cyient limited - research-doc.credit-suisse.com

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

12 April 2017 Asia Pacific/India Equity Research

Computer Services & IT Consulting

Cyient Limited (CYIE.BO) Rating OUTPERFORM Price (10-Apr-17, Rs) 473.05 Target price (Rs) 625.00 Upside/downside (%) 32.1 Mkt cap (Rs/US$ mn) 53,250 / 824.55 Enterprise value (Rs mn) 46,361 Number of shares (mn) 112.57 Free float (%) 77.8 52-wk price range (Rs) 539-451 ADTO-6M (US$ mn) 0.8 Target price is for 12 months.

Research Analysts

Nitin Jain

91 22 6777 3851

[email protected]

Anantha Narayan

91 22 6777 3730

[email protected]

INITIATION

Structurally well placed, with solid momentum Erratum: Due to an internal database error, our revenue and margin numbers

were incorrect in the earlier version. All other numbers were correct.

■ We initiate coverage on Cyient with OUTPERFORM and TP of Rs625.

■ Structurally well placed in the fast changing industry. Cyient is among

the few Indian companies with a large exposure to faster growing engineering

services (or engg. svcs.) with 54% share, and has niche capabilities in rapidly

expanding network engineering (telecom) and utility/GIS practices. These

segments are relatively immune from the difficult transition that the traditional IT

companies are undergoing. Cyient is also possibly the least H-1B/L-1 visa

dependent among its Indian IT peers, with below 15% exposure.

■ Gearing-up for integrated offerings. Cyient has gone through several

strategic changes in the last three years, including verticalisation, broadening

of service portfolio (through several M&As) and venturing into design led

manufacturing. The company is gearing-up to offer integrated services,

ideation-design-prototype-maintenance in case of engineering, and plan-

build-operate for telecom and utility verticals. Management has indicated a

healthy pipeline build-up, and such deals can have higher margins.

■ Solid business momentum, some scope for margin expansion. The top

clients' momentum is solid (high correlation with the overall growth), trends

are stable to positive in all the key verticals, and order intake is healthy. We

expect the company to report over 13% revenue CAGR (organic, constant

currency) over FY17-19—among the best in the industry. Margins can

expand too from the current 13.5% levels to 14.6% by FY19 (better G&A

leverage, pyramid correction and recovery in acquired companies' margins).

■ Initiate with OUTPERFORM. We value Cyient at 14x FY19E P/E (over 15%

FY17-19E EPS CAGR). Its engg. svcs. peers trade at 14-18x CY17E P/E

(single to low double digit EPS CAGR), while the mid-cap Indian IT peers

trade at 12-17x CY17 P/E (average EPS CAGR of 11%). Key risks include

adverse currency moves, client-specific issues and acquisition indigestion.

Share price performance

The price relative chart measures performance against the

S&P BSE SENSEX IDX which closed at 29,575.74 on

10/04/17. On 10/04/17 the spot exchange rate was

Rs64.58/US$1

Performance 1M 3M 12M Absolute (%) 0.9 -4.3 3.4 Relative (%) -2.0 -14.1 -15.7

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 30,955.5 36,061.8 40,736.0 46,260.2 EBITDA (Rs mn) 4,247.0 4,896.5 5,683.3 6,735.3 EBIT (Rs mn) 3,353.8 3,949.3 4,650.8 5,640.4 Net profit (Rs mn) 3,348.6 3,631.6 4,335.2 4,885.1 EPS (CS adj.) (Rs) 29.06 32.33 38.72 43.63 Change from previous EPS (%) n.a. (0.0) 0.0 0.0 Consensus EPS (Rs) n.a. 32.41 38.43 43.34 EPS growth (%) (7.7) 11.3 19.8 12.7 P/E (x) 16.3 14.6 12.2 10.8 Dividend yield (%) 1.5 2.2 2.1 2.3 EV/EBITDA (x) 11.4 9.5 7.8 6.2 P/B (x) 2.78 2.44 2.13 1.86 ROE (%) 17.8 17.8 18.6 18.3 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

12 April 2017

Cyient Limited (CYIE.BO) 2

Focus charts and table

Figure 1: Structurally well placed with niche

capabilities in engineering services, communication

and utility/GIS segments; unique DLM approach

Figure 2: As per Zinnov estimates, the engineering

services market (services providers segment) is

expected to grow at 14% CAGR over 2016-20

Source: Company data, Credit Suisse estimates Source: Zinnov, Credit Suisse

Figure 3: Cyient is among the few Indian firms with

scale and significant exposure to engg. services

Figure 4: It has possibly the least visa exposure to

H-1B/L-1 visa among the Indian IT firms

Source: Company data, Credit Suisse estimates. # L&T Technology Services Source: Company data, Credit Suisse estimates

Figure 5: Business momentum solid: Stable to positive trends across the verticals

Industry units % of revenue Revenue growth* Growth

outlook

Change in outlook

(vs. a year back) 16-Mar 16-Dec

Aerospace and Defense 36% 7% 7% ▲ ◄►

Communications 23% 10% 25% ▲ ◄►

Utilities and geospatial 17% -18% 5% ▲ ▲

Transportation 9% -3% 1% ^ ◄► ◄►

Industrial, Energy and Natural Resources) 9% -8% -9% ▼ ▲

Semiconductor 4% -17% -13% ◄► ◄►

Medical and Consumer Electronics 2% 6% 36% ▲ ▲

Source: Company data, Credit Suisse estimates. * LTM, YoY, US$, organic ^ growing at 6% rate in constant currency

Figure 6: Momentum is strong among the top

accounts as well ++++++ +++++++ +++++ ++++

+++++ +

Figure 7: With decent growth in both services and

DLM business, and margin expansion, we expect

15% EPS CAGR over FY17-19

Source: Company data, Note: Numbers in the boxes represent client share in revenue Source: Company data, Credit Suisse estimates

Engineering services

54%

Communication (networking)

20%

Utility and GIS15%

Design led manufacturing

(DLM)11%

7.98.9

15.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2015 2016 2020

US$ bn

0%

50%

100%

150%

0

500

1,000

1,500

HCLT* TCS Wipro LTTSL # QuEST Infosys Cyient TataElxsi

Mindtree

Engineering services revenue (US$ mn) % share [RHS]0% 10% 20% 30% 40% 50% 60% 70%

Tech Mahindra

L&T Technology Services

Hexaware

Wipro

Persistent Systems

HCL Tech

Cyient

% of US employees on visa

-10%

0%

10%

20%

30%

Top 5 Top 10 Top 6-10

Revenue growth (LTM, YoY, US$)

Mar-16 Dec-16

44% 58% 15%

14.0%

14.5%

15.0%

15.5%

16.0%

0%

5%

10%

15%

20%

FY15 FY16 FY17 FY18 FY19

Services business

Revenue growth (cc, organic)

EBITDA margins [RHS]

0.0%

2.0%

4.0%

6.0%

8.0%

0%

20%

40%

60%

FY16 FY17 FY18 FY19

DLM


EBITDA margins [RHS]

12 April 2017


Structurally well placed, with solid momentum

Structurally well placed in the fast changing industry Cyient is among the few Indian companies with a large exposure (about 54%) to relatively

underpenetrated engineering services, with leadership in aerospace and transportation

verticals and some very strong client relationships. In communication (20% of revenue), there

are opportunities in the new network roll-out/upgradation, and Cyient has built some strong

capabilities in this area, with an expanding client base and wallet share. In utilities and

geospatial, Cyient's business has been growing in smart grid/smart meters and analytics.

