Stock Pick from IT Consulting & Software

CHOICE SCRIP

In Tune With The Times

In a rapidly developing business environment, the company that remains flexible is the one that finds itself in a win-win situation. Cyrient is one such company

Here Is Why:

• Recent acquisition will improve its value chain in its offering.

• Focus on offshore mix, utilisation, efficiency and cost structure optimization is expected to improve its margin.

• The company has considerable exposure to aerospace and defense sectors.

The Indian IT service industry has been experiencing a huge changing environment in the past few years. Furthermore, the IT service companies are making all efforts to adopt the changing dynamics of the industry. Here’s a mid-cap IT company, Cyient, which has already started proactively working towards changing its product and service offerings in the present changing environment.

Cyient is an engineering, network and operations solutions company based out of Hyderabad. The company caters to diverse industries such as aerospace, consumer, energy, medical, oil and gas, mining, heavy equipment, semiconductor, railways, and communications. It has more than 12,500 associates spread across 38 global locations. Over the years, Cyient has closely worked with its clients to anticipate their needs and solve complex problems, and has thereby developed long-term partnerships with its clients around the world.

Traditionally the Indian IT companies are known for application development and maintenance work. However, the industry dynamics have changed due to a rise of other developing countries with an increasing number of clients shifting to these economies. However, the Indian IT companies need to give much focus on product development and consultancy, which are high-margin businesses, to meet the changing needs of their customers. Anticipating this changing scenario, Cyient has already started working towards acquiring the requisite technology and talent via both organic and inorganic ways.

Cyient has recently announced its third acquisition - that of Rangsons Electronics (REL) headquartered in Mysore. The company has signed an agreement to acquire 74 per cent stake in REL which has almost USD 66 million revenue and 10 to 12 per cent EBITDA margins for the financial year 2014. The acquisition gives capabilities to Cyient to meet the changing needs of its clients and extend its offering from solutions to services and systems. Cyient will now have capabilities not only to design the product but also manage the same throughout the product lifecycle. The key clients of REL include defense and industrial majors like Israel Aerospace Industries, Rafale, and ABB.

Cyient delivered a robust set of numbers for Q2 FY15. The company has registered four consecutive quarters of good QoQ growth in revenues. This gives us confidence that the various actions that the management has taken in the last couple of quarters are yielding results and the company is expected to see a continued growth momentum for the quarters to come. While its margins improved on a quarterly basis, its operating margin and profit before tax (PBT) margin improved by 197 and 501 basis points respectively, mainly driven by volume growth, productivity optimization, and favourable other income. The company’s free cash flow generation continues to be robust and stands at 47 per cent as a percentage of its operating profit for H1 of this financial year.

Cyient is expected to improve its margin further due to its focus on offshore mix, utilisation, efficiency, and cost structure optimization. Further, the recent acquisition was an ‘all cash’ deal and will not impact the company’s profitability on the financing front. Interestingly, institutional investors too showed an increased interest in the company. On the valuation front, the stock is trading at a PE ratio of 19.47x times its trailing EPS of Rs 26.56 per equity share. We recommend buying this stock considering the expected improvement in its margins and increased value chain in its offering.