Cyient Limited (532175) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Cyient Limited Q1 FY '27 Results Conference Call. [Operator Instructions] Please note that this call is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, Executive Vice Chairman and Managing Director. Thank you, and over to you, sir.

Thank you very much, Inba, and good evening, ladies and gentlemen. Welcome to Cyient Limited's Earnings Call for the First Quarter of Financial Year 2027. I'm Krishna Bodanapu, Executive Vice Chairman and Managing Director; and present with me on this call are Sukamal Banerjee, Executive Director and CEO; and Shrinivas Kulkarni, CFO, Chief Financial Officer. I would 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 website -- investor update, which has been e-mailed to you and also posted on our corporate website. This call will be accompanied by an earnings call presentation. The details of the same have already been shared with you. We continue to report group performance under 4 segments: DET, DLM, Semiconductor and others. While the focus of this call will remain the DET segment, I will spend some time on semiconductor and DLM since these also represent a significant value of the Cyient Group portfolios. Group numbers include performance of all 4 segments. Coming to some key updates for this quarter. I'll first start with Cyient Semiconductors. As many of you would remember, our semiconductor business has 3 verticals: the services business where we deliver semiconductor services to companies, the custom ASIC turnkey business where we design and source chips and deliver chips at a more mature nodes to companies and the evolving custom product/ASSP business, where we will own the intellectual property and supply chips to companies. The services business continues to grow. You may have seen some announcements on this. We won a deal from the Semiconductor Complex of India to upgrade their fab in Mohali and many other deals, and we continue to have a very strong pipeline on the semiconductor business, which continues to grow. Now coming to the second part, which is the custom ASIC business. The pipeline here now stands at more than $100 million and is building fast, powered by a wave of new design wins and deepening roster of blue-chip marquee clients. Our compound semiconductor initiatives continue to advance, anchored by our push into the Indian gallium nitride or GaN power market. We launched 7 new GaN power chips, leveraging the Navitas technology to rapidly growing demand for high-efficiency, high-power density solutions across AI data centers, telecom, fast-charging consumer applications, industrial power systems and e-mobility platforms. Now coming to the third part or the third pillar, which is the custom ASSP or custom -- sorry, custom ASSP business. There are 2 parts to it, low power and high power. to increase our spread and reach in the low-power ASSPs, we acquired Kinetic Technologies. Q1 was the first quarter where we operated this recently acquired business, fully consolidated it and the combined revenue of the Cyient and the Kinetic Technologies business is $17.9 million. Our semiconductor -- our organic semiconductor business grew 5% quarter-on-quarter to $7.5 million, marking our fifth consecutive quarter of organic growth above 5%. Also, if you look at the high-power ASSP business, we continue to make significant progress in research and development efforts. While QinetiQ gives us access to low power and credibility in power, the high-power business is being developed organically, which is where much of our cash flow is going and which is what has led to lower operating profitability. The team is fully on board. The research phase is completed and now development is in full swing, positioning us to address one of the fastest-growing demand areas in the industry. Turning to a major milestone. As we highlighted on 25th May, we signed a financing agreement with EAAA at a post-money valuation of $500 million. I'm pleased to announce that we have closed this round, $30 million of fresh capital raised through a combination of debt and equity is in place. This is a strong vote of confidence in our strategy and our trajectory and gives us the balance sheet strength to invest in growth and scale. Looking ahead, we remain confident in our outlook for the year. With the recent fundraise closed and an expanding pipeline and strong underlying momentum across the business, Cyient Semiconductor is well positioned for years to come. Now moving on to Cyient DLM. Q1 FY '27 there has begun on a very strong note, reinforcing the message from our previous earnings call that the underlying strength of our business remains intact and the investments we have made over the last few years are translating into tangible results. As you know, this is also starting to reflect in the valuation of Cyient DLM, which is an encouraging validation of the market's confidence in our direction, our capability and our credibility. The quarter played out against a backdrop of continued geopolitical uncertainties, evolving design patterns, demand patterns and global supply chain disruptions, including the West Asia crisis. Despite this, Cyient DLM stayed firmly focused on execution, enabling us to consistently meet our delivery commitments and further strengthening customer trust. Our order book momentum there continues to be a strong anchor for our confidence with the quarter closing at the highest ever order book, supported by a strong order inflow and a book-to-bill ratio of in excess of 1.5. This was complemented by strong revenue growth year-on-year across a diversified revenue mix and sustained double-digit EBITDA margins for 4 consecutive quarters. This reflects our focus on operational excellence, revenue quality and disciplined cost management. Alongside this, key leadership hires in strategy, sales and operations are now substantially complete, meaningfully strengthening our go-to-market engine and positioning us to accelerate growth ambitions. Looking ahead in Cyient DLM, the structural drivers of our business remain firmly intact, rising electronic content, supply chain diversification and the broader outsourcing strength. With our differentiated design-led manufacturing model and our strong customer relationships, Cyient DLM is well positioned to capitalize on these opportunities. Lastly, during the quarter, Cyient successfully completed our share buyback program, extinguishing 6.4 million equity shares at a price of INR 11.25 per share, aggregating to INR 720 crores. This represents approximately 5.76% of the company's total paid-up capital. The promoter group, directors and key management personnel did not participate in the buyback, reinforcing our continued confidence and commitment in the long-term value of the company. Before I hand over to Sukamal, I would also like to take this opportunity to announce that we will have an Investor Day planned on 25th August in Mumbai. It will be a great occasion to engage with our leadership team on strategy, growth priorities and the road ahead. I look forward to interacting with many of you there. With this, I hand over the call to Sukamal, who will take you through the business performance of DET.