Each of these segments are relatively immune from the difficult transition that the traditional IT

companies are undergoing (deflationary impact of cloud and automation, and shifting client

spends towards new areas). Also, with <15% of the US employees on visa, Cyient possibly

has the least exposure (by a wide margin) to the H-1B/L-1 visa, among Indian IT firms.

Gearing-up for integrated offerings Cyient has undergone several strategic changes in the last three years. Mr. Krishna

Bodanapu was elevated as the MD and CEO in 2014 and the company moved to a vertical

organisational structure. As part of its strategy to serve the client across the value chain

(called the S3 strategy), Cyient made several acquisitions. Rangsons, being a

manufacturing company, has been the most unique acquisition (rebranded as design led

manufacturing or DLM). The intention behind the S3 strategy is to offer integrated

services, ideation-design-prototype-maintenance in case of engineering and plan-build-

operate for telecom and utility verticals. For example, the aerospace business is much

diversified now, with over 50% non-design vs 30% a couple of years back. Cyient has

been able to win some contracts led by integrated offerings and management has

indicated a decent pipeline build-up. These deals can also have a higher margin profile.

Solid momentum in the business, some scope for

margin expansion Cyient's last three years have been volatile, due to client issues and low margins

predictability. However, management has been more confident on its business in the recent

quarters and this is backed by the numbers as well. With momentum by its side in the key

verticals and larger accounts, Cyient may report close to 13% revenue CAGR (organic,

constant currency) over FY17-19 in the services business (an incremental 2% inorganic

contribution in FY18). Rangsons can grow at 20% CAGR. The margins can also expand from

the current levels and operate in the 14-15% range at the company level (13.6% in FY17). In

the services business, we expect the EBITDA margins to slightly expand from the current

15% to 15.7% by FY19, helped by better G&A leverage, employee pyramid correction and

some recovery in Softential's margins. For the DLM (Rangsons) business, we expect margins

to recover from the current (FY17) 1% levels to 6% by FY19. We expect an impressive 15%

EPS CAGR over FY17-19, with a decent cash generation.

Initiate with OUTPERFORM We initiate coverage on Cyient with a 12 month forward target price of Rs625, which offers

32% potential upside. Cyient is likely to have the best in class earnings CAGR over the

next two years, and given the structurally strong positioning, and solid business

momentum, we value the company at 14x FY19E P/E. Its engg. svcs. peers trade at 14-

18x CY17E P/E (single to low double-digit EPS CAGR), while the mid-cap Indian IT peers

trade at 12-17x CY17E P/E (average EPS CAGR of 11%).

The key risks include any significant appreciation in INR or adverse cross-currency moves,

client-specific issues (high client concentration), acquisition indigestion and execution risks

on the outcome based projects.

Cyient is relatively immune to the

structural changes that the IT industry is facing

Possibly the least

exposed (by a wide margin) to the H-1B/L-1

visa

Expanding service capabilites to offer

integrated services; M&A—a key

component of the strategy; some initial

signs of success

Solid momentum in the key verticals and larger

accounts; >13% revenue CAGR

(organic, constant currency) over FY17-19, 15% EPS CAGR helped

by margin expansion

TP of Rs625, 32% potential upside

12 April 2017


Cyient Limited (CYIE.BO / )

Price (10 Apr 2017): Rs473.05; Rating: OUTPERFORM; Target Price: Rs625.00; Analyst: Nitin Jain

Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E

Sales revenue 30,956 36,062 40,736 46,260 Cost of goods sold 20,083 23,653 26,701 30,189 EBITDA 4,247 4,897 5,683 6,735 EBIT 3,354 3,949 4,651 5,640 Net interest expense/(inc.) (121) (183) (270) (360) Recurring PBT 4,220 4,592 5,481 6,240 Profit after tax 3,234 3,483 4,220 4,805 Reported net profit 3,262 3,632 4,335 4,885 Net profit (Credit Suisse) 3,349 3,632 4,335 4,885

Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E

Cash & cash equivalents 6,951 8,339 10,446 12,834 Current receivables 6,145 7,045 7,958 9,037 Inventories 979 939 1,193 1,402 Other current assets 3,872 4,214 4,673 5,216 Current assets 17,947 20,537 24,269 28,489 Property, plant & equip. 4,084 4,429 4,415 4,476 Investments 796 1,024 1,144 1,264 Intangibles 2,708 3,260 3,260 3,260 Other non-current assets 1,835 1,786 1,786 1,786 Total assets 27,370 31,036 34,874 39,275 Current liabilities 6,676 7,705 8,412 9,232 Total liabilities 8,144 9,177 9,884 10,704 Shareholders' equity 19,098 21,765 24,891 28,432 Minority interests 128 94 99 139 Total liabilities & equity 27,370 31,036 34,874 39,275

Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E

EBIT 3,354 3,949 4,651 5,640 Net interest 0 0 0 0 Tax paid (1,024) (767) (1,261) (1,435) Working capital (931) (181) (919) (1,011) Other cash & non-cash items 1,386 947 1,033 1,095 Operating cash flow 2,785 3,948 3,504 4,289 Capex (1,287) (1,292) (1,018) (1,157) Free cash flow to the firm 1,497 2,655 2,486 3,132 Investing cash flow (848) (999) (18) (397) Equity raised 22 (1) 0 0 Dividends paid (1,619) (747) (1,209) (1,344) Financing cash flow (1,107) (1,560) (1,379) (1,504) Total cash flow 829 1,388 2,106 2,389 Adjustments 0 0 0 0 Net change in cash 829 1,388 2,106 2,389

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 112 112 112 112 EPS (Credit Suisse) (Rs) 29.06 32.33 38.72 43.63 DPS (Rs) 7.00 10.50 10.00 11.00 Operating CFPS (Rs) 24.81 35.15 31.30 38.31

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue 13.1 16.5 13.0 13.6 EBIT 1.6 17.8 17.8 21.3 EPS (7.7) 11.3 19.8 12.7 Margins (%) EBITDA 13.7 13.6 14.0 14.6 EBIT 10.8 11.0 11.4 12.2

Valuation (x) 03/16A 03/17E 03/18E 03/19E

P/E 16.3 14.6 12.2 10.8 P/B 2.78 2.44 2.13 1.86 Dividend yield (%) 1.5 2.2 2.1 2.3 EV/sales 1.6 1.3 1.1 0.9 EV/EBITDA 11.4 9.5 7.8 6.2 EV/EBIT 14.4 11.8 9.5 7.4

ROE analysis (%) 03/16A 03/17E 03/18E 03/19E

ROE 17.8 17.8 18.6 18.3 ROIC 18.5 20.5 23.0 26.1

Credit ratios 03/16A 03/17E 03/18E 03/19E

Net debt/equity (%) (26.2) (31.2) (35.7) (39.6) Net debt/EBITDA (x) (1.19) (1.39) (1.57) (1.68)

Company Background

Cyient is a leading player in engineering services (large presence in aerospace/defence, transportation), network engineering (communication vertical) and operations management (verticals such as utilities).

Blue/Grey Sky Scenario

Our Blue Sky Scenario (Rs) 740.00

Stronger momentum in the top accounts supplemented by significant new account additions, and synergies from the recent acquisitions. EBITDA margins expand beyond the management's target of 14-15%. There can be upgrades to the earnings estimates and stock can re-rate significantly.

