CYIENTNSEQ3 FY23January 12, 2023

Cyient Limited

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52turns

7analyst exchanges

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Management on call

Krishna Bodanapu

MANAGING DIRECTOR

Ajay Aggarwal

EXECUTIVE DIRECTOR AND

Karthikeyan Natarajan

EXECUTIVE

Key numbers — 40 extracted

197 million

h this, let me take you through the highlights for the quarter. In Q3 FY23, we posted revenue of $197 million, which is a year-on-year growth of 28.6% in constant currency, 24.8% in US dollars and quarter-on

28.6%

for the quarter. In Q3 FY23, we posted revenue of $197 million, which is a year-on-year growth of 28.6% in constant currency, 24.8% in US dollars and quarter-on-quarter growth of 13.4% in constant curr

24.8%

we posted revenue of $197 million, which is a year-on-year growth of 28.6% in constant currency, 24.8% in US dollars and quarter-on-quarter growth of 13.4% in constant currency or 12.7% in US dollars.

13.4%

n-year growth of 28.6% in constant currency, 24.8% in US dollars and quarter-on-quarter growth of 13.4% in constant currency or 12.7% in US dollars. In rupee terms, our quarterly revenue stands at INR

12.7%

tant currency, 24.8% in US dollars and quarter-on-quarter growth of 13.4% in constant currency or 12.7% in US dollars. In rupee terms, our quarterly revenue stands at INR 1,618 crores, which signifies

INR 1,618 crore

3.4% in constant currency or 12.7% in US dollars. In rupee terms, our quarterly revenue stands at INR 1,618 crores, which signifies a growth of 36.7% year-on-year and 15.9% quarter-on-quarter. Services revenue

36.7%

rs. In rupee terms, our quarterly revenue stands at INR 1,618 crores, which signifies a growth of 36.7% year-on-year and 15.9% quarter-on-quarter. Services revenue stood at $167.9 million, which is a

15.9%

quarterly revenue stands at INR 1,618 crores, which signifies a growth of 36.7% year-on-year and 15.9% quarter-on-quarter. Services revenue stood at $167.9 million, which is a year-on-year growth of 3

167.9 million

gnifies a growth of 36.7% year-on-year and 15.9% quarter-on-quarter. Services revenue stood at $167.9 million, which is a year-on-year growth of 34.4% in constant currency and quarter-on-quarter growth of 11

34.4%

% quarter-on-quarter. Services revenue stood at $167.9 million, which is a year-on-year growth of 34.4% in constant currency and quarter-on-quarter growth of 11.9% in constant currency. Services revenu

11.9%

on, which is a year-on-year growth of 34.4% in constant currency and quarter-on-quarter growth of 11.9% in constant currency. Services revenue growth without acquisitions is 10.6% constant currency yea

10.6%

-on-quarter growth of 11.9% in constant currency. Services revenue growth without acquisitions is 10.6% constant currency year-on-year and 3.7% constant currency quarter-on-quarter. Normalized group

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Guidance — 20 items

Krishna Bodanapu

opening

“This call will be accompanied with an earnings presentation.”

Ajay Aggarwal

opening

“It's only that in terms of the D&A, it takes time once we scale up, we will be able to see the gap, also based on the EBIT level.”

Ajay Aggarwal

opening

“And as I said, once we get the synergies and the focus in the medium term, we will make it accretive at the EBIT level itself.”

Ajay Aggarwal

opening

“But in steady state, our guidance will be more like 25% to 26% of tax rate.”

Ajay Aggarwal

opening

“So I can tell you that we will sustain this and we'll further improve this in the next quarter with continued traction on the volume side, operational efficiency side, and some of the measures that you are also trying to take to control the SG&A.”

Karthikeyan Natarajan

opening

“We expect the commercial aerospace to come back to 2019 levels by H2 of 2023 from various analysts and some of our customers.”

Karthikeyan Natarajan

opening

“I think this helps us to continue to make projection of growth.”

Karthikeyan Natarajan

opening

“And we've grown about 3.5% quarter-on-quarter in Q2 and with 4.4% quarter-on-quarter in Q3, we expect probably close to double-digit growth in quarter-on-quarter for Q4.”

Karthikeyan Natarajan

opening

“We expect Rail to come back to a growth trajectory from Q4 and probably will take another few more quarters for us to hit the trajectory that we were running early.”

Karthikeyan Natarajan

opening

“We expect this to improve with one or two customers, which will probably come back to the normalcy in the next one or two quarters.”

Risks & concerns — 9 flagged

Normalized group EBITDA margin, excluding the impact of the exceptional items, stood at 17.2%, which was up 78 bps quarter-on-quarter and down 79 bps year-on-year.

