning,
repair engineering, etc., closer proximity with the client is needed. Similarly, defense-
related projects too have a higher onsite requirement, due to regulatory requirements. In
the telecom business as well, given Cyient works on the networking side, a lot of work
requires deep knowledge of local regulations, geography, etc. However, management
believes that onsite mix could have plateaued at about 60%, and further increase is
unlikely from the current levels. Indeed, the focus is on slightly increasing the offshore mix.
Tailwind from the acquired entities
Rangsons can contribute to margin expansion in the medium term. Historically, it had 10%
margins. Realignment of accounting policies in line with that of Cyient caused 2% impact
on Rangson's margins. Also, Cyient has beefed up the senior management team at
Rangsons to execute the Design Led Manufacturing (DLM) strategy. The current LTM
margins have come down to below 1% (2% in Dec-16), which can move to 5-6% levels in
the next couple of years, as the business scales-up. If Cyient manages to successfully
execute the DLM strategy and secure integrated deals, it can improve the margins even
further.
Softential business, when acquired, had significantly higher margin profile (EBITDA
margins used to be 25-30% in FY15). However, the margins deteriorated to single digit in
FY16 and continue to remain at depressed levels. The reasons have been sluggishness in
the software part of Softential's revenue. Any pick-up in growth in Softential could also
have positive impact on the company margins. Management conservatively expects no
tailwind from improvement in Softential margins, due to somewhat weaker predictability in
this business.
Several other margin levers
Cyient has hired several domain experts and consultants, and has also opened several
delivery centers (some of them onsite/near-shore). Consistent mid-teens revenue growth
can offer operating leverage. The attrition has moved up from 17-18% to over 25% in the
last three years. Higher attrition also has associated costs (with indirect implications on the
margins), and any normalisation in attrition (as expected by the management) could also
be one of the margin levers in the medium term. Although Cyient is currently operating at
over 78% utilisation (which is the highest in the last five years), there could be scope for
some further expansion. The company has also operated at 80% utilisation in the past.
0%
1%
2%
3%
4%
5%
6%
7%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
FY14 FY15 FY16 FY17E FY18E FY19E
EBITDA margin
Services business DLM [RHS]
Onsite mix could have plateaued at about
60%. Focus is on bringing it down by a couple of percentage
points
DLM business margins can improve from 1-2%
to 5-6%
While management conservatively does
not build-in any tailwinds from
Softential, any pick-up in growth could have
margin benefits as well
G&A leverage, improvement in
attrition and employee pyramid correction are
the other levers
12 April 2017
Cyient Limited (CYIE.BO) 21
Figure 29: Broadening of employee pyramid could
be one of the margin levels in the medium-term
Figure 30: Normalisation of attrition can also help
margins
Source: Company data Source: Company data
Greater focus on cash generation
Consistent and better cash generation has been one of the focus areas of management,
through better receivable management and prudent capex. The receivable days have
come down from the peak of 86 days in FY12 to close to 70 days in 3Q FY17 for the
company as a whole. In the services business, the receivable days (including unbilled
revenue) have improved from 80-90 days a couple of years back to 75 days in Dec-16. As
per the company, every Business Unit head's KRA also includes cashflow targets, besides
the usual revenue and profitability targets.
Rangsons business has been generating negative free cash flow at the moment (over
Rs200 mn in 9M FY17) and the focus is on turning it positive in the medium term. That
should further support the overall cash generation, in our view.
Figure 31: Cash generation has improved over the
years…
Figure 32: … With greater focus on accounts
receivables
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
32% 36%
68% 64%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY15 FY16
< 1 year experience > 1 year experience5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
25%
Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16
Voluntary attrition
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Rs mn
CFO FCF50
55
60
65
70
75
80
85
90
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Receivable days
Consistent and better cash generation has
been a key focus area; significant
improvement in receivable days in the
last two years
12 April 2017
Cyient Limited (CYIE.BO) 22
Initiate with OUTPERFORM
TP of Rs625, with 32% potential upside
We initiate coverage on Cyient with a 12-month forward target price of Rs625, which offers
32% potential upside.
With its large exposure to faster growing engineering services (and strong positioning in
the key verticals), and telecom networking/utility domains, Cyient is structurally well placed
relative to its IT Services peers. The on-going structural shifts in the IT Services industry
are relatively less relevant for Cyient's businesses. A large local employee base in the US
(below 15% of the US employees are H-1B/L-1 visa dependent), also makes the company
much immune to the potential adverse changes in the US visa regulations (one of the key
headwinds for the IT Services sector in general at the moment). Structurally, we see the
fundamental trends to be robust for the company.
