Aug 03, 2016 Information -Technology Services Cyient Ltd Cyient Ltd Bloomberg Code: CYL IN Research - Stock Broking BUY

Moderate Capex Leads to Healthy Free Cash Flow Generation Recommendation (Rs.)

CMP (as on Aug 02, 2016) 513 During FY16, Cyient has recorded a cash balance of Rs.7741Mn (cash balance Target Price 589 including the liquid investments) after the four acquisitions made during Upside (%) 15 FY15-FY16. Operating cash flow after adjusting the working capital changes, has Stock Information picked up to 60.0% levels of EBITDA; it has witnessed 90.2% of EBITDA during FY15. Cash per share has grown by 12.5% CAGR during FY12-FY16. Moderate Mkt Cap (Rs.mn/US$ mn) 57713 / 865 capex (Capex/EBITDA multiple of 3.2x, 5.0x and 5.1x during FY16, FY17E and 52-wk High/Low (Rs.) 643 / 369 FY18E respectively) behind the healthy free cash flow generation. 3M Avg. daily volume (mn) 0.07 Revival in business growth, besides healthy deal pipeline and strong Beta (x) 0.68 backlog orders. Rangsons and Softential business performance to be Sensex/Nifty 27982 / 8623 O/S Shares(mn) 112.50 watched: Cyient has recorded a deal pipeline of around US$1021Mn at the end Face Value (Rs.) 5.0 of FY16, a growth of 27.6% from US$799 Mn (during FY15). FY16 has witnessed a Shareholding Pattern (%) weak revenue growth, due to headwinds from the business investments (Softential and Rangsons) and few client specific issues. However, strong orders intake Promoters 22.2 during FY16, besides pickup in orders execution during FY16 displays the revival FIIs 41.4 in business growth. Management has guided 10% of core business revenue growth DIIs 23.1 (including Softential) and 50% growth in Rangsons business (backlog orders Others 13.3 around US$40Mn) during FY17E. Stock Performance (%) 1M 3M 6M 12M Healthy cash flow generation boosts the dividend payout ratio:Cyient has maintained a dividend payout ratio of around 30.3% and 29.0% during FY15 and Absolute 5.6 12.1 18.6 (5.9) FY16 respectively. On the back of healthy cash generation, which could protect Relative to Sensex 2.4 1.9 4.0 (5.4) Source: Bloomberg the downside risks, management could maintain the healthy dividend payout ratio going ahead. Relative Performance* Valuation and Outlook 120

At CMP of Rs.513, stock is trading at P/E of 15.3x and 13.1x of FY17E and FY18E 90 EPS. We re-initiate a coverage on Cyient with a target price of Rs.589 based on

15.1x of FY18E EPS with the potential upside of 15% in a 12-15 month period. 60 16 16 16 15 15 15 15 16 15 16 16 16 ------Key Risks - - Jul Oct Apr Jan Jun Feb Sep Mar Aug Nov Dec yy May Rangsons and Softential’s business to be watched. CYL IN Sensex yy Currency volatility. Source: Bloomberg; *Index 100 yyMacro Economic risk. Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E

Net Sales 22064 27359 30956 35271 40763 EBITDA 4102 4008 4208 5247 6193 EBITDA Margin (%) 18.6 14.7 13.6 14.9 15.2 Net Profit 2660 3532 3263 3775 4391 EPS (Rs.) 23.8 31.5 29.0 33.6 39.0 RoE (%) 18.3 20.6 17.4 18.5 18.7

PE (x) 13.8 15.9 17.0 15.3 13.1 Analyst Contact Source: Company, Karvy Research; *Represents multiples for FY14, FY15 & FY16 are based on historic market price Abhiroop Varma V For private circulation only. For important information about Karvy’s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY, 040 - 3321 6323 Thomson Publishers & Reuters [email protected]

1 Aug 03, 2016 Cyient Ltd

Company Financial Snapshot (Y/E Mar) Company Background Profit & Loss (Rs. Mn) Cyient Ltd (formerly known as Infotech enterprise Ltd) enjoying FY16 FY17E FY18E the market cap of Rs. 54.7 Bn (as of Jun 27, 2016), celebrating its 25th anniversary in 2016. The company has promoted by Net sales 30956 35271 40763 Mr. B.V.R. Mohan Reddy and his son Mr. Krishna Bodanapu. Optg. Exp (Adj for OI) 26748 30024 34571 B.V.R. Mohan Reddy is the executive chairman of the company EBITDA 4208 5247 6193 and also former chairman of NASSCOM (for 2015-16), Krishna Depreciation 893 938 1036 Bodanapu is the Managing Director and CEO of the company. Interest 179 183 183 Cyient is a global information technology solutions provider Other Income 1085 755 728 and specialized in design services, design-led PBT 4134 4880 5702 , networks and operations, data transformation and analytics. It caters services to various industries like Tax 986 1220 1425 aerospace, defense, rail transportation, off-highway & Adj. PAT 3263 3775 4391 industrial, power generation, , oil & gas, , Profit & Loss Ratios utilities, geospatial, semiconductor and medical technology. EBITDA margin (%) 13.6 14.9 15.2 It is enjoying the long standing relationships with its clients. Net margin (%) 10.5 10.7 10.8 Some of the marquee clients from its portfolio are , P/E (x) 17.0 15.3 13.1 Pratt & Whitney, Caterpillar, TomTom, Bombardier, Airtel and Swisscom across all the industries. Currently, it employs over EV/EBITDA (x) 11.8 9.5 7.7 13500 people across 38 locations in , Dividend yield (%) 29.0 28.0 25.6 and -Pacific regions. Source: Company, Karvy Research

Balance sheet (Rs. Mn) Cash Flow (Rs. Mn) FY16 FY17E FY18E FY16 FY17E FY18E

Total Assets 27370 30441 34237 PBT 4134 4880 5702 Net Fixed assets 4084 4203 4390 Depreciation 893 938 1036 Current assets 17947 20898 24508 Interest (paid) 179 183 183 Other assets 5339 5339 5339 Tax (986) (1220) (1425) Total Liabilities 27370 30441 34237 Changes in WC (722) (729) (855) Networth 19098 21816 25083 Others (998) (755) (728) Debt 681 681 681 CF from Operations 2499 3298 3913 Current Liabilities 6676 7024 7547 Capex (1300) (1058) (1223) Other Liabilities 873 879 885 Investment (454) 0 0 Deferred Tax 42 42 42 Others 1205 875 848 Balance Sheet Ratios CF from Investing (549) (183) (375) RoE (%) 17.4 18.5 18.7 Change in Equity 21 0 0 RoCE (%) 12.4 19.3 20.4 Change in Debt 548 0 0 Net Debt/Equity (0.3) (0.3) (0.4) Dividends (1797) (1240) (1306) Equity/Total Assets 0.7 0.7 0.7 CF from Financing (1228) (1240) (1306) P/BV (x) 2.9 2.6 2.3 Change in Cash 722 1875 2232 Source: Company, Karvy Research Source: Company, Karvy Research Exhibit 2: Shareholding Pattern (%) Exhibit 3: Revenue Segmentation (%)

Others Others Data 0.5% 13.3% Transformation, Promoters Network & 22.2% Operations 36.5%

FIIs DIIs 23.1% Engineering 41.4% 63.0%

Source: BSE, Karvy Research Source: Company, Karvy Research

2 Aug 03, 2016 Cyient Ltd Engineering services account for 63.5% of revenues, delivered a revenue growth of 16.0% CAGR during FY12-FY16, We expect the revenue growth of 15.3% CAGR between FY16-FY18E Exhibit 4: Engineering services revenue concentration comparing to its peers