— Krishna Bodanapu

Normalized group EBIT margin, excluding the impact of the exceptional items, stood at 12.9%, which is up 98 bps quarter-on-quarter or down 100 bps year-on-year.

— Krishna Bodanapu

I think this is where you all had a concern.

— Ajay Aggarwal

That is over now and the benefit of volume, the benefit of efficiency and no headwind from the wage hike.

— Ajay Aggarwal

And with many diversification through M&A’s in the Europe as a whole, are we witnessing any amount of client decision-making slowdown in some of the acquisitions which we have done because of the macro pressure, supply chain pressure, gas shortage in the Europe as a whole?

— Sandeep Shah

So are we hinting at a margin decline, so to say, in 4Q?

— Shradha

I think the decline has stopped that's what we have been talking about.

— Shradha

But it's not that the business will de-grow.

— Krishna Bodanapu

But having said that, we find ourselves in a good spot where Aerospace, which was a bit of a challenge for us has now become our strength.

— Krishna Bodanapu

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Q&A — 7 exchanges

Congrats on a good execution. Just wanted to in terms of the guidance. Earlier you used to guide on organic basis 13% to 15 % growth in the group revenue in CC terms. This time, there is no mention for the same. So any change in that outlook?

Krishna Bodanapu

So Sandeep, we're looking at the trade-offs. We definitely have acceleration in Q4 in terms of revenue. So we're also using this as an opportunity to look at what are the areas that or what are some of the things that we can also refocus on because we also want to use this opportunity to continue to focus and build on margins. So if you look at it, for example, this quarter, in spite of the almost 4% growth that we had, our subcontracting work has come down to less than or about 2%. And if you remember at a peak that used to be 6-7%. Obviously, that's not the quality of revenue we want it, so

First of all, congratulations on a great set of numbers. I mean these are really good numbers in the challenging environment. Especially we wanted to ask something about the order intake. I mean, we are having a good order inflow, roughly $240 million on the Services side. But what is driving this order inflow, which are the areas, what kind of deals are we winning? And also on the commentary in your opening remarks, I mean Krishna mentioned that pipeline is of 1.5x in the presentation. So just wanted to get more color, which geography, which areas are leading to this pipeline? And how do you

Mihir Manohar

Yes. So on the Honeywell deal on the DLM side I mean the Captive deal which is there, which is when we start quarter, so what could be the revenue contribution from both these deals? Yes, I think we have not talking about any specific clients, Mihir. But as we talked about even during our Investor Day, we're doubling our automotive business compared to last year. I think that trajectory is still intact.

Congrats on a good quarter. Two, three questions. Can you just tell us what has been the organic Services growth in nine months 23 so far?

Krishna Bodanapu

I think it should be about 11% around 11% constant currency. And sir, the other question is why we are guiding to flat EPS in 4Q despite the fact that Karthik mentioned that even aero can grow double digits. And you take of 15 at the lower end would mean flat EPS on a Q-on-Q basis. So are we hinting at a margin decline, so to say, in 4Q? No, let me clarify that. I'd say we've never guided on EPS. We just did it last quarter for the first time because there were a lot of acquisitions, and various things that were going on in the business, which didn't reflect the ground reality and that's why w

Congratulations on a good set of numbers. Best wishes to all at your end. Just one clarification. Slide No 17, Cyient Services you have mentioned that $240 million is the order intake and you mentioned that the five large deals have a total contract opportunity of $60 million. So what is this difference? If you can just clarify that?

Karthikeyan Natarajan

See, the order intake is the purchase orders, we received during the quarter and which goes into our SAP system. And let me also confirm, purchase orders from customers. The contract potential is something that, the customer signs up with us about, say, $10 million and depending on some of the large segments and $5 million on smaller segments. We consider anything, which is more than $5 million for smaller segments and $10 million for larger segments, as part of total contract potential and that is 60 million from five deals that, we are announcing here. Because there is a good Q-on-Q growth,

Congrats on the performance. So I think most of my questions are answered, but I just had one, you know maybe a medium-term question. So I think, we've been talking about benchmarking our bottom line or the profitability with our peers. So I just wanted to know, what maybe on a three year perspective, what our medium-term aspiration is on the top line? And whether we are going to focus on reducing the volatility in the numbers. I think that has been an issue in the past as well?