Our Grey Sky Scenario (Rs) 430.00

Issues in the top accounts drag the growth and acquisitions do not yield the desired results. Margins fall below tne target range. This can lead to earnings estimate downgrades and derating in the stock

Share price performance

The price relative chart measures performance against the S&P BSE SENSEX

IDX which closed at 29,575.74 on 10-Apr-2017

On 10-Apr-2017 the spot exchange rate was Rs64.58/US$1

Source: Company data, Thomson Reuters, Credit Suisse estimates

12 April 2017


Structurally well placed in the fast changing IT industry With an exposure in niche segments—engineering services (about 54% of revenue),

network engineering (20% of revenue) and utility/geospatial (15% of revenue)—Cyient is

structurally well placed in an otherwise fast changing IT industry. Engineering services is a

large and relatively underpenetrated market and is expected to grow slightly faster than

the Indian IT and BPO exports. Cyient has leadership positioning in the aerospace and

transportation verticals (together, they account for 75% of the engineering services

revenue), with some very strong client relationships. Indeed, it is among the few Indian IT

companies with such a large exposure to engineering services. In communications, there

are opportunities in the new network roll-out/upgradation and Cyient has built some strong

capabilities in this area, with an expanding client base and increasing wallet share. In

utilities and geospatial, Cyient's business has been growing in areas such as smart

grid/smart meters, analytics and asset utilisation.

Each of these segments are relatively immune from the transition that the traditional IT

companies are undergoing (deflationary impact of cloud and automation, and shifting client

spends towards new areas). Cyient has been witnessing new opportunities driven by IoT

and digital in its communication and utility business. Also, with less than 15% of the US

employees on visa, Cyient has possibly the least exposure to the H-1B/L-1 visa (the IT

services companies have visa dependency in the range of 45-65%). This makes Cyient

relatively immune from the regulatory overhang in the US.

Among the few players with a large exposure to the

structurally attractive engineering services market

Engineering services is among the fastest growing sub-segments of the overall Indian IT

services market as per NASSCOM. It involves the design, development, testing, rollout

and maintenance aspects of the product and process development chain (excludes mass

manufacturing) across the industries including automotives, hi-tech, aerospace/defense

and healthcare.

The global engineering services spend was over US$1 tn in 2016. and of this, US$232 bn

is the addressable market for the Indian players as per the management consulting firm,

Zinnov. The current Indian engineering services exports market size is over US$22 bn and

service providers (such as Cyient) have about 40% share in this (the in-house captives of

the global companies account for the remaining 60%).

There have been several structural factors driving this segment's growth including

shortening product life cycles (faster time-to-market), pressure on R&D budgets and talent

availability in India (with mechanical engineering capabilities). Indian engineering services

firms have, over a period, built onsite delivery facilities and have been incrementally

participating in innovation (with involvement in several IP creation).

Given low penetration and several structural drivers, this market is likely to grow at a

CAGR of 14% over 2016-20 to reach over US$35 bn in 2020 as per Zinnov's estimates, at

a pace slightly higher than the growth in the Indian IT services and BPO industry. Service

providers are likely to grow at a slightly higher pace than the captives.

Indian Engineering services market is

likely to grow at 14% CAGR over 2016-20

12 April 2017


Figure 8: Engineering services is a large market globally; US$232 bn addressable market for the Indian IT

firms

Source: Zinnov, Credit Suisse. Note: The above numbers are for 2016

Figure 9: As per Zinnov estimates, the engineering services market (services providers segment) is

expected to grow at 14% CAGR over 2016-20

Source: Zinnov

Cyient is among the few pure-play players, with leadership in aerospace/defense and transportation

Cyient has a strong engineering services practice with some very solid client relationships

(such as Pratt and Whitney, Bombardier, etc.). Cyient is among the few Indian IT firms that

have a prominent exposure to the structurally attractive engineering services segment. As

per our estimates, about 54% of Cyient's overall revenue comes from engineering services

(engineering design). Among the listed Indian IT firms (with significant scale), only L&T

Technology Services has larger scale and exposure to the engineering services segment.

Corporate ER&D spend (US$1 tn)

G500 ER&D spend (US$621 bn)

Addressable Engineering Outsourcing (US$232 bn)

Global addressed market (>US$85 bn)

Market addressed from India (US$22

bn)

Market addressed by Indian service

providers (US$9 bn)

7.9

12.3

8.9

13.4

15.1

22.4

0

5

10

15

20

25

Engineering services - Service providers Captives

US

$ m

n

India engineering services market

2015 2016 2020

Engineering services account for about 54%

of Cyient's revenue

12 April 2017


Cyient is a mature player in the aerospace/defense and transportation verticals

(particularly rail transportation) and has been consistently recognised as a leader in these

verticals by the industry analyst Zinnov. These verticals account for about 59% and 16% of

Cyient's engineering revenue, respectively.

Aerospace/defense manufacturing behemoth Pratt and Whitney (United Technologies

Corporation's subsidiary manufacturing aircraft engines that are used in both civil and

military aviation) is Cyient's largest client. Cyient has strengthened its relationship over the

years with UTC by broadening the service portfolio and has been recognised as the most

innovative supplier for three years in a row. Pratt and Whitney is also a strategic investor

in the company with 14% stake (held through its parent UTC group).

In transportation, Cyient works very closely with Bombardier in its rail segment, particularly

in rail signaling and electrification. The company has a pool of 450 signal design engineers

and this is a Europe dominated business. The semiconductor segment's share has come

down over the years, given industry consolidation and client specific factors; however, the

company believes this segment has bottomed-out. Medical and consumer electronics is a

small but high potential segment as per management.

Cyient's offerings in engineering services

Cyient has strong mechanical and evolving electronic capabilities. In aerospace/defense, it

offers services ranging from new engine/engine component design (mechanical design

using computer aided tools), avionics solutions (communication system, cockpit display

and navigation, etc.), manufacturing engineering solutions (such as process planning,

assembly engineering), and MRO (preparing repair schedules, predictive maintenance,

etc.). In the transportation segment, Cyient provides services including 3D design for rail

electrification, signaling design, and installation, testing and commissioning support. It also

has a large pool of employees with certain pre-requisite certifications such as IRSE.

Besides these, Cyient also provides semiconductor chip design services to the leading

semiconductor companies and services around embedded software (software to control

machines) across aerospace/defense, transport, medical and semiconductor industries.

Figure 10: Engineering services account for 54% of

Cyient's revenue

Figure 11: Cyient is among the few players with

scale and significant exposure to engg. svcs.

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates. * Includes revenue from Geometric # L&T Technology Services

Engineering services, 54%

Communication (networking) and Utility & GIS, 36%

Design led manufacturing,

11%

0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

1,000

1,200

1,400

1,600

HCLT* TCS Wipro LTTSL # QuEST Infosys Cyient TataElxsi

Mindtree

Engineering services revenue (US$ mn) % share [RHS]

Cyient has leadership positioning in the

aerospace/defense and transportation verticals

12 April 2017


Figure 12: Cyient is a leading player in its largest vertical in engg. services—aerospace

Source: Zinnov

Figure 13: Similarly, it is a leading player in transportation, its second largest vertical in engg. services

Source: Zinnov

12 April 2017


Some niche capabilities in telecom and utility

segments

Capabilities on the network side in communication

Communication is the second largest segment for Cyient (23% of the services revenue)

and it has built some strong capabilities on the network side. Cyient works with telecom

service providers on the network side (services such as network planning and design,

network optimisation, GIS, physical and logical inventory solutions). This segment has

scaled-up at a rapid pace in the last couple of years, led by fiber deployment through CAF

II (Connect America Fund) initiatives in the US, and shift from FTTP to FTTN and

opportunities for HFC (Hybrid Fiber Coaxial) networks in Australia and New Zealand.