70% 63.5% 60% Cyient pioneered in product engineering solutions, from 50% the concept to prototype development and also offers 40% 28.7% service engineering solutions that enhance after-market 30% 18.0% revenue. These solutions include product health monitoring, 20% 10.0% reliability engineering, technical publications, obsolescence 7.1% 4.5% 10% 3.4% management and sustenance engineering. 0% Cyient KPIT HCL Mindtree Wipro TCS Infosys tech

Source: Company, Karvy Research Potential Market

Global R&D Spend US$614 Bn

Addressable Market Addressed Market US$216 Bn US$67 Bn

Addressed ER&D Globalisation & Services Addressed Market through offshore in-house market through Outstanding partners US$36 Bn R&D centers US$31 Bn Source: Zinnov market research, Karvy Research

Cyient derives major revenue of 63.5% from Engineering services; highly concentrated on this vertical comparing to its peers and we expect potential market growth would give Cyient a sharp edge to capitalize the growth opportunity. Overall global Exhibit 5: Global R&D spend (US$ Bn) 500 R&D spends grew by 2% and reached US$614 Bn Semiconductor US$ 51 Bn market during FY15, United States continues to be the major contributor with 41% share of the global R&D spends. Out of

Telecom & Automotive global R&D spend of US$ 614 Bn, US$216 Bn is the overall US$ 109 Bn Networking addressable outsourced Engineering R&D services market. US$ 41 Bn However, global service providers addressed US$36 Bn Electrical & Software & cosumer during FY15 (which is 16.7% of total addressed market) and Internet, electronics huge market is still largely untapped. Europe based service USD 71 Bn US$ 48 Bn providers leading the market followed by India ER&D service providers.

Source: Zinnov market research, Karvy Research India engineering R&D service providers revenue grew by 12.7% during FY15, outpacing the growth of Global Engineering services market growth of 8.7% Global Engineering R&D services outsourcing market grew by 8.7% and reached US$36 Bn during FY15. European service providers dominated this market during FY15 (constituting 55% of overall market) and grew by 7.7%. India based R&D service companies which account for 22% (US$ 7.8 Bn) of global R&D services market, grew by much faster pace of 12.7%. According to Zinnov market research, India’s ER&D services market is expected to reach US$15-17 Bn by 2020. North America continues to be the target market for Indian service providers (Contributing 55% of revenues). Cyient is a predominant player with 25 years of experience in Engineering R&D services; and ER&D accounts for 63.5% of total revenue. We expect this potential growth in market would give Cyient a sharp edge to capitalize this growth opportunity strengthening longstanding relationships with the existing clients and pick-up in new client addition.

3 Aug 03, 2016 Cyient Ltd

Exhibit 6: R&D outsourcing spots (US$ Bn) Exhibit 7: Service providers revenue growth (vertical-wise)

20 Others 3% Transportation 1% 18.7 Construction & Heavy Engineering 2% 15 Energy & Utilities 4% 12.7% Growth during FY15 Telecom 23% Semiconductors 4% 10 ISV 25% Industrial Automation 3% 5 7.8 Medical Devices 5% 5.9 Computer Peripherals & Storage 4% Consumer Electronics 5% 1.6 1.6 0 Automotive 12% Western India USA Eastern China Aerospace & Defence 9% Europe Europe 0% 5% 10% 15% 20% 25%

Source: Zinnov market research, Karvy Research Source: Zinnov market research, Karvy Research

Exhibit 8: R&D spends as a percentage of Revenue (US$ Bn)

Hi-tech Verticles 34.7% 12% Among all the verticals, Hi-tech vertical showing the huge 9% business opportunity considering R&D spends, Hi-tech 11.8%

6% 11.7% verticals include ISV (Independent Software Vendor),

3% 2.4% Semiconductors, Telecommunications together constitute 6.1% 5.1% 4.3% 7.3% 4.9% 0% 34.7% of Indian R&D spends. Cyient enjoys the leadership position in Aerospace vertical; Aerospace accounts 9.0% of ISV R&D spends showing the opportunity for Indian players in this Medical Devices Telecom Industrial Defense Consumer Electronics space. Automotive Aerospace & Semiconductor

Source: Zinnov market research, Karvy Research

Exhibit 9: Cyient’s Revenue by Industry Vertical (%)

Medical & Cons. Electronics Utilities and Communications 1.9% geospatial 18.9% 15.8% Within engineering services segment, Cyient has predominant Semiconductor focus on Aerospace & Defense, Transportation, off-highway 4.3% equipment, semiconductor, , utilities and Off-highway geospatial vertical. Equipment Aerospace & 10.0% Defence 38.7% Transportation 10.3%

Source: Company, Karvy Research Strong position with specialization in aerospace engineering services and further long standing relationship with marquee clients display the Cyient’s leadership position and long term business growth Aerospace & Defense vertical contributes 38.7% of total revenues during Q1FY17; Cyient delivers aerospace engineering solutions from the concept to qualification with ownership at a system level across engines, structures, avionics, systems and interiors. It also manages aftermarket services such as repairs, reliability engineering, technical documentation and performance monitoring. Cyient has a dominant global presence with longstanding relationships (more than 10 years) with marquee clients such as Airbus, Boeing and Pratt & Whitney in aerospace engineering services. Airbus and Boeing have been characterized as a duopoly in large Jet and commercial airliners market, Cyient is the service provider for both the players. Most common outsourced business in aerospace engineering services is from design support, technical publications, engine design and aero structures in mechanical or embedded systems in avionics. Majority of the aero structure work is outsourced from Boeing, Airbus and their suppliers; Cyient is enjoying the long standing relationship for more than 10 years with Boeing in aerospace vertical. Currently, Cyient provides design and stress support on the 747-8 Freighter, the 787-8 and 787-9 aircrafts.

4 Aug 03, 2016 Cyient Ltd

Exhibit 10: Orders (Aircrafts) Exhibit 11: Deliveries (Aircrafts) 1600 800 762

1200 723 1503 600 1456 1432 1355 648 635 629 626 601 588 800 1203 400 1080 833 768

400 200 375 298 288 0 183 0 FY12 FY13 FY14 FY15 FY16* FY12 FY13 FY14 FY15 FY16* Airbus Boeing Airbus Boeing

Source: Company, Karvy Research, *FY16 till June 30th Source: Company, Karvy Research, *FY16 till June 30th

Exhibit 12: Engine design and MRO market (US$.Bn) 8 Aero engine work is majorly outsourced from large players such as Rolls Royce, Pratt and Whitney (owned by united 6

6.9 ) and GE (General Electric) Aviation. During 4 6.2 FY16, global engine and Maintenance, Repair and Operations 4.6 2 3.4 0.9 3.2

0.5 (MRO) market expected to be sized at around US$25.7 Bn. 0.1 0 Pratt and Whitney (Cyient is enjoying the strong partnership for more than 10 years) constitutes US$3.4 Bn (13.2% Royce Others -

CFM of market size), while GE Aviation and Rolls Royce are Rolls International Aviation International

Aero engines leading the pack with US$6.9 Bn (26.8% of market size) and Engine Alliance Pratt & Whitney Pratt & Whitney General ElectricGeneral US$ 4.6 Bn (17.9% of market size).

Source: Company, Karvy Research Current demand for commercial airlines is healthy and backlogs are at record highs for Airbus and Boeing. Things to be watched: further growth depends on in-time execution of backlog orders and business cyclicality. Together, the US and Europe airliners (Boeing and Airbus) have an order book close to around 12000 aircrafts gives the long term business visibility representing around 8-10 years of production. Execution of backlog orders to be watched from both the players: both the players are set to produce roughly 28% more aircrafts in 2018 than 1400 expected to be made during FY15. Things to be watched are: if global aviation markets are weakening, there would be many chances of cancelling the orders, as the Airbus and Boeing have significant orders from airlines in emerging countries. In this case, this downturn could also affect the business of their service providers like Cyient. Strategic acquisitions and healthy growth in airline order deliveries, set to revive revenue growth during FY17E and FY18E Exhibit 13: Global MRO segment and forecast (US$ Bn) During Q1FY16, Cyient has acquired Global Services 50 Engineering Asia (GSE), based in from Pratt & Whitney services Pte Ltd which generates revenue around 40

46.8 US$10Mn - US$12Mn and EBITDA margins around 12%-14%.

30 Cyient sets to execute the S3 (Services, Systems & Subsystems 37.1 and Solutions) strategy through the acquisition of Pratt 20 27.9 GSE-Asia which extends its value through MRO services.