Krishna Bodanapu

Two things on the top line, I think, we've sort of talked about what our aspiration is or what our goal, is in terms of getting to the $1 billion run rate in the next fiscal year. I will leave it at that because we haven't done a much longer-term plan against that. Now in terms of the bottom line, we've done a lot of work because, as you said, there is a gap to our peers and we've started to take a lot of actions, we've identified where some of our inefficiencies have been, and we're starting to take a lot of actions around those inefficiencies. So what I would say is and also if you look at i

This is the first time I'm looking at Cyient. I just wanted to understand, what are our capabilities in the Aerospace vertical. What kind of work do we, doing there?

Krishna Bodanapu

Saurabh if I may ask, I think it would be good to have, if you could reach out to Mayur who will set up a more detailed conversation because it will take a bit of time to explain, what exactly we do. So could I suggest that you reach out to Mayur and he will set up a communication with us.

Thank you very much. I’ll just say that thank you for the support and thank you for your time today. Obviously, things are looking quite good. The vertical that was a bit of a lag for us - Aerospace, which at one point was the largest vertical and today is the second largest. Aerospace is back and Aerospace is back with the vengeance, I would say. Like Karthik talked about, we have a double-digit growth. And while it's a double-digit growth every quarter-on-quarter sustainable? Probably not. But it's not that the business will de-grow. That the growth, that we're seeing is sustainable for a lo

Management

Speaking time

Krishna Bodanapu

Moderator

Sandeep Shah

Ajay Aggarwal

Shradha

Sameer Dosani

Karthikeyan Natarajan

Mihir Manohar

Athreya Ramkumar

Saurabh Sadhwani

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Opening remarks

Krishna Bodanapu

Thank you very much. Good evening, ladies and gentlemen, and welcome to Cyient Limited's Earnings Call for the Third Quarter of Fiscal Year 2023. I am Krishna Bodanapu, Managing Director and Chief Executive Officer of Cyient. Present with me on this call are Mr. Ajay Aggarwal, Executive Director and Chief Financial Officer, and Mr. Kartik Natarajan, Executive Director and Chief Operating Officer. I would first like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available on our investor update, which has been mailed to you and is also posted on our corporate website. This call will be accompanied with an earnings presentation. The details have already been shared with you. As you are aware, Cyient Limited's subsidiary, Cyient DLM Limited has filed a draft red-hearing prospectus, DRHP, dated 9th January 2023, with the Securities and Exchange Board of India

Ajay Aggarwal

Thank you, Krishna. I'm very delighted, as Krishna said, we have overall very well-rounded performance. And a performance that's not only sustainable, but which can further improve. When I say well rounded, I think it's not only that we are getting traction on the top line, we have excellent performance on the profitability and cash flow. As you have seen, our vision is to be industry leading earnings growth player and also to be the best in cash generation. I think this quarter is a very good reflection of that, and I want to assure you that the same will continue. With this, I move over to the revenue slide, just to give you a little insight into revenue. Our total revenue is $197 million, as Krishna said, and it's gratifying to see we have about 28.6% growth year-on-year and 13.4% quarter-on-quarter. If you look only for services, it's 167.9 million and if you look at the organic itself, it's close to 4%. I'm talking of all numbers in constant currency. And the inorganic contributio

Karthikeyan Natarajan

Thank you, Ajay. I wish you all a very Happy New Year. And as Krishna and Ajay talked about, I think we had an all-round performance, both on the sales as well as delivery and operational efficiencies have been brought in. And just to put things in the perspective and to start looking at the table on the left side. If you look at Aerospace, which has grown quarter-on-quarter by 4.4% in constant currency. Since the currencies have fluctuated significantly in Q3, we are looking at the constant currency column. And if you could see rail transportation has taken dip of minus 4.9%. We talked about rail recovering in H2, and we are hoping that by Q4, we should probably be getting this in the positive territory. Communications, which has grown by 1.3% and they have been one of our stars of growing at 20%-plus year-on-year. I think that will continue. And as far as mining, energy and utilities, and we have grown about 6.8%, solid performance across all the segments. New growth areas, the growt

Krishna Bodanapu

Thank you Ajay and Karthik for the details. So if I may summarize the outlook, I'd first want to say -- we continue to see very good momentum in our organic business and our Q4 organic revenue in constant currency will be higher than Q3. Like I said, this is backed up with some very strong momentum, order book, order intake, etc. This will be driven by growth in Aerospace, Mining, Communications and Automotive. Having said that and like Karthik also provided a brief as other areas also where we see further tailwinds that are possible including rail and so on and so forth. So overall, we're confident that Q4 will see further acceleration in growth. On top of that, we'll add 14% to 15% in FY23 revenue due to acquisitions in constant currency. We expect the FY23 normalized margins for the organic services business to be in the 13- 14% range for the group. And we're quite confident that we will be well in that range and towards the higher end of that range. We expect FY23 normalized EBITDA

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