Thank you, Krishna. Good evening to all of you, and thank you for joining us today. As Krishna mentioned, I'm also looking forward to seeing many of you next month in Mumbai at our Investor Day, where we'll go deeper on where this business is headed. Today, let me give you the direction and the first proof of it. For some time now, we have been focusing on our life cycle engineering capabilities, and that opens up a far larger market for us. The R&D outsourcing today is a market of roughly $80 billion to $100 billion. Across the full product life cycle, the opportunity in front of us is close to 20x that. And a lot of that can be shaped and defined by us. Our customers are seeing this firsthand. The products they build stay in service for decades. And with far more sensors on board, they now generate more data than ever. Literally, the volume of data is doubling every quarter in our segments. That creates real value for us to capture right across the life cycle from development, manufacturing through supply chain and into aftermarket and in the case of certain Industries MRO, where much of this growth now sits and much of the economic value created now sits. Our M&A strategy was a promise to move on this opportunity. And this quarter, we delivered the first step. We announced our agreement to acquire TAO Digital Solutions. As you are aware, with TAO, we add real depth in data and software engineering, including cloud-native platforms, and that help us guide our key customers through their AI adoption journey. Just as importantly, they know how to keep AI running with AI ops reliably once it's live in production. They work in the same mission-critical industries and platforms as we do, where the data is complex and there is little room for error, especially in the context of deploying AI at scale. Their employees bring that strength across North America, India, Taiwan and some parts of Europe. Bringing their strengths together with our own domain and engineering knowledge, we can finally make AI adoption real for our customers and at scale. This is what carries us further along the life cycle from design and engineering through TAO operations and aftermarket. We have always believed that AI earns its value only when the people shaping it truly understands the domain. And with TAO, we bring those 2 strengths together under one roof. Let me highlight this in translating this with an example of MRO. Our Agent AI-driven MRO platform is a clear example of this life cycle shift in action. Our customers in the aerospace industry are in early stages of building a robust data infrastructure, encompassing dark data, structured and unstructured data to create digital threats across the product life cycle. What we have built brings engineering, the supply chain and the shop floor into one AI operations platform. It turns lost time back into real output from the assets they service. We launched this platform-based offering at the Farnborough Air Show this week, and the customer engagement has been very encouraging. The opportunity is compelling. Our product is designed once and built at scale, but maintained across a service life of 50 years or more, and that is where the growing share of economic value now sits. We layer our domain expertise and Agentic MRO platform playbook on secure AI infrastructure to deliver intelligent outcomes for our customers. Let me now switch gears to talk about our Q1 numbers. As you have seen, overall, we had a satisfactory quarter across broad segments of our business, except one market, which unfortunately had a sharp reversal. This resulted in our overall constant currency to be a degrowth of quarter-over-quarter to be minus 0.5%. And in rupee terms, it was a growth of 2.7% quarter-over-quarter growth. This in year-over-year turned out to be minus 0.9% constant currency. And in rupee terms, it turned out to be a 10.6% growth in constant currency. Apart from the market-specific impact I mentioned, we did see some slowness in awarding of discretionary projects as customers across the globe were cautious on starting new programs with some of the uncertainty and supply chain disruptions due to the West Asia war and the situation that has unfolded because of that. Despite this slight drop in revenue, our ongoing focus on operating margin improvements resulted in an EBIT of 13.2%, up 79 bps quarter-over-quarter normalized. This reflected our continued focus on improving both our revenue through cost ratios, but also ongoing optimizations on our G&A and overheads and bring back to industry levels. This EBIT outcome is despite higher restructuring costs over our near-term quarterly average