10 19.2 With this acquisition, Cyient expanding its services to 15 17.8 16.7 15.9 15.2 14.5 12.4 12.3 Singapore. Singapore is a hub to many aerospace companies 0 (MRO, R&D, manufacturing and data analytics) where we FY15 FY20E FY25E Airframe Engine Component Life see the cross selling opportunities. Pratt & Whitney has also

Source: Zinnov market research, Karvy Research committed the volumes (business) for a period of 4 years to Cyient (GSE business). Considering the healthy airline clients order book, increasing deliveries and strong long term relationship with the clients improve the revenue growth visibility. Example, on an average, it takes three to five years to build an engine in aerospace industry and the engine could be in service for up to thirty years, during the time repairs and maintenance would be required. With the new acquisitions and execution of S3 strategy, now Cyient could provide the services during the entire product life cycle, engine design and after market services (MRO services) which displays the continuous business opportunity.

5 Aug 03, 2016 Cyient Ltd

Trending risk sharing business model, during FY16 Cyient has started risk reward sharing business model with two clients and it intends to expand to 10 new clients for this model in next two years, and we expect these flexible revenue models could support the new deal wins and strengthen the client relationship followed by continuous business. Recognition: Cyient was recognized as an “Established and Expansive” player in Engineering Research and Development (ER&D) services, it has recognized as a leader in Aerospace and Transportation segments for the fifth consecutive year by Global Service Provider Ratings (GSPR) 2015 by Zinnov. Niche competence in railway engineering services, expertise in rolling stock, signaling and electrification services Railway engineering services account for 10.3% of total revenue, Cyient enjoys the niche competence in this segment and expertise in rolling stock, signaling services. Strong relation with the marquee clients in transportation vertical, some of them are Bombardier (leading manufacturer of both planes and trains, Cyient enjoying 14 years of long standing relationship and it is the second largest client to Cyient) is an anchor client to Cyient, Siemens Rail Automation, Alstom (long-term, global engineering partnership with Cyient) and Thales. This segment has witnessed slow growth from the last two quarters; however, growth has revived by 9.0% during Q1FY17. Expecting the healthy growth would continue and key focus in service lines such as Rolling Stock and Signaling, Cyient’s new engineering center in Prague has started commissioning during Q1FY17, which would further progress the volume growth in business units key geography of Europe. Also, it has started Bogies technical center in for expanding transportation business. New deal wins from the client’s side and order backlog, display the further growth from transportation vertical. Some of the Cyient’s key services to its marquee clients are: Bombardier is an anchor client and second largest client to Cyient, Cyient provides range of services in Design engineering projects for railway industry. The new engineering services unit in Hyderabad also executes projects in the area of software development services and embedded services. Bombardier is the major player in the industry providing the transportation and engineering services and tanked the major orders recently. Some of the recent orders pipelined are below: yyBombardier to provide an additional 60 TWINDEXX Vario Double-Deck Coaches to Israel Railways, this call-off order is part of a framework agreement signed in October 2010 and is valued at approximately Euro 106 Mn (US$120 Mn). yyDuring July, 2016, 50 trains have been ordered by Italian rail operator Ferrovie dello Stalo Italiane, contract is around Euro 1.5 Bn. yyDuring June, 2016 Abellio Rail Südwest has formally signed a Euro 215Mn contract for Bombardier Transportation to supply 43 Talent 2 electric multiple-units for use on the Neckartal services which it is to operate from June 2019 under the Land of Baden-Württemberg’s Stuttgart Netz 1a contract. Things to be watched: Bombardier is the second largest client to Cyient. Bombardier pays revenue in terms of EUROs, Euro depreciation or client’s business growth could impact the Cyient’s revenue.

Cyient supports Alstom Transport by providing specialized design engineering solutions for rail transportation. These solutions are delivered from a dedicated Alstom Transport-Cyient Center of Excellence located in , which works in close association with Alstom’s engineering teams across the globe and in India. Alstom has been recently awarded a Eur100Mn (US$111.25 Mn) 10-year contract to provide maintenance support for Class 180 trains operated by UK’s Grand Central Railway Company. Thales signaling collaboration, the continuous increase led the LU (Line Upgrade) to plan the Jubilee and Northern Line Upgrade Programme (JNUP). The JNUP involves the design, procurement and installation of a Transmission-Based Train Control (TBTC) system and was implemented by Thales, in partnership with Cyient. Acquisitions made Cyient foray into Hi-Tech, heavy engineering and telecom verticals Semiconductor and Off-Highway verticals together account for 14.3% (during Q1FY17) of total revenue, Cyient hasmade acquisitions to foray into these verticals. It has strengthened its position and expertise in high-performance ASIC (Application Specific Integrated Circuit), System-on-Chip (SoC) and Field Programmable Gate Array (FPGA) semiconductor design with experience and electronic design tool resources applied to each stage of the design process. It has added large clients to its portfolio and maintaining the long relationship with them, some of them in off-highway verticals are Caterpillar, Terex, John Deere and Komatsu. Few big clients from semiconductor segment are IBM, Qualcomm, Broadcom and Semtech. Cyient has opened

6 Aug 03, 2016 Cyient Ltd a new delivery center in during FY15 to address its semiconductor market. It is executing S3 strategy to this vertical; it has now taken ownership of ASIC for the complete lifecycle. It could able to deliver the prototypes of the first product, which has been tested by the client and ready for the mass production. Increasing services and addressing the complete product lifecycle issues with the strong client portfolio to this vertical could support the business growth.

Exhibit 14: Acquisitions Year Company Industry

2008 Cyient has acquired TTM private Limited Hightech vertical Acquired Daxcon Engineering USA Heavy engineering (Off highway equipment) 2010 Acquired Wellsco Inc USA Telecom Source: Company, Karvy Research

Data and Network Operations (DNO) account for 36.5% of total revenue, delivered a revenue growth of 24.1% CAGR during (FY12-FY16) Utilities & Geospatial verticals together constitute 15.8% of revenue and Communications vertical accounts 18.9% of revenue. Cyient has strengthened its position in geospatial vertical with healthy acquisitions and strong client portfolio, major client in this vertical is TomTom. TomTom, major client in Cyient’s geospatial vertical, witnessed a 34.0% growth in automotive business during Q2FY16 TomTom is a best known player and a global leader in and mapping products space, Cyient’s collaboration is with TomTom’s map product unit which is responsible for maintaining an accurate and up-to-date map of the world. TomTom’s global database covers nearly 46 Mn kilometers and 4.3 Bn people worldwide and features full navigable 135 countries. As part of an ongoing commitment to TomTom, Cyient has also setup a center of excellence in Hyderabad. TomTom is a major client in the Cyient’s data segment and further it enjoys the longstanding relationship with the TomTom. During FY05, Cyient has acquired Tele-Atlas India (Tele-Atlas acquired by TomTom (Parent company)), Tele Atlas joined Cyient as a strategic partner with preferential allotment of shares. Significant spike in automotive and telematics business and healthy order intakes during FY16 from clients side, clears the Cyient’s future business growth. TomTom’s automotive business has witnessed a growth of 34.0% growth during Q2FY16. Healthy order intakes in automotive segment (increasing traction in digital map database), Volvo has chosen TomTom as a global provider of maps and navigation and traffic. Telematics also supporting the company’s future business growth in Geospatial segment (Data segment), during Q2FY16 TomTom has added a record number of 27,000 vehicles installed base and signed an agreement with PSA (Peugeot SA) group to offer value added fleet management services. We expect the healthy business growth in Cyient’s geospatial vertical, considering the revival in automotive and telematics segment, as Cyient is a leading provider of geospatial management services delivering digital database production support to TomTom’s maps. Geospatial segment quarterly outlook Geospatial business has witnessed a high double digit growth during Q4FY16 after a continuous pressure witnessed during the three quarters in FY16, successful ramp-up of two major clients behind Q4FY16 significant growth. But, Q1FY17 revenue has dropped marginally due to small budgeted decline. However, management has guided the healthy growth in this business unit, supported by orders intake during Q1FY17 which was in line with the expected budget.