With top accounts performing well, the business momentum is solid in the telecom, utility
and medical (through small) verticals, and there is stability in the largest vertical
aerospace/defense and the third largest vertical, transportation. After several quarters of
sluggish growth, the semiconductor and energy verticals seem to have bottomed out and
may no longer be a significant overhang on the company's growth rates. Rangsons
business too has witnessed the orderbook translating into revenue.
After disappointing the street for the last 2-3 years on margins, management is now more
conservative with its outlook, the near-term range of 14-15% EBITDA margins appear
realistic to us given several levers available with the company.
The company's strong positioning in a structurally well placed industry, and positive
momentum in the top accounts and business verticals should help the company grow at a
pace higher than the overall industry average. With a scope for slight margin expansion,
we expect the company to report 15% earnings CAGR over FY17-19, which could be
among the best in the industry.
Value the company at 14x FY19E P/E
We value Cyient using a 14x 24-month forward P/E multiple. Given slightly different
industry dynamics, Cyient is not exactly comparable with the IT Services company. Hence,
we also use European engineering services companies such as Altran, Alten, Akka and
Indian pure-play engineering services company L&T Tech Technology Services as the
valuation benchmarks. The European engineering services companies trade at an
average CY17E P/E multiple of 16x (range of 14x to 18x), with CY16-18E earnings CAGR
in single digit (except for Akka, which, as per the consensus estimates, is likely to have
35% CAGR). The Indian peer L&T Technology Services trades at over 17x CY17E P/E,
with consensus earnings CAGR of 13% over CY16-18. Though not exactly comparable,
the mid-cap Indian IT peers trade at 12-15x CY17E P/E, with an average growth
expectation of 11% EPS CAGR. (On consensus estimates for not covered stocks.)
Cyient's RoE (18%) is similar to that of its European peers, but much lower than that of
L&T Technology Services (30%+). We believe, the lower RoE partly reflects the
acquisitions made by the company to enhance capabilities for future growth. With earnings
growth expectations higher than the peers (at 15%+), and a positive business momentum,
we assign a 14x target P/E multiple to Cyient, which looks comfortable in comparison with
the mid-sized IT peers and the engineering services firms.
We expect the company to report 15%
earnings CAGR over FY17-19, which could be among the best in
the industry
Cyient's engg. svcs. peers trade at 14-18x CY17E P/E (single to low double-digit EPS
CAGR) and the mid-cap Indian IT peers trade at
12-17x CY17E P/E (average EPS CAGR of
11%)
With earnings growth expectations higher
than the peers (at 15%), and a positive business momentum, we assign
a 14x target P/E multiple to Cyient
12 April 2017
Cyient Limited (CYIE.BO) 23
Figure 33: With over 15% EPS CAGR estimate, Cyient trades at attractive multiples relative to its global as
well as Indian peers
Company Mcap (US$
mn)
Sales
(US$
mn)
Sales
CAGR
EV/Sales EBITDA
CAGR
EBITDA
margin
EV/EBITDA EPS
CAGR
P/E ROE Price performance
CY16 CY16-
18
CY17 CY18 CY16-
18
CY17 CY17 CY18 CY16-
18
CY17 CY18 CY17 CY18 1Y 3Y 5Y
Global engineering services
Altran* 2,868 2,346 6% 1.2 1.2 nm 12% 10.7 9.6 10% 16.5 14.6 17 17 27% 94% 250%
Alten* 2,493 1,934 5% 1.2 1.2 6% 11% 11.3 10.6 3% 17.3 16.0 17 16 30% 86% 211%
Bertrandt* 956 1,098 4% 0.9 0.9 5% 12% 7.3 6.7 5% 13.9 12.8 17 16 -11% -17% 57%
Akka* 912 1,242 7% 0.7 0.7 20% 9% 8.3 7.4 34% 15.0 12.6 24 24 65% 118% 185%
Assystem* 748 1,057 4% 0.7 0.7 10% 8% 8.6 7.9 5% 14.9 13.6 19 19 33% 39% 90%
Indian engineering services
Cyient 825 469 12% 1.4 1.3 17% 16% 9.1 7.7 16% 12.7 11.2 17 17 4% 49% 189%
L&T Technology services* 1,247 482 11% 2.3 2.1 14% 19% 12.3 10.9 13% 16.6 14.7 34 31 NA NA NA
Indian IT services (tier-2)
L&T Infotech* 1,910 934 10% 1.8 1.6 8% 18% 9.9 9.0 7% 12.5 11.6 36 32 NA NA NA
Mphasis* 1,818 910 7% 1.5 1.4 9% 16% 9.4 8.7 9% 13.3 12.3 13 14 14% 33% 41%
Mindtree 1,160 758 8% 1.4 1.2 14% 15% 8.9 7.6 16% 14.8 12.1 19 20 -33% 30% 260%
Hexaware 969 512 10% 1.6 1.4 12% 18% 8.7 7.7 11% 13.3 11.8 0 0 -16% 24% 74%
