Cyient has shown resilience in Q2 FY25 with broad-based growth across key verticals, though impacted by specific challenges in its Sustainability sector. Anand Rathi Research has given a Buy rating with a target price of Rs. 2,230, up from previous estimates, indicating an optimistic 25% upside from its current price of Rs. 1,785. This upward revision follows a 2% revenue growth this quarter and is underpinned by expectations of improved performance in the second half of FY25, particularly in Aerospace, Connectivity, and New Growth Areas. Management reaffirms a stable outlook, anticipating a 16% EBIT margin by Q4 FY25. Here’s a closer look into the key aspects of Cyient’s performance and forecasted trajectory.

Q2 FY25 Performance Highlights

Revenue Growth Recovers Despite Sectoral Weakness
Cyient reported 2% sequential revenue growth, aided by broad-based vertical performance, with a minor setback in the Sustainability sector due to European seasonality. Aero and Transport divisions were the primary growth drivers, rebounding with 3.4% quarter-on-quarter growth, while Connectivity saw a 3.9% uplift, primarily driven by demand in the United States. The company expects this momentum to continue in H2 FY25.

Order Book and Deal Flow Impacted by Market Conditions
Total contract value (TCV) has declined by 14.7% year-on-year to $156.8 million. This resulted in a book-to-bill ratio of 0.9x, below the long-term average of 1.2x. Management attributes this decrease to global economic factors that have led to smaller deals with shorter execution cycles. Despite this, the outlook for H2 remains positive as new deals are expected to ramp up by Q3.

Strategic Divestments and Capital Allocation

Partial Divestment in Cyient DLM
Cyient has divested 14.5% of its stake in Cyient DLM (down to 52.2%), unlocking capital to pursue growth in its Semiconductor segment. This cash influx will support strategic acquisitions, with management focusing on semiconductor design and development to complement its portfolio in Healthcare and Automotive.

Strategic Focus on the Middle East and Expansion Plans
The company is establishing a stronger foothold in the Middle East, particularly within the UAE's energy sector. Cyient recently set up an entity in the UAE and acquired Gulf Computer Establishment in Abu Dhabi, positioning itself as a key player in the region's burgeoning tech and energy infrastructure.

Outlook for Key Business Verticals

Transportation and Aerospace: Reviving Growth Drivers
Following a temporary slump, Cyient’s Aerospace sector rebounded in Q2, marking a 3.4% sequential improvement in transportation. The company sees Aerospace as a stable growth driver, with steady demand across aviation and defense sectors in the coming quarters.

Connectivity: Stabilized Growth Driven by US Market Demand
Connectivity grew by 3.9% in Q2, reversing prior declines seen across previous quarters. Growth was particularly robust in the U.S. market, and Cyient’s Connectivity division is expected to maintain this trajectory in H2, driven by digital transformation and infrastructure projects.

Sustainability: Seasonal Impact but Long-term Resilience
Revenue from Sustainability dipped 6.4% sequentially, primarily due to European seasonality and consulting softness. Cyient foresees a recovery for this segment in H2, with demand driven by energy transitions, carbon management, and decarbonization efforts.

New Growth Areas: Potential in Healthcare and Semiconductors
New Growth Areas, covering Healthcare, Automotive, and Semiconductors, saw a 9.7% sequential increase in Q2. Management anticipates continued traction in these areas, particularly as the company channels its recent capital gains into R&D and operational expansion within the semiconductor industry.

Financial and Operational Metrics

Profit Margins Show Gradual Recovery
The Q2 FY25 EBIT margin rose by 74 basis points sequentially to 14.2% despite industry challenges, with management targeting a margin of 16% by Q4 FY25. Although TCV has dipped, operational efficiencies are expected to sustain margin growth, with revenue and profitability potentially stabilizing by the end of FY25.

Cost Management and Workforce Optimization
Cyient reported a 4% reduction in headcount year-on-year in Q2, signaling effective cost management strategies. Attrition rates have also dropped to 15%, aligning with industry norms and suggesting a stabilization in workforce turnover.

Revenue Per Employee on an Upward Trajectory
Revenue productivity showed signs of recovery, returning to previous highs after a slight drop in Q1, suggesting pricing leverage. Cyient’s productivity trends are expected to improve further as the company navigates the second half of the fiscal year.

Investment Thesis and Target Price

Target Price Raised to Rs. 2,230
ARSSBL has revised its target price for Cyient upwards from Rs. 1,990 to Rs. 2,230, representing a 26x FY27e EPS valuation at a ~10% discount to sector leader LTTS. The current share price of Rs. 1,785 offers a 25% potential upside, reflecting ARSSBL’s confidence in Cyient’s growth potential.

Positive Outlook Despite Market Challenges
Cyient’s strategic focus on expanding verticals and entering new regions underscores its potential for a robust recovery in H2 FY25. Management’s focus on margin improvement, capital reallocation toward high-growth areas, and cost efficiency strategies all contribute to the Buy recommendation.

Risks: Prolonged Sustainability Sector Weakness
Sustained weakness in the Sustainability sector, primarily affected by seasonal factors in Europe, remains a potential downside risk. Additionally, fluctuations in global macroeconomic conditions could impact TCV and revenue growth in the short term.