Exhibit 15: Acquisitions Strengthening its GIS vertical Year Company

1999 Europe based GIS (Geospatial) software Solution Company – Dataview solutions Ltd. 2001 European GIS distributor Map Centric - a leading independent GIS distributor in Europe. 2004 VAGRIS, a GIS company in US. 2007 Acquired 74% stake in Geospatial Integra and renamed the company as Infotech Geospatial (India) Ltd. Source: Company, Karvy Research

7 Aug 03, 2016 Cyient Ltd Strong traction around fiber rollout programs across globe and pickup in order intakes boost the communications business further Communications vertical accounts for 19.0% of total revenue (during Q1FY17), some of the marquee clients in this vertical are AT&T, Verizon, British Telecommunication and Airtel. Onsite delivery center was started in to further strengthen communication vertical. Strategic step of acquiring Softential Inc for strengthening communication business unit

Exhibit 16: Softential Revenue (Rs.Mn) Cyient has acquired softential during FY14, under the S3 35 strategy. With this acquisition, Cyient has extended its service 30 from network plan and design to build operational support 30 25 systems and manage network and service operation centers 20 23 for communication and utilities clients, Plan-Build-Operate 15 (S3 Strategy). Softential generated around US$13Mn during 17 16 10 the time of acquisition; Cyient has planned a synergy of 5 leveraging Plan/Build/Run model to additionally managed NOC (Network Operation Center) services to existing and 0 FY14 FY15 FY16 new clients across all the Cyient geographies and targeted the Revenue (US$ Mn) Targeted revenue (US$ Mn) revenue of US$30Mn during FY16. Considered the revenue Source: Company, Karvy Research target, Softential has performed the healthy growth during FY15, revenue grew to US$23Mn. However, due to the seasonality issues (challenges in the software sales) and impact from main client IBM’s overall performance, Cyient missed the revenue target of US$30Mn in FY16. Revenue has fallen back to US$16Mn (FY14 levels) during FY16. Management has guided revival in Service Management & Assurance (SMA) segment (Management addressing Softentail business as SMA) in coming quarters, considering the good order pipeline and continuous investment in expanding presence in US and cross selling the services to other industry verticals like Rail Transportation, Navigation.

PLAN BUILD RUN Design and automate Develop, Configure, test and 24/7 support desk, monitor & Service Management integrate Service Management manage Service Management solutions Solutions Environment $2.5Bn $7.2Bn $10.0Bn addressable addressable addressable market market market Quarterly outlook: Communications business has delivered a significant growth of 13.1% during Q1FY17, due to strong traction around fiber rollout programs across the globe and mobile upgrades in APAC (Asia-Pacific) and US regions, major growth has witnessed from its key customers in USA and Australia & markets. We expect the growth would continue further considering the fast pick up in fiber rollout programs across all the geographies. Longstanding relationship with marquee clients in all the segments and pickup in the new clients addition, display the healthy business growth

Industry Verticals Marquee clients Industry Verticals Marquee clients Years as a client

Pratt & Whitney, UTC Southern California Edison, Tom Tom 20 Aerospace Aerospace systems, Boeing, Utilities AEP, SP AusNet, Singapore Pratt & Whitney 15 Airbus and Honeywell Power and Stedin Airtel 15 Bombardier, Siemens Rail AT&T, Verizon, British Bombardier 13 Communications Transportation Automation, Alstom, Hyundai Telecom, Airtel and Telstra British Telecom 12 Rotem and Thales Westinghouse, GE Energy, GE 12 Caterpillar, Terex, John Deere, Energy & Natural Off-Highway Transocean, MHI and Rio Boeing 11 Joy Global and Komatsu Resources Tinto Swisscom 9 IBM, Qualcomm, GUC, Philips, Thermofisher and Telstra 8 Semiconductor Consumer & Medical Broadcom and Semtech Medivators I H S 7 Source: Company, Karvy Research Source: Company, Karvy Research Source: Company, Karvy Research

8 Aug 03, 2016 Cyient Ltd

Exhibit 17: Clients added in numbers Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16

Engineering 5 7 7 3 6 4 8 8 13 7 10 9 Data & Network Operations 5 8 4 4 3 15 15 8 11 10 11 11 Product realisation 2 3 3 2 Total 10 15 11 7 9 19 23 16 26 20 24 22 Source: Company, Karvy Research

S3 strategy, transforming Cyient from pure services play to becoming systems and solutions partner

Services Provides technical services

Systems Integrated multi disciplinary capabilities across & Subsystems mechanical engineering, embedded software and electronics for designing, prototyping and testing

System level engineering with manufacturing and Solutions after-market support and end-to-end process management deliver complete solutions

Source: Company, Karvy Research

Cyient’s S3 strategy is to transform the business from services to systems and solutions partner. Cyient is executing the strategy through the acquisitions across all the business verticals. We expect the execution of S3 strategy, could accelerate the Cyient’s overall business growth in the coming years. As Cyient is maintaining a strong relationship with its marquee clients in their specific segments, the chances are high in building up the healthy deal pipeline with the extended services.

Exhibit 18: S3 strategy to transform Cyient’s business from services to systems and solutions partner

Solutions 5.0% Systems 50.0%

Services 75.0% Services Systems FY16 FY20E 30.0% 20.0%

Solutions 20.0%

Source: Company, Karvy Research Rangsons effect Cyient has acquired 74% of equity stake in Rangsons Electronic Private Ltd during Q4FY15. Rangsons is a leading electronics system design and manufacturing services provider. The strategic acquisition is an execution of S3 strategy, with this acquisition Cyient has extended its services to design led manufacturing capability. Rangsons business is referred as DLM (Design Led Manufacturer) business; during FY15 it has generated US$39Mn. Management has guided 50% of revenue target during FY17E, considering the US$ 40Mn backlog orders. We have factored 50% revenue target in our FY17E revenue expectations. During FY16, Rangsons contributed around 9% of consolidated total revenue. As per management guidance, the Rangsons would generate US$59Mn, which is around 11.1% of total revenue. During Q1FY17, DLM segment could not able to show the expected growth on the back of seasonality issues, but considering the order backlog (US$40 Mn), management is expecting the growth in coming quarters to support the targeted growth of 50%. Rangsons business is to be watched in coming quarters.