Persistent* 700 412 15% 1.3 1.1 18% 17% 7.6 6.5 15% 13.1 11.2 18 19 -21% 8% 242%
Indian IT services (tier-1)
Infosys 33,751 10,012 9% 2.7 2.4 9% 27% 9.8 8.9 8% 14.6 13.3 21 21 -20% 18% 39%
TCS 73,924 17,289 9% 3.7 3.4 8% 27% 13.6 12.4 7% 17.7 16.2 27 26 -3% 14% 117%
Wipro 19,272 8,104 5% 2.3 2.2 7% 21% 11.3 10.3 8% 13.8 12.4 17 17 -11% -11% 30%
HCL Tech 18,412 6,790 13% 2.2 2.0 12% 22% 10.0 8.9 9% 13.7 12.4 25 25 -1% 20% 240%
Tech Mahindra 6,690 4,252 7% 1.3 1.2 13% 16% 8.3 7.1 10% 12.5 10.7 18 18 -4% 3% 148%
Source: Thomson Reuters, Credit Suisse estimates. * Not covered stocks. Used consensus estimates for these stocks. For the covered stocks, used CS estimates.
Figure 34: Our TP of Rs625 implies reasonable assumptions for the DCF model
FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Revenue growth 14.0% 13.6% 12.0% 11.0% 10.0% 9.0% 8.5% 8.0%
EBITDA margin 14.0% 14.6% 14.6% 14.6% 14.6% 14.6% 14.6% 14.6%
Tax rate 23.0% 23.0% 23.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Net working capital (% of revenue) 12.5% 12.8% 12.8% 12.5% 12.5% 12.5% 12.5% 12.5%
Capex (as % of revenue) 2.5% 2.5% 2.4% 2.4% 2.3% 2.3% 2.3% 2.3%
Cost of capital 12.5%
Long term growth 4.5%
Source: Company data, Credit Suisse estimates
The stock trades below its two-year average P/E,
business momentum much better that last year
Cyient's stock currently trades at over 12x FY18E P/E. This is slightly below the stock's
two-year average of 13x and in line with the three year average of slightly above 12x.
More importantly, the business momentum is much better that what it was at the beginning
of FY17, which can driver multiple re-rating in the near term.
12 April 2017
Cyient Limited (CYIE.BO) 24
Figure 35: The stock currently trades at below its two-year average P/E multiple
and is in line with its last three year's multiple—the business momentum is
much better as compared to the last year, though
Source: Thomson Reuters
Key risks
■ Currency: Cyient derives over 60% of its revenue in USD, and 13%, 11% and 8% of
its revenue in AUD, GBP and EUR, respectively. Any significant move in INR against
USD or cross currency moves between AUD/GBP/EUR, and USD could have a
material impact on the company's earnings. As per management, every 1% move in
INR/USD has 30-35 bp impact on operating margins. The earnings impact is also a
function of hedging gains/losses (the company hedges 70% of its net foreign currency
receivables over the next 12 months through forward contracts). We have used
INR/USD rate of 66 for FY18 and FY19.
■ High client concentration: Cyient derives 44% of its revenue from the top-5 clients
and 58% of its revenue from top-10 clients. Such a high client concentration can create
volatility in the financial performance. Cyient's high client concentration is also
reflective of its strong relationship with the leading players in most of the key industry
verticals it has a presence in. High client concentration is common with nearly all the
Indian Midcap IT Services companies, e.g., likes of Hexaware, Persistent Systems and
Mphasis have client exposure similar to Cyient.
■ Integration challenges on acquisitions: Cyient has an active M&A policy. The
company has done several acquisitions over the years and may continue to do so going
forward. This creates integration risks—failure to retain the key employees can materially
impact the business. The acquisitions may also fail to generate the desired synergies.
■ Execution risks in risk-reward/outcome based contracts: The company has
recently started offering risk-reward/outcome-based models, where the revenue flow
depends on the successful outcome of the prototype. Typically such projects are more
integrated (i.e., include components of idea generation, design and prototyping) and
help serving the client across the value chain, but they also have greater execution
risks. Such contracts are still small in the overall scheme of things (<5% of company's
revenue). The outcome based model is also gaining traction among the Indian IT firms.
0
2
4
6
8
10
12
14
16
18
Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
12m fwd P/E
12 April 2017
Cyient Limited (CYIE.BO) 25
CS HOLT® framework also implies 30%+ upside HOLT is not part of Credit Suisse Research.