Cyient's client base includes some of the leading telecom service providers (for example,

Telstra in Australia has witnessed significant traction for Cyient). Besides these, LTE

Broadcast is also an opportunity for the company as per management. The company

believes this segment can sustain the strong growth momentum built-up over the recent

quarters.

Cyient's offerings in communication

Cyient helps the telecom service providers with new network roll-outs (including fiber

deployment and network optimisation). Its services include planning, designing and

managing wireless and wireline networks, tools that automate error detection in network

design and help correct the error, and data analytics, besides business operations

management. It also has geospacial offerings for the communication vertical.

Utility and geospatial is another niche

Utility and geospatial (U&G) accounts for 17% of the company's services revenue and has

picked-up momentum in the recent quarters. The growth is primarily driven by increasing

work on smart meters, smart grids (upgradation of grids that have been in service for

many years), smart cities and incremental focus of utilities to optimise cost by better asset

utilisation. From spatial data creation, this business has graduated to generating insights

from the data. With smart meters and grids, Cyient is also incrementally witnessing

opportunities on the data analytics side. Some of the key clients in this segment include

Southern California Edison and TomTom. This is one of the key growth verticals for the

company in the medium term, besides communication.

Cyient's offerings in utility and GIS

Cyient's offerings for utility industry include data analytics (data maintenance and

cleansing – a significant part of the business), field engineering (tie-ups with several field

contracting agencies for this—it includes field survey, pole data digitalisation, data

analytics, predictive maintenance), meter data management system (systems

implementation, integration with upstream and downstream applications), and outage

management system implementation and integration. It also provides location based

services (GIS) for navigation (TomTom a key client), and utility customers.

Business model is different from IT services;

structural shifts not equally relevant in engg. svcs.

Indian IT firms going through a structural shift…

The traditional IT business has been going through several structural shifts at the moment.

While the overall IT spends are likely to increase, there is a shift in mix from old to new.

Cloud, automation, and overall cost pressure are having a somewhat deflationary impact

on the traditional IT spends of the clients. This saving is being diverted to the new areas,

collectively termed as digital (including modernising the front-end, back-end, and use of

IoT, Big Data). Indian IT services companies are also going through this structural shift—

Communication is 23% of Cyient's revenue;

network roll-out/upgradation

initiatives by telecom service provider driving

Cyient's business

Smart meter, smart grid, analytics, etc., are

driving growth in utility/geospatial

For the traditional IT firms, Cloud and

automation are having a somewhat

deflationary impact on client spends

12 April 2017


they have to cannibalise their existing revenue streams (by offering the

automation/productivity gains to the clients). To capture the increasing digital spends (to

compensate for the cannibalisation in the traditional business and for the incremental

revenue), they need to build new services capabilities and retrain the existing large

employee base.

… Cyient's business is relatively immune from this changes

Unlike the IT services, the engineering services business is relatively immune to the cloud

cannibalisation, and scope for automation is also limited. Also, the ER&D budget in the

organisations is separate from the IT budget—engineering services companies deal with

different people in the client organisation (unlike CIOs in the case of traditional IT). The

employee profile too is different—a major chunk of Cyient’s employees in the engineering

business have a mechanical engineering (and increasingly also in electronic and

aeronautical engineering) background. On the other hand, similar to IT services, spends

on digital (particularly IoT) is a net positive for the engineering services players.

The other niche offerings on the network and GIS are also relatively immune to these

structural shifts. Indeed, with the incremental focus on smart meters/smart grids and

upgradation in telecom networks to support the data usage, the digital shift has been

driving the company's business in the utility and telecom segments.

Similar to pure IT services, engineering services firms are too adopting models such as

risk sharing with the clients, which are more complex than the traditional time and material

and fixed price models.

Among the least visa dependent Indian IT firms

Cyient employs a significant number of local employees in the US, given the nature of

some of its businesses such as defense, and also several acquisitions made by the

company. As per the company, the share of US employees on visa is currently below

15%, which would effectively mean it is not a visa dependent employer (the typical

definition of a visa dependent employer is one with more than 15% US employees on

visa). Among the IT services companies that have shared their visa dependency, it ranges

from 45-65%).

Given the current uncertainties on the potential changes in the visa rules (change in

allocation methodology, minimum wage, etc.), particularly aimed at the visa dependent

employers, we believe a significantly low visa exposure bodes well for Cyient, making it

relatively immune to this overhang.

Figure 14: Cyient has a very low exposure to visa, possibly the lowest among

the Indian IT and engineering services players

Source: Company data, Credit Suisse estimates

0% 10% 20% 30% 40% 50% 60% 70%

Tech Mahindra

L&T Technology Services

Hexaware

Wipro

Persistent Systems

HCL Tech

Cyient

% of US employees on visa

Cyient's business is relatively immune to

the cloud cannibalisation, and

scope for automation is also limited

Cyient's H-1B/L-1 visa dependence is below

15% vs 45-65% for the Indian IT peers

12 April 2017


Gearing-up for integrated offerings Cyient has undergone several strategic changes in the last three years. Mr. Krishna

Bodanapu was elevated as the MD and CEO in 2014 (after spending several years with

the company). Cyient moved to a vertical (business unit) organisation structure (from

earlier service line driven structure), with a focus on further building domain specific

capabilities (the company added several domain experts). As a part of its strategy to

broaden the service portfolio to serve the client across the value chain (also called S3

strategy), Cyient also made several acquisitions (Rangsons, GSEA, Certon and Blom

Aerofilms). Rangsons, being a manufacturing company, has been the most unique one—

later rebranded as design led manufacturing (DLM).

The intention behind this strategy is to offer integrated services (across the value chain),

ranging from ideation, design, prototype manufacturing to maintenance in case of

engineering and plan-build-operate for telecom and utility verticals. With these initiatives,

the aerospace business is much more diversified, with over 50% of revenue outside the

design work (which is more cyclical) vs 30% a couple of years back Cyient has been able

to win some contracts led by integrated offerings and management has indicated a decent

pipeline build up. Such deals can also have higher than company average margins.

Strategic realignment of business with a sharper

focus on domain specialisation

Cyient went through a strategic restructuring in 2014. It rebranded itself (from erstwhile

Infotech Enterprises) and appointed Mr. Krishna Bodanapu (son of the founder—he spent

several years in the company in sales, marketing, account manager, and recently as

COO) as MD and CEO (the founder and then CEO Mr. BVR Mohan Reddy assumed the

role of Executive Chairman). The company moved to a vertical (business unit)

organisational structure (from earlier service line driven structure), with a focus on further

building domain specific capabilities.

The business has been divided into seven business units (aerospace and defense,

transportation, communications, medical and healthcare, utilities and geospatial (U&G);

semiconductor, and industrial, energy and natural resources), each with a separate P&L.

For the larger verticals such as aerospace/defense, transportation, communication and

U&G, the company also has separate delivery heads and geographic sales heads within

the verticals. Additionally, design led manufacturing (the Rangsons business) is a separate

business unit to address the opportunity across the seven verticals.