9 Aug 03, 2016 Cyient Ltd Financial outlook: Strong orders pipeline and backlogs, pickup in orders execution and client specific issues are behind during the Q4FY16 and Q1FY17, boost the revenue growth further. Cyient has delivered US$ revenue growth of 9.9% CAGR during FY12-FY16. FY16 revenue has delivered a muted US$ revenue growth of 5.6% on the back of flat growth in engineering and DNO segments, behind few client specific issues from these segments, top 20 clients contribution has dropped and headwinds faced from the Cyient’s business investments. Softential has witnessed a significant drop in the business during FY16, on the back of some seasonality issues, challenges faced in software sales and issues from IBM (major client) overall business performance. However, with the strong business pipeline and backlog order book in softential business, we expect the pickup from this segment during FY17. Rangsons business (Design Led Manufacturing) has faced headwinds from the business cyclicality during FY16 and could not able to reach expected managements target. It has delivered revenue of US$39Mn (During FY16), management has guided 50% growth in DLM segment during FY17E considering the backlog order book (around US$40Mn) and pickup in backlog orders execution. Pickup in deal pipeline, US$1021Mn during FY16 against US$799 Mn at the end of FY15, we expect this project based deals could boost the revenue during FY17E and FY18E. We have factored the management’s guidance in our FY17E revenue, as 10% of growth from the core business and 50% growth in Rangsons (DLM) business. Pickup in DLM orders intake (Executable in current year) to US$12.3Mn from US$9.8Mn during Q4FY16, total orders intake during Q1FY17 is US$148 Mn and management expecting healthy orders inflow during H2FY17E as few of the major clients in Aerospace and Defense issue purchase order in Q3 and Q4 quarters. We expect the revenue growth of 13.9% and 15.6% during FY17E and FY18E at a CAGR of 14.8% (during FY16-FY18E). Exhibit 19: Revenue (US$ Mn) and Growth (%) Exhibit 20: Revenue (Rs.Mn) and Growth (%)

609 23.0% 25% 40800 30% 24.0% 607 20% 20.6% 30600 40763 406 525 17.8% 20% 35271 472 15% 447

15.6% 20400 30956 363 27359 345 10% 15.6% 203 11.2% 13.1% 13.9% 10% 10200 22064

5% 18731 6.5% 5.6% 5.3% 0 0% 0 0% FY13 FY14 FY15 FY16 FY17E FY18E FY13 FY14 FY15 FY16 FY17E FY18E Revenue (US$ Mn) Growth (%) Revenue (Rs.Mn) Growth (%)

Source: Company, Karvy Research Source: Company, Karvy Research

Drop in EBITDA margins, challenges from Softential and Rangsons performance behind the drop. However, pick up in the utilization rate and management’s increased focus on margin expansion would be the margin levers

Exhibit 21: EBITDA (Rs.Mn) and EBITDA Margin (%) Cyient’s EBITDA margins have fallen to the levels of 13.0%- 15.0% levels during FY15-FY16 from 16% to 19% levels during 6300 18.3% 18.6% 15.2% 20% 14.9% FY11-FY14, due to currency fluctuations (AUD and GBP 14.7% 13.6% 6193 depreciated during FY16), demand in onsite projects and fall 4200 15%

5247 in utilization. Significant drop in EBITDA margins during FY16 4208

4102 to 13.6% due to headwinds from Softential and Rangsons 4008 2100 10% 3424 (lower margin business); core business engineering and DNO margins have shown an improvement of around 100bps 0 5% (15.5% excluding Rangsons and Softential) during FY16. FY13 FY14 FY15 FY16 FY17E FY18E However, due to drop in Softential and Rangsons businesses EBITDA (Rs.Mn) EBITDA margin (%) and margins affected the overall operating margins during Source: Company, Karvy Research FY16, Softential alone has created a 100bps swing during FY16, Softential margin has witnessed a significant fall during FY16 from 20% to 5%. We expect FY17E margins would improve by around 128bps during FY17E. We see some client specific issues are behind during Q4FY16 and Q1FY17 and pick up in utilization by 80bps to 73.5% during Q1FY17. We expect the growth would continue further, factoring the growth in Softential and Rangsons businesses; and we expect the margins would grow to 14.9% and 15.2% during FY17E and FY18E respectively.

10 Aug 03, 2016 Cyient Ltd

Exhibit 22: Overall Utilization rate (%) Exhibit 23: Onsite and Offshore mix (%) 78% 65% 76.7% 59.3% 76.1% 60% 56.7% 56.3% 75.8% 75.4% 53.5% 76% 59.3% 74.8% 55% 52.2% 56.6% 55.2% 56.1% 73.8% 50% 46.5% 73.5% 74% 74.3% 45% 47.8% 43.3% 43.7% 40.7% 44.8% 43.9% 40% 43.4% 72.7% 72% 40.7% 35% Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Overall utilization (%) Onsite (%) Offshore (%)

Source: Company, Karvy Research Source: Company, Karvy Research

Exhibit 24: Manpower by operating units (in numbers) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16

Engineering 4774 4923 5113 5312 5472 5447 5608 5574 5590 5649 5612 5600 DNO 5268 5764 5906 5953 6243 6480 6308 5955 5917 5662 5869 6184 IT services* 120 140 142 140 134 135 139 135 126 0 0 0 Support Functions 653 712 697 689 690 697 722 703 703 715 705 714 Total 10815 11539 11858 12094 12539 12759 12777 12367 12336 12026 12186 12498 Source: Company, Karvy Research, *Q2FY16 IT services business has been divested

Moderate capex, contributing robust free cash flow generation Cyient has generated Rs.7741Mn (Rs.7.4 bn) cash including liquid investments during FY16 after four acquisitions made during FY14-FY16 and cash per share has grown by 17.6% during FY16. Moderate capex has boosted the free cash flow generation over the last 5 years, operating cash flows have picked up to 60.0% levels of EBITDA and also witnessed a significant move to 90.2% levels of EBITDA during FY15. We expect the capex moderation would continue further and generate the healthy free cash flows, which boosts the strong cash accretion on balance sheet.

Exhibit 25: Healthy cash flow generation FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Cash and cash equivalents (Rs. Mn) 4782 5593 7313 6565 7741 9616 11848 Cash per share (Rs.) 42.9 50.2 65.4 58.5 68.8 85.5 105.3 Growth (%) 16.8 30.5 (10.6) 17.6 24.2 23.2

Operating cash flow (Rs. Mn) 1259 1380 2272 3617 2499 3298 3913 Operating cashflow/EBITDA (%) 46.8 40.3 55.4 90.2 59.4 62.9 63.2

Capex (Rs. Mn) 804 722 766 818 1300 1058 1223 EBITDA/Capex (x) 3.3 4.7 5.4 4.9 3.2 5.0 5.1

Free cash flow from operations (Rs. Mn) 455 659 1506 2799 1199 2240 2690 FCF as % of EBITDA (%) 16.9 19.2 36.7 69.8 28.5 42.7 43.4 FCF as % of Net Profit (%) 28.2 28.5 56.6 79.2 36.8 59.3 61.3 Source: Company, Karvy Research, *Q2FY16 IT services business has been divested

11 Aug 03, 2016 Cyient Ltd

SEZ (Special Economic Zone) deployment strategy Exhibit 26: Tax rate (%) 40% 35.6% Under the SEZ strategy, Cyient has realized a substantial 35% tax reduction from the last three years to 25% levels from 30.7% 29.1% 35.6% during FY12. The company has added close to 3000 30% employees (FY15) under this strategy over three years. SEZ 24.6% 23.9% locations are Hyderabad, Visakhapatnam, Kakinada and 25% Bangalore.

20% FY12 FY13 FY14 FY15 FY16 Tax rate (%)

Source: Company, Karvy Research

Healthy free cash flow generation improves the dividend payout ratio Exhibit 27: Dividend Payout Ratio (%)

30.3% 31% 29.0%

25.3% 26% Healthy free cash flow generation has pushed the dividend 22.0% payout ratio to 29.0%-30.3% levels during FY15-FY16, we 20.0% 21% expect the dividend payout ratio would improve further on the back of healthy cash generation.