HOLT is a value-based, return on capital framework proprietary to Credit Suisse. HOLT
provides an objective view of over 20,000 companies in 65 countries using a methodology
that examines accounting information, converts it to cash, and then values that cash,
allowing investors to identify key drivers of value.
CYIE’s CFROI® has been on an uptrend since 2011, underpinned by healthy double-digit
revenue growth and improving asset efficiency. With expanding CFROI levels, CYIE has
also delivered strong Economic Profit (earnings in excess of the firm’s opportunity cost of
using capital) growth over the same period. Based on consensus forecasts, CFROI is
expected to moderate further to 12% in the near term.
Figure 36: Cyient Ltd CFROI® (LHS) and Economic Profit trend (RHS)
Source: Credit Suisse HOLT LensTM
.
Cyient Ltd—what’s priced in?
Beyond IBES consensus revenue growth and EBITDA margins in FY18, CYIE’s shares
are currently priced for no revenue growth along with margins falling by half to 7.5% by
FY20. Expectations appear conservative relative to the company’s historical track record.
(Link to HOLT Scenario)
Even if CYIE fails to deliver revenue growth in FY19/20, a scenario where EBITDA
margins remain at historical lows of 14% yields a HOLT warranted a price of Rs620 (32%
potential upside). (Link to HOLT Scenario)
12 April 2017
Cyient Limited (CYIE.BO) 26
Figure 37: Cyient Ltd’s market-implied scenario
Source: Credit Suisse HOLT LensTM
.
Additional information about the Credit Suisse HOLT methodology is available upon
request or for additional information about the Credit Suisse HOLT, please contact Shawn
Lee ([email protected], +65 6212 3370)
12 April 2017
Cyient Limited (CYIE.BO) 27
Appendix
Company profile
Cyient is a leading player in engineering services (presence in aerospace/defense,
transportation, semiconductor, and industrial, energy and natural resources verticals)
network engineering (communication vertical) and operations management (verticals such
as utilities). With Rangsons acquisition in 2014, the company also ventured into design led
manufacturing business (small scale prototype manufacturing), with an intention to provide
services through-out the value chain to the clients.
The company was initially formed as a GIS service provider (map digitisation services) in
1991 by Mr. BVR Reddy. The company ventured into engineering services in 2000's, with
its first contract with Pratt and Whitney, which is now the company's largest client and also
a strategic investor in the company. The company expanded its engineering services
capabilities to other industries as well, including transportation (with Bombardier as a key
client), semiconductors (through Time to Market acquisition, and IBM as a key account -
IBM later sold its semiconductor business to Global Foundry), industrial, energy and
natural resources (with clients such as Caterpillar). Over the years, the company also
moved up the value in the GIS business with services around asset utilisation to the utility
industry, and networking services to the communication industry.
Cyient went through a strategic restructuring in 2014. It rebranded itself (from erstwhile
Infotech Enterprises), appointed Krishna Bodanapu (son of the founder—he spent several
years in the company in sales, marketing, account manager, and recently as COO) as MD
and CEO (the founder and then CEO BVR Mohan Reddy assumed the role of Executive
Chairman). The company moved to a vertical (business unit) organisation structure (from
earlier service line driven structure), with a focus on further building domain specific
capabilities.
Figure 38: Revenue break- up by business units Figure 39: Revenue break-up by service lines
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Aerospace/Defense32%
Communication20%
Utilities and Geospatial
15%
Design Led Manufacturing
11%
Transportation8%
Industrial and ENR8%
Semiconductor4% Medical and
Healthcare2%
Engineering services, 54%
Communication (networking) and Utility & GIS, 36%
Design led manufacturing,
11%
12 April 2017
Cyient Limited (CYIE.BO) 28
Board composition and management team
Figure 40: Cyient: Board composition
On Board
since
Designation Background
Mr BVR Mohan Reddy Since inception Founder, Chairman He founded the company in 1991. He served as the Chairman of NASSCOM (National Association of
Software & Service Companies) in FY16, as the Vice Chairman in FY15, and has been a member of the
Executive Council. He has also served as the Chairman of the Confederation of Indian Industry (CII),
Southern Region (2008-2009)
Mr Krishna Badanapu 2014 MD and CEO Krishna Badanapu initially joined Cyient as a Sales Manager, engineering services in Europe. He later held
the dual roles of marketing manager for the company's aerospace vertical and key account manager. Before
being elevated as CEO in 2014, he worked as the COO. Prior to Cyient, Mr Badanapu was with Altera
Corporation, a leading semiconductor manufacturer in California. He holds a bachelor's degree in electrical
engineering from Purdue University and a master's degree in business administration from the Kellogg
School of Management.