The company has hired some senior resources in the last couple of years. For example,

Cyient hired Mark Ewen from CSC (erstwhile Global Industry General Manager for CSC'

energy & utilities, oil & gas, and natural resources industries) as Vice President of U&G

business. Recently, it also appointed Suman Narayan as the head of semiconductor

business (he has 20 years' experience in the semiconductor industry). For design led

manufacturing business, it hired Dr. Venki Padmanabhan who has 26 years of experience

in manufacturing (senior leadership positions in companies such as Royal Enfield,

DaimlerChrysler and General Motors).

Cyient went through several strategic

changes in the last three years, including

verticalisation

12 April 2017


Figure 15: Cyient has organised the business around eight business units

Source: Company data

Broadening the service portfolio to increase the

addressable market

As a part of the restructuring exercise, Cyient laid out a new strategy to broaden the

service offerings to increase the addressable market, termed as S3 (Services, Systems,

and Solutions). The underlying objective was to have capabilities to service the clients

across the value chain, right from the ideation phase to design, prototype development,

testing and maintenance, thereby helping to mine the clients better. The most significant

change in the strategy has been the addition of the manufacturing capabilities through

Rangsons acquisition (this is now rebranded as design led manufacturing).

S3 strategy has two parts. For the engineering services business, Cyient is targeting the

design-build-maintain value chain, while for the network business (telecom), the S3

strategy is based on plan-build-operate value chain.

Figure 16: Focus to broaden the service portfolio and increase the addressable market

Source: Company, Credit Suisse

0

20

40

60

80

100

120

140

160

180

200

Aerospace/Defense Communication Utilities andGeospatial

Design LedManufacturing

Transportation Industrial and ENR Semiconductor Medical andHealthcare

Cyient's business units with annualised revenue run-rate (US$ mn)

BuildTest

Analyse

Connect

Operate

Maintain

Ideate

Design

Engineer

15% share in typical client’s spend across the value chain

Addressed by: Cyient core engineering

business GSEA - Pratt and Whitney

(MRO engineering)


Addressed by: Rangsons (prototype, small

scale manufacturing) Certon (testing)


Addressed by: Softential (monitoring the

communication network performance)

Invati Insights (Analytics) Blom Aerofilms (data analytics

for utility)

S3 strategy aimed at broadening the service

offerings to serve the client across the value

chain

12 April 2017


Several acquisitions to fill the service gaps

Cyient has an active M&A strategy, and over the last three years (since the company

launched the new S3 strategy), all the acquisitions have been aligned to the S3 strategy.

For example, Rangsons acquisition in FY15 addressed the solutions part of the S3

strategy. The GSEA acquisition in FY16 was towards scaling-up the MRO practice in the

aerospace/defense verticals. Softential acquisition was on the operations side of the

telecom business, and the most recent Certon acquisition brings testing capabilities for

avionics. Besides Rangsons, all the other acquisitions have been smaller in size (US$10-

17 mn in terms of revenue).

Management follows a certain set criteria for M&A—it typically looks for 6-8 years payback

on acquisitions. The focus is on integrating the service offerings in the first year of

acquisition itself (so that the Cyient sales people should be able to sell the acquired

company's offerings and vice versa). The company witnessed some challenges in the

Softential acquisition (this business was let to run independently for two years) and is now

focusing on integrating it with rest of the business.

Cyient also has a corporate venture arm that invests in start-ups in the emerging area—

the company has identified medical technology, communication technology, IoT and

advanced avionics as the preferred area of investments.

Figure 17: Cyient's recent acquisitions have been aligned to the S3 strategy

Acquired entity Year Consideration

(US$ mn)

Revenue run-rate

(US$ mn)

Margin profile at the

time of acquisition

Particulars

Invati Insights FY15 NA 1 NA Data analytics start-up.

Softential FY15 >19 17 Above company

average

Designs, implements and manages systems and applications that monitor and

control communication network performance.

Rangsons FY15 60 (74% stake) 66 2-4% Electronics system design and manufacturing (prototype, SI/testing and small

scale production). Addresses the "Solutions" part of the S3 strategy.

Pratt & Whitney

(GSEA)

FY16 6-7 12 12-14% Engineering and repair unit of the US-based aircraft engine manufacturer Pratt

and Whitney. Strengthens the MRO practice. Got four year volumes

commitment from Pratt and Whitney.

Blom Aerofilms FY17 NA 10 10% Geospatial solutions: data modelling, data acquisition and data processing.

Complements the utility business. Has 40 employees in the UK.

Certon FY17 8 7 Low double digit A testing and validation provider for various parts of the Avionics value chain.


Aerospace: diversification from design to production

and MRO engineering

Traditionally, Cyient's aerospace/defense business has been dominated by its design

related services for new engine designs (Cyient has leadership in this segment). Typically

engine design cycle is followed by production cycle and this has a negative impact on the

traditional design business of the engineering services firms such as Cyient (though there

is always some work on design modification, re-engineering, production engineering, etc.).

Over the years, Cyient's management has proactively broadened the service portfolio. The

GSEA (Pratt and Whitney's arm) acquisition helped Cyient expand the repair engineering

practice. The GSEA acquisition provided Cyient with a presence in Singapore, which is a

large MRO market. At the time of acquisition, GSEA was working exclusively for Pratt and

Whitney; however, Cyient has extended the offering outside Pratt and Whitney. The

company is also expanding its presence in avionics. The recent acquisition of Certon

provides capabilities in testing and validation for various parts of the avionics value chain.

The engine design programs cycle has completed at Pratt and Whitney and there is an

increasing activity on the manufacturing side. Cyient's pro-active initiatives to broaden the

service portfolio are helping it navigate the shift of activity from design to manufacturing.

Several acquisitions in the last three years—all

aligned to the S3 strategy

In aerospace/defense, the spending has been

shifting from new engine design to

production

Cyient has realigned its business with non-

design related business now

accounting for over 50% of revenue (vs.

30% earlier)

12 April 2017


From about 70% of the aerospace/defense revenue, the share of design related work has

come down to about 50% now (it still continues to grow as per management) with the

other 50% consisting of manufacturing engineering, avionics, MRO and testing.

Figure 18: Cyient has diversified its aerospace

/defense business with broadening of service

offerings

Figure 19: With estimated increase in the fleet size,

the MRO market is likely to grow at over 5% CAGR;

Cyient through its offering can play a role

Source: Company data, Credit Suisse estimates Source: Oliver Wayman, Company data, Credit Suisse estimates

Design led manufacturing: a non-conventional

approach; some signs of synergies

Cyient acquired Rangsons in 2014 and since then it has been in the process of aligning

the business in line with the design led manufacturing strategy. Rangsons also provided

access to certain certifications that are a must to work with some of the larger

aerospace/defense manufacturers, and these were hard to build internally.

At the time of acquisition, the revenue was largely driven by the isolated manufacturing

related business—the focus has since then shifted to look at more integrated

opportunities, where Cyient is also involved in design, within the focus verticals—

aerospace/defense, medical and transportation. Cyient has been able to win some

contracts led by integrated offerings and management has indicated a decent pipeline

build up. The share of pure defense offset related work has also reduced, as per

management, in favour of more strategic work.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Couple of years back Now

Cyient's aerospace/defense engineering business break-up

Design MRO, production engineering, Avionics etc

0

20

40

60

80

100

120

2015 2020 2025

MRO market size estimates (US$ bn)

Airframe Engine Component Line

5.9%CAGR

4.8%CAGR

Design led manufacturing is a

unique initiative—fits well with the S3

strategy

12 April 2017


Solid momentum in business, some scope for margin expansion Cyient's last three years have been volatile due to client-specific issues and low

predictability on margins. However, things have stabilised in the recent quarters and the

company is well positioned for a decent earnings growth in the medium term. Management

has sounded more constructive on its business in the recent quarters and this is backed

by the numbers as well. Momentum is stable to positive in the larger verticals and top

accounts too are growing at a solid pace now, with both top-5 and top-10 accounts

growing at 20% or above in Dec-16 (LTM, YoY, US$) vs a flat to declining trajectory in

Mar-16.