that we experienced in Q1. I will let our CFO, Srini, give more color on the progress we have made on this front. Underneath the headline, the momentum in our funnel and our order intake tells the full story. Our order intake was up 5.3% year-over-year for Q1. Order intake growth for our new business, existing new EN and NN business came at 64% year-over-year and 49% quarter-over-quarter. Over the last 2 quarters, Q4 FY '26 and Q1 FY '27, we have won 5 large deals. Additionally, in Q1, we have created and qualified 9 large deals, giving us additional large deal pipeline of over $300 million. So our focus on building up larger deals is starting to show momentum. On our EBIT exit goal of FY '27, let me share how we see it today. We are still working towards a 15% EBIT, but we now believe that this may take a little longer than the Q4 FY '27 we originally [indiscernible]. Our plan rested on 2 things: our internal focus on cost and a certain revenue growth trajectory. We remain firmly on track on the cost side, and it is the revenue ramp-up where we are running a little behind, and that is where our attention is now. We also took a decision not to cut back on our investments, which are critical for our turnaround in the service portfolio mix, which is important to sustain the momentum for our future growth. Let me also add a little more color from a segment performance perspective. As you have seen in our reported segments, Transportation & Mobility was a real standout quarter. It grew 3% quarter-over-quarter in constant currency and 14.8% year-over-year in constant currency and remains our strongest engines, delivering its fifth consecutive quarter of growth. Network and Infrastructure rebounded to grow 0.3% quarter-over-quarter constant currency and 2.5% year-over-year constant currency, which is what we anticipated post our Q4 setback and what we had highlighted to be a quarter-specific problem. The growth numbers would have been even higher had it not been for delayed start to some of the programs which we had already won in Q4 of FY '26, reflecting the demand for higher bandwidth and smarter systems remain strong. This is exactly the high-value [ engineering-led ] work we want more of and the same ambition runs right through our portfolio. As I mentioned before, our strategic units did suffer minus 8.2% quarter-over-quarter de degrowth, primarily due to contraction in our energy business. While the results in the near term has been challenged, we have rebuilt our go-to-market team in several important geographies. And more important, we have created a better perspective and understanding of what we need to take to the market and how we need to play in the market. We are confident that this will start showing market comparable results in the next 2, 3 quarters. Other market segments in strategic units continue to deliver adequate results, and we expect them to gain further momentum as some of the funnel we talked about is reflected in these verticals. From a leadership perspective, a quick word on a couple of additions that we have done. We are very happy to welcome Baskar Nagarajan, who has joined us as the Global Head of Avionics Delivery across nearly 3 decades of experience at Honeywell, HAL and Alstom. He has led teams of thousands on complex safety critical programs and strengthens our work in the transportation segment. We are also glad to welcome Rahul Sarkar to lead our alliances and partnerships, which was one of our critical initiatives, which I've highlighted in some of our forums. Over -- Rahul has -- over the last 12 years at Tech Mahindra has built the partnership and ecosystems across hyperscalers, AI platforms and OEMs. As we take our life cycle strategy further, it is domain expertise and the right partnership that turn technology into real outcomes. And both of them, I'm sure, will help us get there. Before I close, let me leave you with one thought. In our industry, advantage comes from understanding our customers' business deeply enough to know where intelligence creates the greatest value and having expertise to deliver meaningful outcomes. This isn't something AI can take over. It can only augment what experts deliver. That conviction is reflected in everything we have shared today from acquisition and our expanded offerings through how we are sharpening our market focus. We are combining deep domain expertise with AI to solve more meaningful problems for our customers. I'm confident in our strategy, our execution and the team driving it forward. Thank you. And with that, let me hand over to our Chief Financial Officer, Srini, to take you through the financials in more details.