Mr Alain De Taeye 2010 Non-executive Director He is the member of the Management Board at Tom Tom. He serves as a Supervisory Board Member of
Telematics Cluster/ITS Belgium and of the Belgium/Indian Chamber of Commerce & Industry. He has served
as a Director of Nemerix SA since March 2006. Mr De Taeye holds a university degree in civil engineering
and architecture from the State University of Ghent, Belgium, and the Business School of Antwerp.
Mr Tom Prete 2013 Non-executive Director Tom Prete is Vice President of Engineering at Pratt & Whitney. He leads Pratt & Whitney's Global
Engineering organisation. Mr Prete joined Pratt & Whitney in 1988 and has served as chief engineer for
Operational Military Engines, director for Global Services Engineering, and chief engineer of Hot Section
Engineering.
Mr John Wiedemer 2016 Non-executive Director
(Alternate Director to
Tom Prete)
John Wiedemer is the Vice President of Engineering for Module Centers at Pratt & Whitney. He leads an
organisation of approximately 1,600 engineers with primary responsibility for the technology development,
design, analysis, production support, and field support of the components and modules that make up Pratt &
Whitney engines.
Independent Directors
Ms Andrea Bierce 2014 Independent Director Andrea Bierce has over 30 years of industry and consulting experience in the financial services. Currently,
Andrea works with some of the world's largest financial institutions in the areas of governance, enterprise risk
management, compliance and reporting. She is also a member of the Board, UBS Bank USA as a Director.
Mr Harsh Manglik 2012 Independent Director Harsh Manglik served as Chairman & Geography Managing Director, Accenture India, and was a member of
Accenture's global Executive Leadership Team. Mr Manglik was Chairman of NASSCOM and continues as a
member of its Executive Council. He was an invited member of the Confederation of Indian Industry (CII) and
has served as director on the board of the National Skills Development Corporation (NSDC).
Mr John Paterson 2014 Independent Director John Paterson retired as President - Marine & Industrial Power Systems at Rolls-Royce. In this role he also
had responsibility for chairing the Supervisory Board of Tognum, a 50/50 joint venture with Daimler, covering
all the reciprocating businesses within Rolls-Royce.
Mr K Ramachandran 2009 Independent Director He is currently engaged with the Aditya Birla Group as Advisor to the Chairman for the group's Higher
Education Projects. He spent 17 years with Voltas (a TATA Group company) in the electrical power industry
and spanned manufacturing, marketing, sales and project management. He eventually headed the Electrical
Business Group as Business Head and General Manager (Operations).
Mr M M Murugappan 1997 Independent Director He is Vice Chairman of the Murugappa Corporate Board. He is also the Chairman of Tube Investments of
India Limited, Carborundum Universal Limited, Wendt India Limited, and Murugappa Morgan Thermal
Ceramics Limited. He holds a master's degree in chemical engineering from the University of Michigan.
Mr Som Mittal 2014 Independent Director Som Mittal is the former Chairman and President of NASSCOM (2008-13). He has held corporate leadership
roles in the IT industry at companies such as Wipro, Digital India, Compaq and HP. He is on the governing
board of several educational and social organisations and is also a board member of Axis Bank, EXL Service
Holdings, Inc. and IIT, Indore.
Source: Company data, Credit Suisse estimates
12 April 2017
Cyient Limited (CYIE.BO) 29
Figure 41: Cyient: Senior leadership team
Year of
joining
Designation Background
Mr John Renard 2000 President - Utilities &
Geospatial BU &
President EMEA
In his previous role, John Renard served as geography and sales head for the EMEA and India regions. Before
that, he managed the worldwide business operations of the utilities, telecom, and data transformation, and
analytics business units. Prior to Cyient, Mr Renard ran his own consulting practice in France. He lives in London
and has a Master's Degree in Geography and Management Studies from the University of Cambridge
Mr Anand
Parameswaran
2008 Sr. Vice President -
Aerospace & Defense
BU
Anand Parameswaran has earlier led Global Sales and Delivery for the heavy equipment, transportation, hi-tech,
consumer, and medical business unit. Before Cyient, he worked in various leadership roles at companies such as
Wipro and Cognizant. He received a degree from Birla Institute of Technology and Science (BITS), Pilani, India.
Mr Brian Wyatt 2009 Sr. Vice President -
Medical Tech BU
Brian Wyatt joined Cyient as Vice President, Strategic Initiatives for North America in engineering services. Prior
to that, he was Vice President, Business Development at TopCoder Inc (crowdsourcing software development).