Cyient is likely to exit FY17 with 12% revenue growth (constant currency, organic) in the

services business and 40% growth in the DLM business. With momentum by its side in the

key verticals and the larger accounts, we expect the company to report close to 13%

revenue CAGR in organic, constant terms over FY17-19 in the services business.

Acquisitions such as Certon and Blom Aerofilms will have an incremental 2% revenue

contribution to FY18 revenue. Rangsons can grow at over 20% CAGR.

We believe the margins have some scope to expand from the current levels and operate in

the 14-15% range at the company level. In the services business, we expect the EBITDA

margins to slightly expand from the current 15% to 15.7% by FY19, helped by better G&A

leverage, employee pyramid correction and some recovery in Softential's margins. For the

DLM (Rangsons) business, we expect margins to recover from the current (FY17) 1%

levels to 6% by FY19, taking the overall company margins to close to 14.6%. We expect

over 15% EPS CAGR over FY17-19, with a decent cash generation.

Last three years have been volatile; some stability in

the recent quarters

Last three years have been very volatile for Cyient, and FY16 was a low point. From mid-

teens in FY15, the organic revenue growth decelerated to low single digit in FY16. Margins

too deteriorated from 18%+ levels in FY14 to around 15% levels in FY15, and have further

come down to 14% in FY16—significantly missing management's own expectations.

Rangsons' (acquired towards the end of FY15) orderbook took longer than expected to

convert into revenue, and that resulted in FY16 actual results to be significantly different

(lower) from management's earlier expectations.

Several forces at play led to this volatility. Similar to the any other mid-sized Indian IT firm,

Cyient has a high client concentration, and hence, any significant momentum change in

the top accounts can impact the overall momentum for the company. Unfortunately, Cyient

witnessed loss of momentum in several of its top-10 accounts (clients such as TomTom,

Southern California Edison and IBM), due to client specific situations. TomTom internally

went through a change in platform from on-premise to cloud, which had a transitory impact

on Cyient's business (there was also a price re-negotiation as per the contractual terms).

Due to some profitability challenges in the Southern California Edison (utility) account,

management became selective, and the semiconductor business got impacted due to the

sale of IBM's semiconductor unit to Global Foundries. Besides these, the energy vertical

had its own challenges due to low oil prices.

Margins were even more volatile than revenue. The changing nature of services (from

traditional offshore heavy to onsite heavy) and lower predictability in the acquired entities

(Rangsons and Softential) during the initial years of acquisition, significantly hampered

management's ability to manage margins. The company missed the margin guidance for

three consecutive years (the most significant one in FY15).

Last three years were volatile for Cyient, due

to client specific issues, and changing

nature of services

12 April 2017


Some stability in the recent quarter; management's targets now appear more realistic

There has been some stability in the recent quarters—the growth momentum has been

accelerating again, and margins have also stabilised at about 13.5% levels. More

importantly, management is more realistic in terms of its targets, particularly for the

acquired businesses., e.g., Softential used to have 20% + margins till FY15, which

deteriorated to single digit in FY16; its management is currently not building in return-back

to 20% levels.

Figure 20: Services business' revenue growth

momentum slightly improved; margins stable at the

last two year levels

Figure 21: Rangsons (DLM) business too has

witnessed orderbook conversion in revenue, but

margins have suffered

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 22: Onsite revenue mix increased sharply

over the last three years

Figure 23: Overall EBITDA margins came down from

18-19% in FY14 to 14% levels now


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Mar-14 Mar-15 Mar-16 Dec-16

Services business (Ex-Rangsons)

Revenue growth (LTM, YoY, cc, organic) EBITDA margin (LTM)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0

10

20

30

40

50

60

Dec-15 Dec-16

Rangsons (Design Led Manufacturing)

Revenue (LTM, INR mn) EBITDA margin (LTM)

40%

45%

50%

55%

60%

65%

Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

Onsite mix

5%

7%

9%

11%

13%

15%

17%

19%

Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

Overall EBITDA margin (LTM)

Revenue growth picking-up and margins

have stabilised

12 April 2017


Top account momentum is solid; vertical specific

headwinds are largely behind

Management has sounded more constructive on its business outlook in the recent

quarters and this is backed by the numbers as well. Momentum is stable to positive in the

larger verticals and top accounts too are growing at a solid pace now, with the top-5 and

top-10 accounts growing at 20% or above in Dec-16 (LTM, YoY, US$) vs flat to declining

revenue in Mar-16. Order intake momentum (based on the limited historical data) also

appears strong—the order intake was US$189 mn in Dec-16 in the services business (vs

US$170 mn in Dec-15, and US$160 mn in Mar-16).

In its largest vertical—aerospace and defense, management continues to witness

momentum in production engineering, MRO and avionics offerings, and believes Europe

could offer incremental growth opportunities (the current aerospace/defense business is

largely US dominated). The top account’s (Pratt and Whitney) momentum is also strong.

Any defense-related opportunities in the US market can be an incremental driver for the

business.

The communication business' growth has picked up from barely double digit to about

25% (in LTM, YoY, USD terms) and the growth has been more broad-based, with

contribution from APAC (Australia) as well as US. The strong growth momentum is likely

to sustain as the programs are long cycle and the company sees a decent demand

environment. Softential business appears to have stabilised with a new management team

in place.

The utilities and geospatial vertical has turned positive, with re-acceleration in accounts

such as Sothern California Edison and TomTom. The business is driven by smartcity,

smartgrid, legacy grid upgradation and cost optimisation focus of clients through higher

asset utilisation. IoT is a tailwind for this business. After several quarters of decline (on

YoY basis), this business is now growing at 20% YoY rate (20% and 23% YoY growth in

2Q FY17 and 3QFY17, respectively).

The transportation vertical is growing below the company average (1% in USD, 6% in

constant currency). There is an acceleration nonetheless from Mar-16 (3% decline). The

company is exploring opportunities in Eastern Europe and Australia, and is optimistic of

returning to double-digit growth in constant currency terms.

Among the smaller verticals, the energy vertical (part of industrial, energy and natural

resources business unit) remains a headwind, while the semiconductors segment has

finally returned to a small growth (+2% YoY) in Dec-16 after several quarters of decline.

Medical and consumer electronics is a smaller vertical, but it continues to grow at a

rapid pace (36% LTM, YoY growth in Dec-16). High double-digit growth can sustain, as

per management.

After a challenging FY16, Rangsons is tracking in line with management's plans (at least

on the revenue front), with some early success on the design led deals as envisaged by

management in its S3 strategy. Management is optimistic of a strong FY18 as well.