16% FY12 FY13 FY14 FY15 FY16 Dividend payout ratio (%)

Source: Company, Karvy Research

Healthy return ratios EPS (Earnings per share) has delivered a growth of 18.9% CAGR during FY12-FY16, muted growth during FY16 on the back of headwinds from the business verticals and operating margins. We expect the EPS growth of 16.0% CAGR during FY16-FY18E on the back of pickup in business growth and recovering margins. Exhibit 28: Healthy Return Ratios 25% 40

20% 30

15% 20

10% 10 14.5 20.7 23.8 31.5 29.0 33.6 39.0 5% 0 FY12 FY13 FY14 FY15 FY16 FY17E FY18E EPS (Rs.) (RHS) Return on equity % Return on total assets % Return on invested capital % Return on capital employed %

Source: Company, Karvy Research

12 Aug 03, 2016 Cyient Ltd

Sensitivity analysis We have done a sensitivity analysis for Cyient to assess the key operating parameters like USD-INR (exchange rate), Volumes, Billing rates, EBITDA and EPS. Cyient being an IT company running the offshore centric business model, any given percentage change in either INR-US$ rate or in revenue growth could typically has a more than proportionate impact on EBITDA and Net Profit and EPS.

Exhibit 29: USD revenue sensitivity to volume and billing rates US$ Mn Volumes (Mn)

4% 2% 0% -2% -4% FY18E 21.6 21.2 20.8 20.3 19.9 4.0% 30.4 656 643 631 618 606 2.0% 29.8 643 631 619 606 594 Blended billing rates US/$ hr 0.0% 29.2 631 619 607 594 582 (2.0%) 28.6 618 606 594 583 571 (4.0%) 28.1 606 594 582 571 559 Source: Company, Karvy Research

Exhibit 30: USD revenue sensitivity to volume and billing rates in percentage terms Chg (%) Volumes (Mn)

4% 2% 0% -2% -4% FY18E 22.0 21.2 20.8 20.3 19.5 4.0% 30.4 8.2% 6.1% 4.0% 1.9% (0.2%) 2.0% 29.8 6.1% 4.0% 2.0% (0.0%) (2.1%) Blended billing rates US/$ hr 0.0% 29.2 4.0% 2.0% 0.0% (2.0%) (4.0%) (2.0%) 28.6 1.9% (0.0%) (2.0%) (4.0%) (5.9%) (4.0%) 28.1 (0.2%) (2.1%) (4.0%) (5.9%) (7.8%) Source: Company, Karvy Research

Exhibit 31: INR revenue sensitivity to USD revenue with average USD exchange rate Revenue (Rs. Mn) US$ Revenue (Mn)

4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 44089 43242 42394 41546 40698 2.0% 68.5 43242 42410 41578 40747 39915 Average USD-INR rate 0.0% 67.2 42394 41578 40763 39948 39133 (2.0%) 65.9 41546 40747 39948 39149 38350 (4.0%) 64.5 40698 39915 39133 38350 37567 Source: Company, Karvy Research

Exhibit 32: INR revenue sensitivity to USD revenue with average USD exchange rate in percentage terms Chg (%) US$ Revenue (Mn)

4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 8.2% 6.1% 4.0% 1.9% (0.2%) 2.0% 68.5 6.1% 4.0% 2.0% (0.0%) (2.1%) Average USD-INR rate 0.0% 67.2 4.0% 2.0% 0.0% (2.0%) (4.0%) (2.0%) 65.9 1.9% (0.0%) (2.0%) (4.0%) (5.9%) (4.0%) 64.5 (0.2%) (2.1%) (4.0%) (5.9%) (7.8%) Source: Company, Karvy Research

13 Aug 03, 2016 Cyient Ltd

Exhibit 33: EBITDA sensitivity to USD revenue at average USD-INR rate EBITDA (Rs. Mn) US$ Revenue (Mn) 4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 9519 8671 7823 6975 6127 2.0% 68.5 8671 7839 7008 6176 5345 Average USD-INR rate 0.0% 67.2 7823 7008 6193 5377 4562 (2.0%) 65.9 6975 6176 5377 4578 3779 (4.0%) 64.5 6127 5345 4562 3779 2997 Source: Company, Karvy Research

Exhibit 34: EBITDA sensitivity to USD revenue in % terms Chg (%) US$ Revenue (Mn) 4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 53.7% 40.0% 26.3% 12.6% (1.1%) 2.0% 68.5 40.0% 26.6% 13.2% (0.3%) (13.7%) Average USD-INR rate 0.0% 67.2 26.3% 13.2% 0.0% (13.2%) (26.3%) (2.0%) 65.9 12.6% (0.3%) (13.2%) (26.1%) (39.0%) (4.0%) 64.5 (1.1%) (13.7%) (26.3%) (39.0%) (51.6%) Source: Company, Karvy Research

Exhibit 35: EBITDA margin sensitivity EBITDA Margin (%) US$ Revenue (Mn) 4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 21.6% 20.1% 18.5% 16.8% 15.1% 2.0% 68.5 20.1% 18.5% 16.9% 15.2% 13.4% Average USD-INR rate 0.0% 67.2 18.5% 16.9% 15.2% 13.5% 11.7% (2.0%) 65.9 16.8% 15.2% 13.5% 11.7% 9.9% (4.0%) 64.5 15.1% 13.4% 11.7% 9.9% 8.0% Source: Company, Karvy Research

Exhibit 36: EPS sensitivity to USD revenue with average USD-INR rate EPS (Rs.) US$ Revenue (Mn) 4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 61.2 55.5 49.9 44.2 38.6 2.0% 68.5 55.5 50.0 44.5 38.9 33.4 Average USD-INR rate 0.0% 67.2 49.9 44.5 39.0 33.6 28.2 (2.0%) 65.9 44.2 38.9 33.6 28.3 23 (4.0%) 64.5 38.6 33.4 31.5 23.0 17.8 Source: Company, Karvy Research

Exhibit 37: EPS sensitivity percentage change % Chg (%) US$ Revenue (Mn) 4% 2% 0% -2% -4% FY18E 631 619 607 594 582 4.0% 69.9 56.9% 42.3% 27.9% 13.3% (1.0%) 2.0% 68.5 42.3% 28.2% 14.1% (0.3%) (14.4%) Average USD-INR rate 0.0% 67.2 27.9% 14.1% 0.0% (13.8%) (27.7%) (2.0%) 65.9 13.3% (0.3%) (13.8%) (27.4%) (41.0%) (4.0%) 64.5 (1.0%) (14.4%) (19.2%) (41.0%) (54.4%) Source: Company, Karvy Research

14 Aug 03, 2016 Cyient Ltd

Exhibit 38: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16 FY17E FY18E Comments

During FY16, Cyient has witnessed significant headwinds from the business investments made and flat growth in core business Revenue 27359 30956 35271 40763 (organic business). Softential business has witnessed a significant fall in revenue on the back of challenges from the software sales and client specific issues. However, Q1FY17 has witnessed a pickup in the communication business on the back of increasing traction from fiber rollout programs and mobile upgrades in APAC and US regions. We expect the traction would continue further during FY17E and FY18E. After witnessing the weak business on the Rangsons side Revenue Growth (%) 24.0 13.1 13.9 15.6 during FY16, strong deal pipeline and backlog order book of around US$40Mn and improving order execution lend the confidence in Rangsons revenue target. Margins have fallen by 105bps during FY16 on the back of significant EBITDA 4008 4208 5247 6193 headwinds from Softential and Rangsons low margin businesses and increasing onsite business mix. Core business has witnessed a growth of 100bps in margins, Softential alone made a swing of around 100bps during FY16, margins have fallen to 5% levels from 20% levels EBITDA Margins (%) 14.7 13.6 14.9 15.2 during FY16. We expect the margin levers are around utilization and offshore mix during FY17E and FY18E. Besides the pressure from EBITDA margins, SEZ (Special Economic Zone) strategy has benefited the profit margins. Under the SEZ PAT (normalized) 3532 3263 3775 4391 strategy, it has realized a substantial tax reduction from the levels of 35.6% in FY12 to 23.9% in FY16. Fully Diluted EPS (Rs.) 31.5 29.0 33.6 39.0 Fully Diluted EPS Growth (%) 32.3 (7.9) 15.7 16.3 Capex 818 1300 1058 1223 Net CFO 3617 2499 3298 3913 Moderate capex generates the healthy cash flows. Net Debt* (4949) (5123) (6998) (9230) Free Cash Flow 2799 1199 2240 2690 Source: Company, Karvy Research, * Short term and long term