He also spent over ten years as a strategy consultant. He has a bachelor's degree in economics from Boston
College and a master's degree in business administration from the Kellogg School of Management.
Mr NJ Joseph 1998 Sr. Vice President -
Strategy & Marketing
He currently heads the Corporate Strategy (including S3 strategy execution) and Marketing functions. He also
plays an active role in assessing opportunities for inorganic growth and post-merger integration. Prior to this role,
Mr Joseph was strategy head for the Networks, Operations, and Data Transformation businesses. He has a
bachelor's degree in electronics and communication engineering from Kerala University.
Mr PNSV
Narasimham
2016 Sr. Vice President -
Global Human
Resources
He has extensive experience of over 25 years human resources. In his previous role, he served as the Chief
People Officer and Executive Vice President at Microland Limited. Mr Narasimham holds an MBA degree in
Human Resources.
Mr Prabhakar Atla 2004 Sr. Vice President - Rail
Transportation BU
Prabhakar Atla has over 20 years of experience spanning sales, product management, client relationship
management, and business leadership. He is a graduate in engineering and holds a master's degree in business
administration.
Mr Rajendra
Velagapudi
1999 Sr. Vice President -
Business Excellence
Prior to Cyient, Rajendra Velagapudi designed and analysed powertrain systems for commercial and off-highway
equipment. He began his career in 1987 at Ford's Truck Division, later transitioning to Bajaj Tempo and Bharat
Earth Movers Limited. Mr Velagapudi holds a degree in mechanical engineering from Siddhartha Engineering
College (India) and master's degrees from Madras Institute of Technology (India) in automobile engineering and
Cranfield University (UK) in design.
Mr Sanjay Krishna 2000 Sr. Vice President -
Communications BU &
President - APAC
Sanjay Krishna has over 19 years of international business experience. Mr Krishna is on the advisory board of
Deakin School of Engineering, Australia and is also an esteemed member of Engineers Australia. He has been
awarded a Fellowship for his contribution in the field of engineering. In the past, he has held offices as Director of
Geospatial Informational Technology Association (GITA, ANZ). Mr Krishna has a degree in international marketing
from IIM (Bangalore, India). He has also studied strategic thinking and action at Melbourne Business School.
Mr Suman Narayan 2017 Sr. Vice President –
Semiconductor BU
Suman Narayan has over 20 years of experience in the high-tech electronics and semiconductor industry and
has served in various leadership roles at ON (Fairchild) Semiconductor and Texas Instruments. Mr Narayan
holds a degree in Electrical Engineering from PSG Tech, Coimbatore India, a Master’s degree in Electrical and
Biomedical Engineering from the Iowa State University, and an MBA from the University of Texas.
Mr Sunil Kumar
Makkena
1991 Sr. Vice President -
Utilities & Geospatial BU
Sunil Kumar Makkena was one of the first three associates of Cyient Ltd. He executed and led various general
management functions across operations and delivery, business development, marketing, and account
management, including the integration of a captive unit. He holds a bachelor's of technology in engineering and
communications from Andhra University and completed an executive management program in business
management from the IIM, Kozhikode.
Mr Tom Edwards 2010 Sr. Vice President - UTC
Account & President -
North America
Prior to Cyient, Tom Edwards had a 26-year sales career at IBM, where he rose to global Channel Sales Leader
in the System Technology Division. Mr Edwards graduated from Clarkson University in Potsdam, NY, with
degrees in management and marketing.
Ms Katie Cook 2010 Sr. Vice President -
Industrial, Energy &
Natural Resources BU
Prior to the current role, Katie Cook led the North American sales and account management. Prior to Cyient, Ms Cook
spent 16 years at IBM, where she guided clients in improving supply chain efficiency and customer experience. She
received a bachelor's degree in both mathematics and education from the University of Idaho (USA).
Mr Ajay Aggarwal 2011 Chief Financial Officer Before joining Cyient, Ajay Aggarwal was Chief Corporate Controller with Tata Chemicals. Prior to that, he was
associated in various capacities with reputed organizations such as Reliance Industries, Kirby Building Systems,
P T Polysindo and J K Synthetics. Mr Aggarwal is an FCS, FICWA, and holds an engineering degree from BITS,
Pilani, India. He completed the corporate finance program at Euromoney, UK.
