After a 33 percent rise from its 52-week low of ₹724, hit on November 3, 2022, more upside is seen in the midcap IT firm Cyient.
Domestic brokerage house Motilal Oswal (MOSL) has retained its buy call on the stock with a target price of ₹1,170, implying a potential upside of 21 percent. This comes after the IT firm posted better-than-expected results in the December quarter of FY23 (Q3FY23) on the back of robust acquisitions.
In Q3, Cyient reported a better-than-expected 37 percent jump in quarterly revenue on the back of a slew of acquisitions that helped counter a weak demand in an uncertain economic environment. Its consolidated revenue from operations for the quarter ended December 31 stood at ₹1,618 crore as against ₹1,183 crore a year ago, it said in an exchange filing.
The firm's consolidated net profit rose 18.4 percent in Q3 to ₹156 crore whereas its EBITDA stood at ₹209 crore with a margin of 12.9 percent.
The Hyderabad-based company benefited from the four acquisitions it did last year, including its largest ever of Finnish engineering services firm Citec which helped expand its footprint in Europe. Cyient's strong performance comes even as the industry braces for a demand slowdown amid fears of a recession in major western markets.
The brokerage pointed out that Cyient's operating performance has inherently been subdued over the past several years as a few of its growth engines remained weak and underperformed that of its peers. In addition, execution challenges have marred the company’s overall topline growth.
The management said that the challenges under Aerospace and Communications segments (50 percent of service revenue) have bottomed out and these segments are likely to improve and stimulate overall organic growth (guided at 13-15 percent in constant currency (CC) terms) in FY23E. Additionally, its revenue growth should also amplify led by the inorganic components (14-15 percent of FY23E revenue) and gradual recovery in its Design Led Manufacturing (DLM) business, it stated.
The brokerage further pointed out that the management aspires to reach a $1 billion revenue run-rate for the consolidated entity with 15-15.5 percent margins by Q4FY24. With the given aspiration, it requires the company to deliver 5 percent CQGR over the next five quarters along with a 200 bps margin improvement in Q4FY24 versus 12.9 percent in QeFY23.
"We consider this as a bull case scenario that has an upside risk over our base case. Based on the above thesis, the bull case scenario is seeing an EPS upgrade of 3 percent and 15 percent over the base case in FY23E and FY24E, respectively. The revised EPS translates into P/E multiples of 18x and 12x EPS of ₹53.7 and ₹78.7, respectively. If the bull case scenario turns out to be positive, Cyient would have significant re-rating potential," MOSL observed.
If Cyient trades at 17x FY24E EPS of INR78.7 that would translate into a substantial 38 percent upside from the current level, it predicted.
However, it noted that its base case still remains the same given the ongoing macro headwinds and the company-level execution challenges. The current valuations at 18x/14x FY23E/FY24E EPS of ₹51.9/ ₹68.6 appear highly attractive giving more comfort to maintain our BUY rating. The target multiple of 17xFY24E EPS implies a TP of ₹1,170, with a 21 percent potential upside in the base case, it forecasted.
Stock price trend
Cyient has risen a little over 19 percent in the last 1 year and around 16 percent in 2023 YTD.
It has risen 8 percent in Feb so far after an 8.5 percent jump in January 2023, however, it lost 3 percent in December 2022.
The stock has lost around 25 percent of investor wealth from its record high of ₹1292, hit in October 2022.
However, from its 52-week low of ₹724, hit in November last year, the stock has advanced 33 percent. It hit its 52-week high of ₹995 just last week, on February 23, 2022.
In the last 10 years, the stock has given multi-bagger returns, rising nearly 450 percent to ₹966 (currently) from ₹176, 10 years ago.
Meanwhile, from its record low of ₹4.15, hit in November 1997, the stock has skyrocketed 23,900 percent.
As per the brokerage, Cyient's service segment is shaping up quite well with a majority of its growth engines (excluding Rail, Consulting and Utility) sustaining the positive momentum and delivering robust growth of 15 percent YoY in the 9 months of FY23. Conversely, other segments are on the verge of recovery and should incrementally contribute to its overall growth in FY24E, it added.
With DLM, the value unlocking may come through after the carve-out of the business. The change in the leadership structure and decoupling of the business would incrementally add value to Cyient's earning profile, further highlighted MOSL.
However, given the ongoing macro headwinds and the company-level execution challenges, it remains watchful of the company’s earnings growth trajectory, cautioned MoSL.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.