Buy IT Stock Cyient, Says Broking Firm Anand Rathi

Broking firm, Anand Rathi has recommended buying the stock of Cyient. The company is an IT services company and with IT stocks falling, it may open opportunities for investors to buy at lower levels.

Aiming for a 15% from in FY 2023

According to Anand Rathi the company is now aiming at 15% growth in FY23, catching up with peers like L&T Technology Services (guided to 15.5%).

"Services order intake was $188m, taking TTM to $632m, up 14% y/y. DLM at $26m (down 14% y/y) continues to face challenges, expected to grow <10% in FY23 (FY22: 9%). The 14.5% EBIT margin was up 59bps q/q, 180bps y/y, with attrition softening a bit to 27%. No meaningful change in estimates but we revise our target to Rs1,250 (from Rs 1,460), at 21x FY24e EPS, a discount to peers reflecting patchy growth. We retain a Buy," the brokerage has said.

Services growth supported by order intake

According to Anand athi, the Services division grew 1.2% q/q, supported only by Communications (6% q/q) while the other verticals were flattish to negative. The company expects Aerospace, Communications and Portfolio to be strong, while Rail may continue to be weak in H1. Services order intake was healthy and reflects steady improvement over the last four quarters, moving from -14% to +14% on a TTM basis.

EBIT margins climb to 14.5%, attrition eases a bit to 27%.

According to Anand Rathi, throughout FY22, Cyient exceeded margin expectations, delivering 13.9% in FY22 (10.1% in FY21), translating to 51% EBIT growth. This was achieved by ~2.4% better utilisation and ~5.5% better offshore. The company resumed hiring with Services headcount up 13% in FY22 (-14% in FY21). It expects to more-than-average wage hikes in FY23 to further cool attrition. Overall, FY23 margins are likely at FY22 levels.

FY23 guidance at 13-15%, EBIT margins to be 13-14%

DLM is likely to remain under 10%, translating to higher services growth. The company is seeing momentum building up in Aerospace while Communications and Utilities are likely to sustain growth. Tax rates will be higher in FY23 but we expect the company to shift to a lower tax regime by FY24.

Retaining a Buy

The stock quotes at 15x FY24e EPS of Rs 59, which seems attractive compared to the sector and considering its FCF yield of 6%. According to Anand Rathi, the key risks are large M&A and integration-related.

Recent acquisition

Cyient, recently announced that it has signed definitive agreements to acquire Citec, an international Plant and Product engineering services company serving customers across the energy, process, oil and gas, and manufacturing industries. This will be the largest outbound acquisition by an Indian engineering services company and Cyient's largest acquisition to date. The acquisition transactions will be completed during the quarter.

This acquisition will enhance Cyient's position as a leader in the Plant and Product Engineering sector, strengthen its presence in the energy industry with a focus on clean energy and expand its European footprint in the Nordic countries of Finland, Norway, and Sweden, and in Germany and France. The stock of Cyient was last seen trading at Rs 893 on the National Stock Exchange.