Momentum is stable to positive in the key

verticals

Top-5 and top-10 accounts grew at 20% (LTM, YoY) in Dec-16

Production engineering, MRO and

avionics, and Europe offer incremental

growth opportunities in aerospace/defense

Communication business growing at

25%; strong momentum to sustain

Utility/geospatial has turned-around, growing

at 20% now

Transportation is growing at a slower

pace, but there is some acceleration

After challenging FY16, DLM is tracking in-line

with plans; FY18 can also be strong

12 April 2017


Figure 24: Pick-up in momentum across most of the verticals; outlook is net

positive

% of revenue Revenue growth* Growth Change in outlook

Mar-16 Dec-16 outlook (vs. a year back)

Aerospace and Defense 36% 7% 7% ▲ ◄►

Communications 23% 10% 25% ▲ ◄►

Utilities and geospatial 17% -18% 5% ▲ ▲

Transportation 9% -3% 1% ^ ◄► ◄►

Industrial, Energy and

Natural Resources)

9% -8% -9% ▼ ▲

Semiconductor 4% -17% -13% ◄► ◄►

Medical and Consumer

Electronics

2% 6% 36% ▲ ▲

Source: Company data, Credit Suisse estimates. * LTM, YoY, US$, organic ^ growing at 6% rate in constant currency

Figure 25: Top account momentum has been solid; management has positive

outlook for most of the top accounts across verticals

Source: Company data, Credit Suisse estimates. Note: number in the dotted box represent revenue share of top-5, top-10 and top 6-10 accounts

Expect close to 13% revenue CAGR (organic, cc)

over FY17-19 in the services business; 20% in DLM

Cyient is likely to exit FY17 with 12% revenue growth (constant currency, organic) in the

services business and about 40% growth in the DLM business. With momentum by its side

in the key verticals and the larger accounts, we expect the company to report close to 13%

revenue CAGR in organic, constant terms over FY17-19 in the services business.

Acquisitions such as Certon and Blom Aerofilms will have an incremental 2% revenue

contribution to FY18 revenue. We expect the strong growth momentum in the

communications and utility business to sustain, aerospace/defense and transportation

business to grow at or below (for the latter) the company average, and gradual recovery in

the semiconductor and ENR verticals (both are currently in negative trajectory on LTM

basis, but have shown signs of recovery on sequential basis).

Though management expects strong growth momentum in the DLM business gaining

confidence from the FY17 performance, we build-in a relatively conservative 20% CAGR

in this segment.

-5%

0%

5%

10%

15%

20%

25%

30%

Top 5 Top 10 Top 6-10

Revenue growth (LTM, YoY, US$)

Mar-16 Dec-16

44% 58% 15%

Overall, we expect over 13% organic revenue

CAGR (constant currency) over FY17-19

We built-in a conservative 20% CAGR in the DLM

business

12 April 2017


Figure 26: We expect close to 13% revenue CAGR (organic, cc) over FY17-19 in

the services business; 20% in DLM


Some scope for margin expansion as well

Cyient had a margin reset over the last three years. From the 17-19% range, EBITDA

margins have come down to 13-14% range. There have been two key reasons for this

margin reset—first, the onsite revenue mix increase over the years (from 50% in FY14 to

~60% in FY17). This itself could have about 300-350 bp negative impact on the margin.

Second, the Rangsons and Softential acquisitions had about 150-200 bp negative margin

impact (the former's margins have been under pressure due to Cyient's strategic

investments, and the latter's margins suffered due to revenue volatility). Additionally,

Cyient has made certain investments in terms of hiring consultants and domain experts.

We believe the margins have some scope to expand from the current levels and operate in

the 14-15% range at the company level (we expect it to improve from 13.6% in FY17 to

14.6% in FY19). In the services business, we expect EBITDA margins to slightly expand

from the current 15% to 15.7% by FY19, helped by better G&A leverage, employee

pyramid correction and some recovery in Softential's margins. For the DLM (Rangsons)

business, we expect margins to recover from the current (FY17) 1% levels to 6% by FY19.

Figure 27: Acquisitions and onsite mix shift have been the key reasons for

margin contraction in the last three years

Source: Company data, Credit Suisse estimates. * percentage points

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY14 FY15 FY16 FY17E FY18E FY19E


Services business Design led manufacturing (Rangsons) [RHS]

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

FY14 EBITDA margin Dilution due toRangsons

Dilution due toSoftential

Increase in onsite mix(10 pp*), wages, offset

by efficiency gains

Current margins

Recovery in acquired companies' margins,

G&A leverage, pyramid correction and

improvement in attrition are some of

the key margin levers

EBITDA margins likely to improve from 13.6%

in FY17 to 14.6% in FY19

12 April 2017


Figure 28: With slight expansion in the services business margins, and

recovery in the DLM business, we expect the overall EBITDA margins to

improve from 13.6% in FY17 to 14.6% in FY19


Onsite/offshore mix could be neutral to positive

The recent sharp increase in Cyient's onsite revenue mix reflects the nature of the

business. In Aerospace projects such as manufacturing engineering, process planning,

repair engineering, etc., closer proximity with the client is needed. Similarly, defense-

related projects too have a higher onsite requirement, due to regulatory requirements. In

the telecom business as well, given Cyient works on the networking side, a lot of work

requires deep knowledge of local regulations, geography, etc. However, management

believes that onsite mix could have plateaued at about 60%, and further increase is

unlikely from the current levels. Indeed, the focus is on slightly increasing the offshore mix.

Tailwind from the acquired entities

Rangsons can contribute to margin expansion in the medium term. Historically, it had 10%

margins. Realignment of accounting policies in line with that of Cyient caused 2% impact

on Rangson's margins. Also, Cyient has beefed up the senior management team at

Rangsons to execute the Design Led Manufacturing (DLM) strategy. The current LTM

margins have come down to below 1% (2% in Dec-16), which can move to 5-6% levels in

the next couple of years, as the business scales-up. If Cyient manages to successfully

execute the DLM strategy and secure integrated deals, it can improve the margins even

further.

Softential business, when acquired, had significantly higher margin profile (EBITDA

margins used to be 25-30% in FY15). However, the margins deteriorated to single digit in

FY16 and continue to remain at depressed levels. The reasons have been sluggishness in

the software part of Softential's revenue. Any pick-up in growth in Softential could also

have positive impact on the company margins. Management conservatively expects no

tailwind from improvement in Softential margins, due to somewhat weaker predictability in

this business.

Several other margin levers

Cyient has hired several domain experts and consultants, and has also opened several

delivery centers (some of them onsite/near-shore). Consistent mid-teens revenue growth

can offer operating leverage. The attrition has moved up from 17-18% to over 25% in the

last three years. Higher attrition also has associated costs (with indirect implications on the

margins), and any normalisation in attrition (as expected by the management) could also

be one of the margin levers in the medium term. Although Cyient is currently operating at

over 78% utilisation (which is the highest in the last five years), there could be scope for

some further expansion. The company has also operated at 80% utilisation in the past.

0%

1%

2%

3%

4%

5%

6%

7%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

FY14 FY15 FY16 FY17E FY18E FY19E

EBITDA margin

Services business DLM [RHS]

Onsite mix could have plateaued at about

60%. Focus is on bringing it down by a couple of percentage

points

DLM business margins can improve from 1-2%

to 5-6%

While management conservatively does

not build-in any tailwinds from

Softential, any pick-up in growth could have

margin benefits as well

G&A leverage, improvement in

attrition and employee pyramid correction are

the other levers

12 April 2017


Figure 29: Broadening of employee pyramid could

be one of the margin levels in the medium-term

Figure 30: Normalisation of attrition can also help

margins

Source: Company data Source: Company data

Greater focus on cash generation

Consistent and better cash generation has been one of the focus areas of management,

through better receivable management and prudent capex. The receivable days have

come down from the peak of 86 days in FY12 to close to 70 days in 3Q FY17 for the

company as a whole. In the services business, the receivable days (including unbilled

revenue) have improved from 80-90 days a couple of years back to 75 days in Dec-16. As

per the company, every Business Unit head's KRA also includes cashflow targets, besides

the usual revenue and profitability targets.