Thank you, Sukamal. Ladies and gentlemen, thank you for joining today's call. I'll now walk you through the financials. Before turning to the numbers, let me confirm that the only change to the reporting structure this quarter is the inclusion of Kinetic in the Semiconductor segment. This call today will focus on BET performance, followed by a brief commentary on the group level performance. Two updates before the quarter's numbers. First, as Krishna noted, the buyback is complete. All the 6.4 million shares were extinguished and the consideration fully settled. Both the acceptance and extinguishment occurred after the reporting period, which is June 30. So there is no impact on Q1 FY '27 results as reported. Second, on Tower Digital acquisition that was announced earlier, the closing is progressing well, and we are expecting to satisfy all the closing conditions by August 2026. We have expensed in the current period $1.4 million in transaction costs in Q1, and this is normalized and treated as nonrecurring for the quarter. Coming to DET's performance. DET reported Q1 revenue of $162.5 million. It's down 0.5% sequentially and 0.9% on a year-on-year basis in constant currency. In INR terms, revenue was INR 1,540 crores, up 2.7% quarter-on-quarter and 10.6% year-on-year. The divergence between the dollar growth and the rupee growth is explained by the currency tailwind. On margins, and you will see this noted in the annex that we have shared, we have revised our gross margin definition this quarter to reflect full accountability of project-linked costs by reclassifying project-linked costs such as software, hardware, facility and technology incubation spend. This is a presentation change only. This has no impact at the EBIT level and prior periods have also been restated for a like-to-like basis. DET gross margin for Q1 FY '27 stands at 32.7%. It's down 13 basis points sequentially, but up 127 basis points on a year-on-year basis. On the EBIT margin, DET delivered 13.2% this quarter. This is normalized for the M&A expenses I referred to earlier, and it's up 79 basis points sequentially and 114 basis points on a year-on-year basis. This is driven by continued cost optimization and favorable foreign exchange from a stronger USD. Q1 DET profit after tax normalized for M&A expenses is INR 141 crores. It is up 2.1% sequentially, but down 13.5% year-on-year. The year-on-year decline reflects lower other income as Q1 of FY '26 benefited from a one-off reinstatement gains. The effective tax rate for the quarter was 29.2%, broadly flat sequentially, but up 150 basis points year-on-year, driven by a shift in the profit mix towards higher tax jurisdictions and some prior period true-ups. We are working on initiatives to bring this down, and we expect the full year run rate of ETR to be between 27% and 28%. On cash, DET free cash flow for the quarter was INR 114 crores or 80.5% conversion to normalized PAT. This is down sequentially 49% against a strong Q4 base, primarily due to certain payments for which provisions were created in Q4 but paid in Q1. And -- but the Q1 FCF conversion pattern is consistent with prior years, which is why on a year-on-year basis, FCF is broadly flat. Also, you'll notice that the CapEx spending this quarter is a little bit higher, which is reflective of the cyclical IT system refresh and project ramp-up. As in prior quarters, DET's EBIT PAT and EPS are presented on a normalized basis, excluding the INR 14 crores of M&A-related expenses tied to the Tower acquisition. A full reconciliation is in the annex of this presented. Quickly on the group performance. At the group level, Q1 revenue is $219 million, up 4.5% sequentially and 9.1% year-on-year in constant currency. INR revenue is INR 2,076 crores, which is up 7.7% quarter-on-quarter basis and 21.3% on a year-on-year basis. Numbers this quarter includes INR 10.4 million from the Kinetic Technologies within the Semiconductor segment, and this is their first quarter of consolidation. Group EBIT margin normalized was 9.7%, up 16 basis points sequentially and 19 basis points on a year-on-year basis. DET's improvement, partially offset by continued investments in the semiconductor business is the result of this. Consolidated and organic semiconductor details are in the annexures. The group profit after tax normalized was INR 114 crores with EPS at INR 10. 32. On a reported basis, group profit after tax was INR 104 crores and EPS was INR 9.42. In closing, this was a quarter of disciplined execution. BET expanded EBIT margin both sequentially and on a year-on-year basis even as top line growth remained muted in constant currency. With the buyback now fully settled and Tower Digital on track to close by August, our capital allocation priorities for the year are largely executed and the team's focus now turns fully to integration and converting this margin trajectory into a sustainable higher base. I'll now hand over the call back to Inba for moderating the Q&A.