Exhibit 39: Karvy vs Consensus Karvy Consensus Divergence (%) Comments Revenues (Rs. Mn)

FY17E 35271 35493 (0.6) We expect the revival in business growth during FY17E and FY18E on the back of strong deal FY18E 40763 40037 1.81 pipeline and backlog order book, increasing EBITDA (Rs. Mn) traction from fiber rollout programs and mobile upgrades in APAC and US regions display the FY17E 5247 4934 6.4 pickup in Softential business and Rangsons FY18E 6193 5866 5.6 strong order book of around US$40Mn and EPS (Rs.) overall business pipeline stands at US$1021Mn during FY16, would support our revenue FY17E 33.6 33.0 1.7 targets. We expect the margin levers are around FY18E 39.0 38.9 0.3 utilization and offshore mix Source: Bloomberg, Karvy Research

15 Aug 03, 2016 Cyient Ltd

Exhibit 40: Revenue (Rs..Mn) and Growth (%) Cyient has delivered a revenue growth of 18.8% CAGR during 40800 30% FY12-FY16, during FY16 it has witnessed a drop in the growth due to few 24.0% 30600 20.6% client specific issues (drop in top 20 clients contribution) and headwinds 17.8% 40763 20% from the investments made, Softential business has witnessed a significant

20400 35271

30956 fall in revenue on the back of challenges faced in software sales, Rangsons

27359 15.6% 10% 10200 13.1% 13.9% weak business during FY16 due to the headwinds with the cyclicality of the 22064 18731 business. However, with the healthy deal pipeline and backlog orders, we 0 0% expect the revival in business growth during FY17E and FY18E. Softential

FY13 FY14 FY15 FY16 business has witnessed the strong traction in fiber rollout programs and FY17E FY18E Revenue (Rs.Mn) Growth (%) mobile upgrades during Q1FY17 in APAC and US regions; we expect

Source: Company, Karvy Research the momentum would continue forward supporting its business. On the Rangsons side, strong backlog orders of US$40Mn displays the growth in business during FY17E. At the end of FY16, overall deal pipe line stood at around US$1021Mn. Factoring the above aspects in our revenue estimations, we expect the revenue would grow by 14.8% CAGR during FY16-FY18E.

Exhibit 41: EBITDA (Rs.Mn) and EBITDA Margin (%) EBITDA margins have fallen to the levels of 13%-14% levels during FY15 and FY16, due to the acquisitions made and increase in the demand for 6300 18.3% 18.6% 15.2% 20% 14.9% onsite projects and headwinds from the utilization rates. During FY16, 14.7% 13.6%

4200 6193 15% margins have fallen by 105 bps on the back of headwinds from the

5247 Softential and Rangsons weak margins. Softential business alone has 4208 4102 2100 4008 10% created a 100bps swing in overall margins; it has witnessed a significant 3424 fall in margins during FY16 from 20% levels to 5% levels. The core business 0 5% has witnessed a spike of 100bps in margins. We expect the margins would

FY13 FY14 FY15 FY16 improve to 14.9% and 15.2% during FY17E and FY18E on the back of FY17E FY18E EBITDA (Rs.Mn) EBITDA margin (%) margin levers around utilization and pickup in offshore mix. Q1FY17 has

Source: Company, Karvy Research witnessed a pickup in the utilization rates and management’s increased focus on offshore work.

Exhibit 42: PAT (Rs.Mn) and PAT Margin (%)

4400 15% 12.9% 12.1% 10.5%

3300 4391 13% Despite the pressure from the EBITDA margins, SEZ (Special Economic 12.3% 3775

3532 Zone) deployment strategy is supporting the PAT margins. Under the SEZ 2200 3263 10.7% 10.8% 10%

2660 strategy, it has realized a substantial tax reduction from the levels of 35.6% 1100 2311 8% during FY12 to 23.9% during FY16. We expect the PAT margins would be

0 5% 10.7% and 10.8% during FY17E and FY18E respectively. FY13 FY14 FY15 FY16 FY17EFY18E PAT (Rs.Mn) PAT Margin (%)

Source: Company, Karvy Research

Exhibit 43: Operating cashflow/EBITDA (%)

90.2% 95%

During FY16, Cyient has recorded the cash balance of Rs.7741Mn 75% 63.2% 62.9% (including the liquid investments) after the four acquisitions made during 55.4% 55% FY15-FY16, moderate capex increases the free cash flow generation. We 59.4% 40.3% expect the healthy cash flow generation further, which further boosts the

35% dividend payout ratio. FY13 FY14 FY15 FY16 FY17E FY18E Operating cashflow/EBITDA (%)

Source: Company, Karvy Research

16 Aug 03, 2016 Cyient Ltd

Exhibit 44: Company Snapshot (Ratings) Low High 1 2 3 4 5 Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 Source: Company, Karvy Research

17 Aug 03, 2016 Cyient Ltd

Valuation & Outlook

Strong business growth could continue further comparing to its peers

Exhibit 45: Revenue growth (5 years CAGR %) comparing to peers Exhibit 46: EPS (Rs.) comparing to peers

25% 125 Large cap

20% 100 123.3 75 22.8% 22.1%

15% 21.1% 50 18.8% 17.9%

10% 16.6% 14.3

25 53.1 59.8 36.1 29.0 5% 0 TCS KPIT

0% Cyient Infosys Mindtree

TCS Infosys HCL Tech Mindtree KPIT Cyient Tech HCL

Source: Respective Companies, Karvy Research Source: Respective Companies, Karvy Research Strong business visibility in aviation vertical, MRO business to boost the business growth and could protect against the downside risk Cyient has recorded a total order book around US$1021Mn during FY16, as it is enjoying the leadership position in aviation space and longstanding relationship with the marquee clients (Boeing and Airbus). At present, Airbus and Boeing have combined healthy order book around 12000 aircrafts, with the business visibility for 8-10 years. MRO segment could also boost the revenue further; Cyient’s GES-Pratt acquisition could further support Cyient’s MRO business in aviation segment, and also could protect against the risk from the order book execution. Rangsons 50% revenue growth target during FY17E, strong backlog orders could support the growth. Rangsons business integration and strong backlog order book around US$40Mn could support the 50% revenue target of around US$59Mn. Healthy free cash flow generation, moderate Capex behind the picture We expect moderation in capex could further boost the free cash generation (EBITDA/Capex at 3.2x, 5.0x and 5.1x during FY16, FY17E and FY18E respectively). During FY16, it has recorded the cash balance of Rs.7741Mn (including liquid investments), strong balance after 4 acquisitions made, cash per share Rs.68.8, grown by 17.6% during FY16. Healthy cash generation boosts the dividend payout, which has reached 30.3% and 29.0% during FY15 and FY16 respectively, we expect the healthy dividend payout would continue further. Valuation and Outlook: At CMP of Rs.513, stock is trading at P/E of 15.3x and 13.1x of FY17E and FY18E EPS. We re-initiate a coverage on Cyient with a target price of Rs.589 based on 15.1x of FY18E EPS with the potential upside of 15% in a 12-15 month period.

