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Axis Securities Report
Valuation and recommendation
We recommend a 'Buy' rating on Cyient Ltd. and assign a 22 times price to earning multiple to its FY26E earnings of Rs 99.4/share to arrive at a target price of Rs 2,195/share, implying an upside of 13% from the current market price.
Recommendation rationale and key highlights
Sustainability vertical: Cyient operates a plant engineering business under its sustainability vertical. The management expects the energy and utilities industry will accelerate demand in this segment. Moreover, the energy transition from fossil fuels to greener and newer energy fuels will drive strong demand in the near term. Cyient has developed robust capabilities to partner with these technological changes with large manufacturers in whole ecosystems.
New growth areas: Automotive, semiconductor, hi-tech, healthcare, and medical devices are the new growth areas. The management foresees strong demand in the automotive segment, however, given the entry of many players in the segment, the focus will be on fewer areas like driving growth through silicon and semi-conductor partnerships and developing capabilities around autonomous vehicles. Cyient's sub-segment exposure to automotive is largely around tier-I suppliers as well as construction and off-highway equipment companies.
Communication Vertical likely to remain laggard in the near term: The communication vertical remained the laggard in the past few quarters due to high-interest rates which have pressured leveraged sectors like Telecom. It is curtailing capex and opex on 5G-related spending for being weak in the absence of a clear monetisation path for that technology given it is a business-to-business technology (versus business-to-consumer customer base of telecom companies). The management expects weakness to continue in the near term.
Outlook
From the long-term perspective, we believe Cyient is a better engineering research and development player with an improved outlook and better deal wins. The recent recovery and momentum are likely to be sustained for the next two to three years. However, rising concern over uncertainties in the large economies and supply-side constraints may pose challenges to the growth prospects of the company.
Key risks to our estimates and target price
The demand environment is uncertain due to the potential threat of recession from the world's largest economies.
The rising subcontracting cost and cross-currency headwinds may impact operating margins negatively.
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