Source: Company data, Credit Suisse estimates
12 April 2017
Cyient Limited (CYIE.BO) 30
Shareholding structure
Figure 42: Cyient Limited: Shareholding structure
Dec-14 Dec-15 Jun-16 Dec-16
Founders 22% 22% 22% 22%
First Carlyle Ventures (aggregate holding) 15% 15% 15% 15%
Carrier International Mauritius (UTC group) 14% 14% 14% 14%
Other FII 23% 26% 28% 29%
DII 13% 10% 8% 7%
Others 13% 13% 13% 13%
Source: BSE, Credit Suisse
12 April 2017
Cyient Limited (CYIE.BO) 31
Key operating metrics
Figure 43: Cyient: Key operating metrics
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
Revenue (US$ mn) 104.0 111.0 114.7 117.4 114.3 118.4 118.4 120.9 124.0 136.5 135.8
% growth QoQ (cc) 7.2% 7.4% 5.3% 4.5% -2.3% 4.2% 0.2% 2.6% 2.0% 10.3% 0.6%
Revenue (ex Rangsons, US$ mn) 104.0 111.0 114.7 108.2 108.3 108.2 107.7 108.7 114.6 123.0 121.0
Verticals (Ex Rangsons)
Aerospace and Defense 33.9% 33.3% 31.2% 34.5% 35.8% 36.2% 37.7% 38.9% 38.7% 36.8% 35.6%
Transportation 11.2% 10.4% 10.1% 10.4% 10.4% 10.6% 10.2% 10.0% 10.3% 9.4% 9.4%
Industrial, Energy and Natural Resources 12.1% 12.2% 11.5% 12.0% 11.8% 11.4% 10.8% 10.3% 10.0% 9.3% 9.3%
Semiconductor 5.8% 6.1% 5.9% 5.6% 5.6% 5.3% 4.3% 4.4% 4.3% 4.1% 3.9%
Medical and Consumer Electronics 1.7% 1.3% 1.2% 1.5% 1.4% 1.5% 1.5% 1.7% 1.9% 1.9% 1.9%
Utilities and geospatial 20.2% 20.3% 20.9% 18.8% 17.9% 15.8% 15.7% 16.8% 15.8% 16.7% 17.2%
Communication 14.2% 15.4% 18.3% 16.4% 16.2% 18.4% 19.4% 17.6% 18.9% 21.8% 22.7%
Geographies (Ex Rangsons)
Americas 60.9% 63.9% 65.0% 63.7% 64.0% 64.1% 63.6% 60.2% 60.0% 59.1% 58.0%
Europe, Middle East, Africa and India 29.3% 27.4% 26.8% 25.8% 24.0% 24.1% 23.2% 25.5% 24.6% 24.0% 24.0%
Rest of APAC 9.8% 8.7% 8.2% 10.5% 12.0% 11.8% 13.2% 14.3% 15.4% 16.9% 18.0%
Client metrics (Ex Rangsons)
Top 5 36% 37% 37% 35% 36% 35% 35% 36% 40% 43% 44%
Top 10 51% 52% 50% 50% 51% 50% 49% 51% 56% 57% 58%
20 mn+ 3 3 4 4 4 4 2 2 3 3 3
10 mn+ 8 9 9 8 8 9 10 11 10 10 11
5 mn+ 19 20 20 20 22 21 19 20 19 19 21
1 mn+ 55 54 56 55 59 60 60 62 60 56 60
Offshore mix (Ex Rangsons)
Onsite 52.2% 53.5% 55.2% 56.7% 56.1% 56.3% 56.6% 59.3% 59.3% 59.9% 59.6%
Offshore 47.8% 46.5% 44.8% 43.3% 43.9% 43.7% 43.4% 40.7% 40.7% 40.1% 40.4%
Employee metrics (Ex Rangsons)
Total 12,539 12,759 12,777 12,367 12,336 12,026 12,186 12,498 12,965 13,216 13,094
Utilisation (%) 74.3 74.8 75.8 73.8 75.4 76.1 76.7 72.7 73.5 78.0 78.3
Voluntary attrition (%, quarterly annualised) 15.3 12.7 13.3 17.2 18.8 21.6 20.6 18.4 19.9 22.7 22.6
Involuntary attrition (%, quarterly annualised) 2.2 6.3 2.6 2.4 2.6 3.2 1.8 1.6 3.1 4.0 1.9
Overall attrition (%, quarterly annualised) 17.5 19.0 15.9 19.6 21.4 24.8 22.4 20.0 23.0 26.7 24.5
Currency mix (%)
USD 62.0% 63.0% 65.0% 67.0% 67.0% 67.5% 68.0% 67.5% 67.0% 63.8% 62.5%
EUR 16.0% 15.0% 15.0% 12.0% 15.0% 14.4% 11.0% 10.1% 15.0% 8.6% 8.2%
GBP 7.0% 8.0% 8.0% 8.0% 8.0% 8.5% 8.0% 9.1% 8.0% 10.9% 10.7%
AUD 12.4% 11.0% 8.0% 7.0% 6.0% 7.0% 8.0% 8.2% 6.0% 12.0% 13.1%
Cash generation (Rs mn)
Cash and cash equivalents 7,358 7,184 8,003 6,565 6,614 6,523 7,650 7,743 8,025 8,064 8,627
Capital expenditure 219 134 167 214 170 179 225 204 196 244 263
OCF (Ex Rangsons) 706 785 1,072 1,139 505 1,026 1,420 1,094 722 607 1,680
FCF (Ex Rangsons) 487 651 905 924 374 887 1,208 910 571 380 1,432
Rangsons FCF -118 83 -175
Order intake (US$ mn)
Services (current FY) 83.8 81.3 96.4 130.2 124.9 112.1 105.9
Services (beyond current FY) 20.9 6.6 73.7 30.2 8.1 21.2 83.0
