Cyient – Exposure to ITeS minus commoditized body shopping

Few of my takeaways from Q1 FY25 of Cyient Limited

𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐞 𝐓𝐫𝐚𝐣𝐞𝐜𝐭𝐨𝐫𝐲:

• Cyient faced significant operational challenges in Q1 FY25, resulting in weaker-than-expected performance.
• However, the company is confident of a robust recovery starting Q2, driven by a strong order book, double-digit growth in order backlog, and healthy engagement with top customers.
• The management expects H2 FY25 to be stronger than H1, with flattish year-on-year revenue growth for the full year.

𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐜 𝐁𝐥𝐮𝐞𝐩𝐫𝐢𝐧𝐭:

• Cyient has announced the setup of a wholly-owned subsidiary to drive dedicated focus on turnkey ASIC design and chip sales through a fabless model for analog mixed-signal chips.
• This move is aimed at capitalizing on the growing semiconductor market opportunities, leveraging Cyient’s existing capabilities in design, fabrication, and testing.
• The new semiconductor business unit is expected to unlock value for shareholders, akin to the success of Cyient DLM.

𝐌𝐚𝐫𝐤𝐞𝐭 𝐃𝐲𝐧𝐚𝐦𝐢𝐜𝐬:

• The global semiconductor market is poised for significant growth, expected to reach $1 trillion by 2030, with the Indian market forecast to reach $100 billion by 2030.
• Cyient is well-positioned to capitalize on these opportunities, given its extensive portfolio of intellectual properties, long-standing client relationships, and global capabilities.
• The company is also making progress in emerging technologies like Generative AI, winning multiple projects across various business segments.

Industry Tailwinds:

• The semiconductor industry is experiencing strong demand, driven by the increasing adoption of analog mixed-signal chips across various industries, including automotive, healthcare, and industrial automation.
• Cyient’s expertise in designing and fabricating these specialized chips aligns well with the industry’s growth trajectory.

Industry Headwinds:

• Delays and project shifting in Q1 FY25, particularly in the connectivity and sustainability segments, impacted the company’s performance.
• The continuing stress in the rail sector also contributed to the weaker-than-expected results.

𝐈𝐧𝐯𝐞𝐬𝐭𝐨𝐫/𝐀𝐧𝐚𝐥𝐲𝐬𝐭 𝐐𝐮𝐞𝐬𝐭𝐢𝐨𝐧𝐬:

• Analysts were surprised by the magnitude of the miss in Q1 FY25, questioning the company’s forecasting accuracy and process.
• The management acknowledged the challenges and indicated that they are working to refine the forecasting process, incorporating lessons learned from the recent experiences.
• The company is also focusing on improving the predictability of the project-based business, especially in connectivity and sustainability, to better manage potential delays and ramp-ups.

Competitive Landscape:
Cyient’s established capabilities in design, fabrication, and testing of analog mixed-signal chips, along with its growing semiconductor business, position the company as a unique player in the evolving Indian semiconductor landscape.

𝐅𝐮𝐭𝐮𝐫𝐞 𝐏𝐫𝐨𝐣𝐞𝐜𝐭𝐢𝐨𝐧𝐬:

• For FY25, the company has provided a flattish year-on-year revenue growth guidance, citing a prudent approach after the Q1 miss.
• However, the management remains confident in achieving a strong recovery in Q2 and H2, driven by a robust order book and growing engagement with top customers.
• The company aims to reach its previous year’s EBIT margin range of 16% by the end of FY25, as the revenue growth trajectory strengthens.

𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐃𝐞𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭:

• Cyient has been proactively managing its debt position, which has seen a 44% year-on-year reduction in Q1 FY25.
• The company is focused on maintaining a healthy balance sheet to support its growth initiatives, including the new semiconductor business.

Opportunities & Risks:

• The growing semiconductor market and Cyient’s unique end-to-end capabilities present significant opportunities for the company to drive long-term growth and value creation.
• Execution risks related to the new semiconductor business, as well as potential delays in project ramp-ups, remain key concerns that the management needs to address.

𝐑𝐞𝐠𝐮𝐥𝐚𝐭𝐨𝐫𝐲 𝐂𝐥𝐢𝐦𝐚𝐭𝐞:

The Indian government’s various initiatives to promote the domestic semiconductor industry, such as the Production-Linked Incentive (PLI) scheme, provide a supportive regulatory environment for Cyient’s semiconductor aspirations.

𝐂𝐨𝐧𝐬𝐮𝐦𝐞𝐫 𝐏𝐮𝐥𝐬𝐞:

• Cyient’s top 10 customers have seen double-digit year-on-year growth, indicating their continued confidence in the company’s capabilities.
• The management is focused on improving the predictability of project-based businesses to better align with customer needs.