Exhibit 47: PE Band Exhibit 48: PB Band 25.0 5.0

20.0 4.0

15.0 3.0

10.0 2.0

5.0 1.0

0.0 0.0 12 13 14 15 12 13 14 15 13 14 15 16 13 14 15 16 12 13 14 15 16 12 13 14 15 16 13 14 15 16 13 14 16 15 ------Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Jan Jan Jan Jan Jan Jan Jan Jan P/E Average 1+SD P/BV Average 1+SD 2+SD ~-1SD 2+SD ~-1SD

Source: NSE, Karvy Research Source: NSE, Karvy Research

18 Aug 03, 2016 Cyient Ltd

Exhibit 49 (a): Comparative Valuation Summary CMP Mcap EV/EBITDA (x) P/E (x) EPS (Rs.) (Rs.) (Rs. Mn) FY14 FY15 FY16 FY17E FY14 FY15 FY16 FY17E FY14 FY15 FY16 FY17E Cyient LTD 513 57713 7.2 12.7 11.8 9.5 13.8 15.9 17.0 15.3 23.8 31.5 29.0 33.6 MindTree LTD 613 102872 7.8 14.0 11.4 10.9 24.4 18.7 17.2 17.7 53.9 32.9 35.6 34.6 NIIT Tech LTD 442 27074 6.2 5.3 5.5 4.4 10.6 9.7 9.8 9.7 37.8 45.6 45.3 45.5 Source: Bloomberg, Karvy Research

Exhibit 49 (b): Comparative Operational Metrics Summary CAGR % (FY15-17E) RoE (%) Price Perf (%) Net Sales (Rs. Mn) Sales EBITDA EPS FY14 FY15 FY16 FY17E 3m 6m 12m FY14 FY15 FY16 FY17E Cyient LTD 16.9 8.5 12.1 18.3 20.6 17.4 18.5 12.1 18.6 (5.9) 22064 27359 30956 35271 MindTree LTD 22.2 12.4 (13.7) 30.0 23.6 26.4 22.0 (10.1) (19.2) (4.2) 30316 46730 45973 55326 NIIT Tech LTD 7.5 10.0 6.4 19.1 19.0 18.6 16.3 (7.4) (19.5) (8.3) 23050 26755 26832 28637 Source: Bloomberg, Karvy Research

Key Risks Rangsons and Softential’s businesses to be watched: Sofential business has performed weak during FY16, on the back of challenges faced in software sales and issues from major clients (IBM business performance), it has witnessed a negative growth of -30.4% during FY16. However, pick up in business due to strong traction around fiber rollout programs and mobile upgrades during Q1FY17 and expecting the momentum would continue further. Rangsons business has witnessed a weak growth during FY16, on the back of business seasonality issues and weak momentum continued further to Q1FY17. However, considering the deal pipeline and backlog order book of around (US$40 Mn) management has guided 50% revenue growth during FY17E. Hence, Rangsons and Softential businesses to be watched in coming quarters due to their business criticality. Currency volatility: Cyient majorly deals with the global clients; and hence volatility in foreign currency could adversely impact the financials. US$ accounts for 67.5% of revenue, EUR 10.1%, GBP 9.1%, AUD 8.2% and others 5.1%, Currency volatility could impact the financials. Example, Bombardier is the second largest client to Cyient. Bombardier pays revenue in terms of EUROs, Euro depreciation or client’s business growth could impact the Cyient’s revenue. Macro Economic risk: Aviation industry majorly depends on economic growth and conditions, and adverse change in the industry could impact the returns. Aviation & Defense accounts for 38.7% during Q1FY17. Cyient deals with the major players like Airbus, Boeing and Pratt & Whitney. Currently, combining the Airbus and Boeing order books stand around 12000 aircrafts (business visibility of 8-10 years) and major orders from emerging economies, weak macro economic growth could affect the order book and increase in order cancellations, which could indirectly affect the Cyient’s business. We expect the MRO segment could mitigate some risk, as increasing in new deliveries and older aircrafts inventory levels, which need to be replaced with the new technology, displays the business opportunity.

19 Aug 03, 2016 Cyient Ltd

Financials

Exhibit 50: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues 22064 27359 30956 35271 40763 Growth (%) 17.8 24.0 13.1 13.9 15.6 Operating Expenses 17962 23351 26748 30024 34571 EBITDA 4102 4008 4208 5247 6193 Growth (%) 19.8 (2.3) 5.0 24.7 18.0 Depreciation & Amortization 720 713 893 938 1,036 Other Income 169 1218 1085 755 728 EBIT 3382 3295 3315 4308 5156 Interest Expenses 14 58 179 183 183 PBT 3538 4456 4134 4880 5702 Tax 1030 1096 986 1220 1425 Adjusted PAT 2660 3532 3263 3775 4391 Growth (%) 15.1 32.8 (7.6) 15.7 16.3 Source: Company, Karvy Research

Exhibit 51: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Inventories 6913 6229 6951 8825 11058 Sundry Debtors 4800 5336 6145 6958 8041 Inventory 0 606 979 979 979 Loans & Advances 1778 2722 2734 2734 2734 Investments 925 1011 1586 1586 1586 Net Block 3413 3718 4084 4203 4390 Miscellaneous 1724 6164 4891 5155 5450 Total Assets 19553 25786 27370 30441 34237 Current Liabilities & Provisions 3617 6702 7329 7677 8200 Debt 0 467 681 681 681 Other Liabilities 53 176 262 267 273 Total Liabilities 3670 7345 8272 8625 9154 Shareholders Equity 560 562 562 562 562 Reserves & Surplus 15323 17879 18536 21253 24521 Total Networth 15883 18441 19098 21816 25083 Minority Interest 0 122 128 134 140 Total Networth & Liabilities 19553 25786 27370 30441 34237 Source: Company, Karvy Research

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Exhibit 52: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT 3538 4456 4134 4880 5702 Depreciation 720 713 893 938 1036 Interest 14 58 179 183 183 Tax Paid (1025) (1171) (986) (1220) (1425) Inc/dec in Net WC (669) 335 (722) (729) (855) Other Income (169) (1218) (1085) (755) (728) Other non cash items (137) 446 87 0 1 Cash flow from operating activities 2272 3617 2499 3298 3913 Inc/dec in capital expenditure (766) (818) (1300) (1058) (1223) Inc/dec in investments 209 64 (454) 0 0 Others 380 (4528) 1205 875 848 Cash flow from investing activities (176) (5282) (549) (183) (375) Inc/dec in borrowings 55 455 548 0 0 Issuance of equity 52 66 22 0 0 Dividend paid (521) (784) (1619) (1057) (1123) Interest paid (14) (56) (179) (183) (183) Cash flow from financing activities (427) (319) (1228) (1240) (1306) Net change in cash 1668 (1984) 722 1875 2232 Source: Company, Karvy Research

Exhibit 53: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) 18.6 14.7 13.6 14.9 15.2 EBIT Margin (%) 15.3 12.0 10.7 12.2 12.6 Net Profit Margin (%) 12.1 12.9 10.5 10.7 10.8 Dividend Payout Ratio (%) 22.0 30.3 29.0 28.0 25.6 Net Debt/Equity (x) (0.4) (0.3) (0.3) (0.3) (0.4) RoE (%) 18.3 20.6 17.4 18.5 18.7 RoCE (%) 16.4 13.9 12.4 19.3 20.4 Source: Company, Karvy Research

Exhibit 54: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) 23.8 31.5 29.0 33.6 39.0 DPS (Rs.) 5.0 8.0 7.0 8.0 8.5 BVPS (Rs.) 142.1 164.4 169.8 193.9 223.0 PE (x) 13.8 15.9 17.0 15.3 13.1 P/BV (x) 2.3 3.0 2.9 2.6 2.3 EV/EBITDA (x) 7.2 12.7 11.8 9.5 7.7 EV/Sales (x) 1.3 1.9 1.6 1.4 1.2 Source: Company, Karvy Research; *Represents multiples for FY14, FY15 & FY16 are based on historic market price

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Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : <5%

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