Services total 104.7 87.9 170.1 160.4 133.0 133.3 188.9
DLM (current FY) 6.1 11.5 9.8 9.8 12.3 9.3 9.4
DLM (current FY) 0.2 3.1 4.0 1.4 2.2 2.1 4.3
DLM Total 6.3 14.6 13.8 11.2 14.5 11.4 13.7
Source: Company data
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Companies Mentioned (Price as of 10-Apr-2017) Akka Tech (AKA.PA, €42.5) Alten (LTEN.PA, €69.9) Altran Tech (ALTT.PA, €15.415) Assystem (ASY.PA, €31.8) Bertrandt AG (BDTG.DE, €89.0) Bombardier Inc (SVS) (BBDb.TO, C$2.22) Cyient Limited (CYIE.BO, Rs473.05, OUTPERFORM, TP Rs625.0) HCL Technologies (HCLT.BO, Rs832.8) Hexaware Technologies (HEXT.BO, Rs210.95) Infosys Limited (INFY.BO, Rs952.95) International Business Machines Corp. (IBM.N, $171.2) L&T Infotech (LRTI.NS, Rs722.6) L&T Technology (LTEH.NS, Rs791.25) Mindtree Ltd (MINT.BO, Rs445.55) Mphasis Ltd (MBFL.BO, Rs557.7) Persistent Systems (PERS.BO, Rs564.55) Tata Consultancy Services (TCS.BO, Rs2421.15) Tech Mahindra Limited (TEML.BO, Rs443.25) Telstra Corporation (TLS.AX, A$4.58) TomTom (TMOAY.PK, $3.95) United Technologies Corp (UTX.N, $112.88) Wipro Ltd. (WIPR.BO, Rs503.35)
Disclosure Appendix
Analyst Certification Nitin Jain and Anantha Narayan each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
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Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (54% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Cyient Limited (CYIE.BO)
Method: Cyient is likely to have the best in class earnings CAGR over the next two two years, in our view, and given the structurally strong positioning, and solid business momentum, we value the company at 14x FY19E P/E (price-to-earnings). Cyient's engineering services peers trade in the range of 14-18x CY17E P/E, with single digit to low double digit earnings growth expectations. Though not exactly comparable, the mid-cap Indian IT peers trade at 12-17x CY17E P/E, with an average growth expectation of 11% EPS (earnings per share) CAGR. We thus have an OUTPERFORM rating on the stock with a target price of Rs625.
Risk: The key risks to our target price of Rs625 and OUTPERFORM rating for Cyient Limited include any significant appreciation in INR or adverse cross-currency moves, client-specific issues (given high client concentration), acquisition indigestion and execution risks on the new outcome based projects.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (UTX.N, HEXT.BO, TCS.BO, IBM.N, BBDb.TO, TLS.AX, HCLT.BO, INFY.BO, WIPR.BO, TEML.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (HEXT.BO, IBM.N, BBDb.TO) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (TCS.BO, IBM.N, WIPR.BO, TEML.BO) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (IBM.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (HEXT.BO, IBM.N, BBDb.TO) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (UTX.N, HEXT.BO, TCS.BO, IBM.N, BBDb.TO, TLS.AX, MINT.BO, HCLT.BO, INFY.BO, WIPR.BO, TEML.BO) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (TCS.BO, IBM.N, WIPR.BO, TEML.BO) within the past 12 months A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (CYIE.BO, HEXT.BO, TCS.BO, IBM.N, BBDb.TO, TLS.AX, MINT.BO, HCLT.BO, WIPR.BO, TEML.BO) within the past 12 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (PERS.BO, LRTI.NS, MBFL.BO, LTEH.NS, CYIE.BO, HEXT.BO, TCS.BO, MINT.BO, HCLT.BO, INFY.BO, WIPR.BO, TEML.BO)
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