Cyient keeps surfing the AI wave. And its rally is far from over

Cyient operates in critical sectors such as transportation, sustainability, and communications, and other new growth sectors
Cyient operates in critical sectors such as transportation, sustainability, and communications, and other new growth sectors

Summary

With its expertise in AI, strategic diversification, and a proven track record of successful transformations, Cyient is well-positioned to ride the AI wave. For investors seeking exposure to high-growth sectors, the midcap IT stock deserves a closer look

Artificial intelligence has evolved remarkably over the years, seamlessly integrating into our world. It has been reshaping the way we interact with technology.

From voice-activated virtual assistants such as Siri and Alexa to personalized recommendations on streaming platforms, AI has become an indispensable part of our daily lives. It’s safe to say the use of AI is increasing all over the world at a fast pace. In the coming years, AI will transform the way we live and work even more.

In India, this has raised the question of AI’s potential in every industry. Indian firms have already developed uses for AI in healthcare, finance, e-commerce and manufacturing, and its use is expected to increase even more.

Moreover, the shift towards electrification, autonomous and connected vehicles will bring in more opportunities for engineering services in the areas of design and development of electric vehicle components, battery technologies, charging infrastructure, and electric drivetrains or engines.

And this is where midcap IT stock Cyient comes into the picture.

A company with multi-bagger potential, Cyient seamlessly fits into the evolving AI puzzle, poised for its next growth phase.

How Cyient is gearing up for growth

Formerly known as Infotech Enterprises, Cyient has come a long way from its humble beginnings as a GIS data conversion vendor (the process of translating spatial data from one format or type to another within a geographic information system) to a formidable engineering company.

Cyient operates in critical sectors such as transportation, sustainability, and communications, and other new growth sectors.

Within the transport sector, the company caters to the aerospace and the railway segments. It provides software services to enhance aircraft performance, safety, and efficiency. And in the railway sector, it partners with specialized tech providers and startups, contributing to the global rail industry’s rapid increase in digital capabilities.

Cyient also partners with digital map developers to help solve issues in the automotive sector as well as make self-driven vehicles safer and smarter.

Baidu, China’s leading search company, envisions that smart maps for self-driving vehicles will emerge as a more significant business than web search. This is where Cyient aims to drive its future business growth.

Targeting new-age sectors for expansion

The navigation aids created by Cyient assist autonomous vehicles in steering clear of collisions. AI in self-driving cars can identify real-time changes in the environment and update maps instantly.

Apart from this, the company aims to strategically diversify its portfolio, with a keen eye on expanding in the healthcare sector.

This sector, with its continuous investments in predictive and personalized patient care, connected devices, and digital platforms, and the need for accelerated testing, is a great market for the company.

Cyient is also eyeing growth in the sustainability sector, confident of gaining from the massive transition to sustainable sources of energy.

Suffice to say, the company has strategically positioned itself, effectively catering to a bunch of new growth sectors.

Cyient is investing heavily in artificial intelligence, actively constructing AI-powered platforms and integrating them in its products and services.

Recently, the company announced a strategic collaboration with Microsoft Corp to create a product named ‘Engeener’. Leveraging Azure Microsoft’s OpenAI service and generative AI technologies, this product aims to enhance agility in the engineering lifecycle across industries.

Cyient has been expanding inorganically as well, having acquired over 20 firms so far. In fiscal year 2023, the company bolstered its presence in the sustainability and communications segments with acquisitions. It acquired Citec and Grit in the sustainability sector, Celfinet in communications, and a strategic purchase in the automotive segment.

The acquisition of Finland-based Citec stands out as the largest in terms of revenue, valuation, workforce size, and geographic reach, highlighting the company’s growing commitment to expand in the sustainability sector.

Past victories fuel future confidence

Cyient has transformed its business significantly over the years, expanding into diverse areas since FY2019-20. Previously, over 40% of its revenue was attributed to transportation. It now has a substantially more diversified revenue model.

 

Cyient’s Evolving Revenue Mix

 FY2019-20H1 2023-2024 
Transportation
 
 
 
 

46% 

 
 
 
 

31% 

Sustainability
 
 
 
 

24% 

 
 
 
 

28% 

Communication
 
 
 
 

23% 

 
 
 
 

23% 

New growth areas
 
 
 
 

7% 

 
 
 
 

1,800% 

This shift instils confidence in the company’s ability to adapt, evolve and successfully navigate different business segments, showcasing a commitment to ongoing growth and diversification.

The top 20% of Cyient’s customers contributed 55% of its total revenue in FY2023, down from 71% in FY2020, indicating further diversification and mitigating the risk of dependence on a few clients.

Between 2019-2023, the business has performed admirably. The company’s sales and net profit have grown at a CAGR of 8.4% and 4.9%, respectively, over the past five years.

Cyient Financial Snapshot (2019-23)
 
 
 
 
 

2018-2019 

 
 
 
 

2019-2020 

 
 
 
 

2020-2021 

 
 
 
 

2021-2022 

 
 
 
 

2022-2023 

 
 
 
 
 

Revenue Growth

 
 
 
 

17.33% 

 
 
 
 

-3.87% 

 
 
 
 

-6.25% 

 
 
 
 

8.09% 

 
 
 
 

31.26% 

 
 
 
 
 

Operating Profit Margin

 
 
 
 

16.61% 

 
 
 
 

15.97% 

 
 
 
 

17.30% 

 
 
 
 

20.51% 

 
 
 
 

18.03% 

 
 
 
 
 

Net Profit Margin

 
 
 
 

10.33% 

 
 
 
 

7.71% 

 
 
 
 

8.80% 

 
 
 
 

11.52% 

 
 
 
 

8.55% 

 
 
 
 
 

Return on Capital Employed

 
 
 
 

23.47% 

 
 
 
 

17.49% 

 
 
 
 

16.65% 

 
 
 
 

21.96% 

 
 
 
 

19.92% 

 
 
 
 
 

Return on Equity

 
 
 
 

19.56% 

 
 
 
 

13.36% 

 
 
 
 

13.25% 

 
 
 
 

17.31% 

 
 
 
 

15.80% 

Data Source: Ace Equity

The returns have been strong, with its return on equity and return on capital employed averaging at 15.9% and 19.9% over a 5-year period.

The company also boasts a healthy balance sheet, which allows it to reward its shareholders with hefty dividend payments. Its 5-year average dividend yield stands at a commendable 3%.

Cyient’s stock performance

Cyient has been a huge wealth creator since its listing. From 12 a share in 1998, the stock is now trading at 2,303, clocking in a 200x return. So 100 invested in 1998 would amount to 20,000 today.

Over the past year, the stock price has moved up sharply, more than doubling in value from 886 a share in January 2023 to about 2,270 at present.

The stock has surged following its strong half-yearly results. While sales were up 31% from a year earlier, net profit jumped 81%.

The stock is currently trading at a price-to-earnings ratio of 36 times, a premium to its 5-year median PE.

Cyient is currently trading at a price-to-earnings ratio of 36 times
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Cyient is currently trading at a price-to-earnings ratio of 36 times

Riding the AI wave

With its expertise in AI, strategic diversification, and a proven track record of successful transformations, Cyient is well-positioned to ride the AI wave.

For investors seeking exposure to high-growth sectors, Cyient deserves a closer look.

However, the recent run-up in the stock price indicates that investors may have already factored in the bright outlook, possibly limiting the upside in the near term.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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