[Operator Instructions] We take our first question from Moez Chandani of AMBIT.

My first question was on the 3 segments, right? Starting with strategic units. We've seen, I think, a decline for the last 2 quarters. Do we think that we are now at the bottom for this segment? Or do you think that there is still some further impact because of some of the delays in discretionary spends that you noted in your remarks?

Moez, to answer your question, as I mentioned, there are essentially 3 markets included over there, and we definitely see strong potential and the numbers are also reflecting that in terms of growth in 2 of them. For one of them, which is energy, as I highlighted, we might have 1 or 2 more quarters. I won't say of softness, but for growth to rebound, we probably will need 1 or 2 more quarters. So overall attempt should be to narrow the gap, if not make it flat for this particular quarter. That is what we are working towards.

Understood. And then just on your transportation and mobility, obviously, growth has been strong for you there. Again, is there a particular project or ramp-up that is driving this? Or that's more of a function of the broader aerospace sector where we are seeing growth going forward?

No, it is not driven by one project. In fact, as you know, it is the transportation mobility constitutes of aerospace, rail and automotive. We have growth in all 3 of those segments quarter-over-quarter as well as double-digit growth year-over-year in each of those 3 segments. So it is pretty holistic growth that we are driving across these 3 markets.

Sure. Understood. And then lastly on semiconductors. I know, Krishna, you highlighted a fairly strong demand environment for the entire segment. Any sense in terms of how do you see breakeven coming through for the semiconductor business, especially on the PAT level given that we've already taken some debt for the Kinetic acquisition and also your expectations in terms of growth for the rest of the year?

So Moez, growth will continue to be very strong. I mean we continue -- we see a strong pipeline both for the signed organic business and the acquired entity, which is Kinetic Technologies. So from a growth perspective, we're not overly worried in that sense. I think there's a very, very good growth. Now in terms of breakeven, it looks like breakeven will happen only in FY '28. We -- and most of it -- and if you look at a gross level, it has a very healthy gross margin. Our semiconductor business has a higher gross margin than the services business, which is expected. But as I said, there's 2 parts to the custom product or ASSP business. One is, of course, what we acquired, but the second is the design and development of certain high-voltage products. Now that still will consume cash for the next 4, 5 quarters, at least. That's why I say breakeven in FY '28. But also you have this amortization and depreciation -- amortization, sorry, because of the acquisition of Kinetic and that's why there's about $3 million a quarter there that we have to cover up. That's why net-net, growth is good, breakeven in '28.

We take our next question from Hasmukh Vishariya from Tata MS.

So my question is on the energy vertical within the strategic unit, right? So if I think about 2 years back, we were exception vertical let's say, last 3, 4, 5 quarters, the momentum has faded away whereas if I look at one of your peers -- leger peer, they are continuously getting good deal wins [indiscernible]. If you could elaborate on rationale with respect to the loss or market share loss market share loss, why is that?

Yes. So I think to answer your question, 2 parts, the numbers that you are referring to, which were strong a couple of years back were built on one single very large project. And I think we have in our commentary over the last 4, 5 quarters, talked about the ramp downs we were facing in that project, which is now completely over. The project is completed. What now we have been working on is -- and I understand the comparison you are making. And that's why in my commentary, I also said that steps we have taken and the changes we have done, we feel very confident in next 2, 3 quarters, we'll be showing comparable numbers to the market. And those are to do with 2, 3 different things. One, as I mentioned, the change in the go-to-market team, which had to be done in some pockets to align with what the market needs are. Second, to prioritize on which offerings that we take to the market given the current market conditions. And third to broaden the service portfolio that we have been taking to that market instead of just depending largely on planting, we have broadened our service portfolio. In fact, it is already reflected in one of our large deal wins in Q1, where we won, and I think it's highlighted in the key deals as well with one of the large energy OEMs, we won a multiyear large deal for digitalization of their service parts catalog. And these are the kind of projects which expands our service portfolio to these customers that we already have as our logos. And those are the 3 steps we are taking to make sure that the turnaround gets done towards the results that we are seeing.

