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Motilal Oswal, a prominent financial research firm, has issued a sell recommendation for Cyient, an Indian multinational technology company. Their analysis, released recently, points to a significant downside potential for Cyient's stock price, urging investors to consider selling their shares. The core of their recommendation rests on a detailed examination of Cyient's financial performance, specifically focusing on the company's Digital Engineering and Technology (DET) business segment. This segment constitutes a crucial component of Cyient's overall operations, and its health is highly indicative of the company's overall trajectory.
The report highlights Cyient's third-quarter (3QFY25) results, revealing a 2.4% quarter-over-quarter (QoQ) increase in constant currency (CC) terms for DET revenues, reaching USD 175 million. While this represents growth, it falls short of Motilal Oswal's projections of 2.3% growth. The report further emphasizes a somewhat mixed performance across different verticals within the DET segment. While several verticals exhibited broad-based growth, the 'Sustainability' vertical registered a decline of 1.3% QoQ (CC). This inconsistency in performance across different sectors underscores potential underlying challenges within Cyient's business model and strategic diversification efforts.
The report delves into the profitability of Cyient's DET business, revealing a contraction in the Earnings Before Interest and Taxes (EBIT) margin. The EBIT margin contracted by 70 basis points (bp) QoQ and a significant 250 bp year-over-year (YoY), settling at 13.5%. This figure, while matching Motilal Oswal's estimates, nevertheless indicates a concerning trend of declining profitability. Further compounding the negative sentiment, the service order intake, a key indicator of future revenue streams, was reported as muted at USD 312.3 million, exhibiting only a 5% YoY increase. This sluggish order intake raises concerns about the company's future growth prospects and ability to sustain its revenue streams.
Looking at the broader financial picture, Cyient's performance during the nine months of fiscal year 25 (9MFY25) paints a less than optimistic view. The report indicates that DET revenue, EBIT, and Profit After Tax (PAT) all declined compared to the same period in 2024 (9MFY24). Specifically, a decline of 1.8% in revenue, 16.8% in EBIT, and 14.3% in PAT was observed. These figures represent substantial year-on-year decreases, signaling potential underlying weaknesses within the company's operational efficiency and financial health. The outlook for the fourth quarter (4QFY25) is equally subdued, with projections suggesting flat revenue and further declines in EBIT and PAT compared to the same period last year. Specifically, the report predicts a 15.5% YoY decrease in EBIT and a 9.9% YoY decline in PAT.
Central to Motilal Oswal's valuation and recommendation is their Sum of the Parts (SOTP) methodology. This approach involves separately valuing different components of Cyient's business, including its stake in DLM (presumably another company). The report states that Cyient's stake in DLM is valued at market valuation, adjusting for a 20% holding company discount, reflecting the inherent discount applied to holding companies. Moreover, the report values the DET business using a price-to-earnings (P/E) ratio of 18x, based on the estimated earnings per share (EPS) for fiscal year 27 (FY27E). This valuation methodology, coupled with the observed financial performance and outlook, leads to their SOTP-based target price of INR 1350. This target price implies a substantial downside of 23% from the current market price, solidifying their sell recommendation.
In conclusion, Motilal Oswal's sell recommendation for Cyient stems from a comprehensive analysis of the company's financial performance and outlook. The report highlights declining profitability, muted order intake, and a generally pessimistic outlook for the coming quarter. This assessment, combined with their SOTP valuation methodology, leads them to a target price that suggests significant downside risk for investors. It's crucial for investors to conduct their own thorough due diligence before making any investment decisions based on this report or any other financial advice. The report's detailed analysis, however, provides a compelling case for investors to seriously reconsider their position in Cyient and potentially adjust their portfolios accordingly.