[Operator Instructions] Our next question is from Dipesh Mehta of Emkay Global.

Two questions. First, on the revenue growth side. Considering -- if I understand correctly, you are indicating energy, most of the weakness is behind, growth will take some time. So considering the negative headwind is largely behind and other 2 segments you expect growth to continue. Should we expect positive growth to return starting quarter 2? And as year progresses, momentum to accelerate in FY '27 from revenue growth perspective? That is question one. Second question is on the margin, what you indicated, you are differing some of the time line of 15%. Can you provide more detail around it? When now one should expect your margin trajectory to be 15% and above 15% kind of trajectory?

Sure. I'll take the first question, and I'll ask Srini to comment on the second one. On the commentary that you made is largely correct. I think the growth numbers that we are trying to pursue will obviously build up slowly over the quarters, but that's definitely the visibility and the perspective we have at this point in time. Srini, on the margin question on EBIT.

Yes. So I think like Sukumar explained on the call, I think our EBIT trajectory and growth has 2 elements to it working in tandem. One are the cost levers and the optimization levers, which are largely in our control. And the second is on the absorption rate we would expect from growth. Now on the first part, which is in our control, those are on track. I think we are working on a number of levers like the rate increases from customers, the productivity and automation-related savings, taking the G&A optimization, et cetera. But on the second part, since growth has been muted, I think we will see the absorption coming in a little late. We've also taken a conscious call not to stop any of the investments that we are making, which is required for the rebound and for the growth momentum to come back. So we will see a path towards 15%. It will take us a couple of quarters into the next year, by which time we hope to get there.

Understand. And any thought around the wage hike during this period when you say, let's say, my understanding is you are indicating somewhere in H1 and we should be reaching 15%? And how to look wage hike in this...

No, no. I said we will reach the 15% in H1 of next year, not this year.

FY '28 I said, yes.

Yes. So the wage hike is a different conversation. I think that is driven by the market forces. We will take a call looking at all the scenarios in the beginning of H2 on the wage hike itself.

Our next question is from Shradha Agrawal from Asian Market Securities.

Just on the revenue question again. So I think earlier, we had broadly indicated that revenue growth in '27 will be in the mid- to high single-digit range with whatever commentary you have around strategic unit. So what is the outlook on revenue that we want to give now? And with Tao Digital acquisition getting consolidated, say, from 3Q or probably 1 month of 2Q, how should we look at revenue, including TAO?

So I'll answer the first part, and then we'll come -- I'll hand it over to Sukamal. See, on the revenue, first of all, there was no guidance from us, right? We said we were aiming towards a mid-single-digit growth. Now of course, that will be challenged given just the way the mathematics works, if you have not started the year with the growth, I think the ask rate for the rest of the year does become very hard. But of course, we are very hopeful of growth returning in a meaningful way in H2 of this year. We are still working through the numbers. We don't have the details to give a specific commentary on what -- where that will land us, right? Tower will definitely add...

Yes, sure. So Tao, as you might be aware, we are still in the closing process, and it is anticipated to be sometime in the late Q2 time frame. And I think we had indicated regarding the revenue it brings. And once we close, we'll be able to be in a better position. But it definitely will be closer to about $40 million, $50 million range if you are able to close with the time lines that we are sharing right now.

Right. And I understand the order book number for this quarter has been quite strong. So what has driven that? It is mostly led by the new business, but what about renewables in the existing order book? Has that seen a decline because of some client-specific issues? Or what has been the reason?

I think 2, 3 broad factors. Number one, a lot of project-based work which came to end. And some of them were already planned. So it's not a surprise or most of it was already planned, not a surprise. Second, as I mentioned, the start in some of our segments or discretionary projects to restart, there has been a delay. And that is where we have -- and some of these we count as renewals because these are more regular projects that are customer hands over to the same team. So there are some delays in that, and that is what has depressed on the existing business. And those were the 2 primary reasons why existing business was -- renewal was a little depressed. But having said that, it has nothing to do with any structural issues or market issues. It has more to do with some of the timing and both from a project perspective as well as customer willingness to commit to new projects.