Rangsons business has been generating negative free cash flow at the moment (over

Rs200 mn in 9M FY17) and the focus is on turning it positive in the medium term. That

should further support the overall cash generation, in our view.

Figure 31: Cash generation has improved over the

years…

Figure 32: … With greater focus on accounts

receivables


32% 36%

68% 64%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY15 FY16

< 1 year experience > 1 year experience5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16

Voluntary attrition

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Rs mn

CFO FCF50

55

60

65

70

75

80

85

90

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Receivable days

Consistent and better cash generation has

been a key focus area; significant

improvement in receivable days in the

last two years

12 April 2017


Initiate with OUTPERFORM

TP of Rs625, with 32% potential upside

We initiate coverage on Cyient with a 12-month forward target price of Rs625, which offers

32% potential upside.

With its large exposure to faster growing engineering services (and strong positioning in

the key verticals), and telecom networking/utility domains, Cyient is structurally well placed

relative to its IT Services peers. The on-going structural shifts in the IT Services industry

are relatively less relevant for Cyient's businesses. A large local employee base in the US

(below 15% of the US employees are H-1B/L-1 visa dependent), also makes the company

much immune to the potential adverse changes in the US visa regulations (one of the key

headwinds for the IT Services sector in general at the moment). Structurally, we see the

fundamental trends to be robust for the company.

With top accounts performing well, the business momentum is solid in the telecom, utility

and medical (through small) verticals, and there is stability in the largest vertical

aerospace/defense and the third largest vertical, transportation. After several quarters of

sluggish growth, the semiconductor and energy verticals seem to have bottomed out and

may no longer be a significant overhang on the company's growth rates. Rangsons

business too has witnessed the orderbook translating into revenue.

After disappointing the street for the last 2-3 years on margins, management is now more

conservative with its outlook, the near-term range of 14-15% EBITDA margins appear

realistic to us given several levers available with the company.

The company's strong positioning in a structurally well placed industry, and positive

momentum in the top accounts and business verticals should help the company grow at a

pace higher than the overall industry average. With a scope for slight margin expansion,

we expect the company to report 15% earnings CAGR over FY17-19, which could be

among the best in the industry.

Value the company at 14x FY19E P/E

We value Cyient using a 14x 24-month forward P/E multiple. Given slightly different

industry dynamics, Cyient is not exactly comparable with the IT Services company. Hence,

we also use European engineering services companies such as Altran, Alten, Akka and

Indian pure-play engineering services company L&T Tech Technology Services as the

valuation benchmarks. The European engineering services companies trade at an

average CY17E P/E multiple of 16x (range of 14x to 18x), with CY16-18E earnings CAGR

in single digit (except for Akka, which, as per the consensus estimates, is likely to have

35% CAGR). The Indian peer L&T Technology Services trades at over 17x CY17E P/E,

with consensus earnings CAGR of 13% over CY16-18. Though not exactly comparable,

the mid-cap Indian IT peers trade at 12-15x CY17E P/E, with an average growth

expectation of 11% EPS CAGR. (On consensus estimates for not covered stocks.)

Cyient's RoE (18%) is similar to that of its European peers, but much lower than that of

L&T Technology Services (30%+). We believe, the lower RoE partly reflects the

acquisitions made by the company to enhance capabilities for future growth. With earnings

growth expectations higher than the peers (at 15%+), and a positive business momentum,

we assign a 14x target P/E multiple to Cyient, which looks comfortable in comparison with

the mid-sized IT peers and the engineering services firms.

We expect the company to report 15%

earnings CAGR over FY17-19, which could be among the best in

the industry

Cyient's engg. svcs. peers trade at 14-18x CY17E P/E (single to low double-digit EPS

CAGR) and the mid-cap Indian IT peers trade at

12-17x CY17E P/E (average EPS CAGR of

11%)

With earnings growth expectations higher

than the peers (at 15%), and a positive business momentum, we assign

a 14x target P/E multiple to Cyient

12 April 2017


Figure 33: With over 15% EPS CAGR estimate, Cyient trades at attractive multiples relative to its global as

well as Indian peers

Company Mcap (US$

mn)

Sales

(US$

mn)

Sales

CAGR

EV/Sales EBITDA

CAGR

EBITDA

margin

EV/EBITDA EPS

CAGR

P/E ROE Price performance

CY16 CY16-

18

CY17 CY18 CY16-

18

CY17 CY17 CY18 CY16-

18

CY17 CY18 CY17 CY18 1Y 3Y 5Y

Global engineering services

Altran* 2,868 2,346 6% 1.2 1.2 nm 12% 10.7 9.6 10% 16.5 14.6 17 17 27% 94% 250%

Alten* 2,493 1,934 5% 1.2 1.2 6% 11% 11.3 10.6 3% 17.3 16.0 17 16 30% 86% 211%

Bertrandt* 956 1,098 4% 0.9 0.9 5% 12% 7.3 6.7 5% 13.9 12.8 17 16 -11% -17% 57%

Akka* 912 1,242 7% 0.7 0.7 20% 9% 8.3 7.4 34% 15.0 12.6 24 24 65% 118% 185%

Assystem* 748 1,057 4% 0.7 0.7 10% 8% 8.6 7.9 5% 14.9 13.6 19 19 33% 39% 90%

Indian engineering services

Cyient 825 469 12% 1.4 1.3 17% 16% 9.1 7.7 16% 12.7 11.2 17 17 4% 49% 189%

L&T Technology services* 1,247 482 11% 2.3 2.1 14% 19% 12.3 10.9 13% 16.6 14.7 34 31 NA NA NA

Indian IT services (tier-2)

L&T Infotech* 1,910 934 10% 1.8 1.6 8% 18% 9.9 9.0 7% 12.5 11.6 36 32 NA NA NA

Mphasis* 1,818 910 7% 1.5 1.4 9% 16% 9.4 8.7 9% 13.3 12.3 13 14 14% 33% 41%

Mindtree 1,160 758 8% 1.4 1.2 14% 15% 8.9 7.6 16% 14.8 12.1 19 20 -33% 30% 260%

Hexaware 969 512 10% 1.6 1.4 12% 18% 8.7 7.7 11% 13.3 11.8 0 0 -16% 24% 74%

Persistent* 700 412 15% 1.3 1.1 18% 17% 7.6 6.5 15% 13.1 11.2 18 19 -21% 8% 242%

Indian IT services (tier-1)

Infosys 33,751 10,012 9% 2.7 2.4 9% 27% 9.8 8.9 8% 14.6 13.3 21 21 -20% 18% 39%

TCS 73,924 17,289 9% 3.7 3.4 8% 27% 13.6 12.4 7% 17.7 16.2 27 26 -3% 14% 117%

Wipro 19,272 8,104 5% 2.3 2.2 7% 21% 11.3 10.3 8% 13.8 12.4 17 17 -11% -11% 30%

HCL Tech 18,412 6,790 13% 2.2 2.0 12% 22% 10.0 8.9 9% 13.7 12.4 25 25 -1% 20% 240%

Tech Mahindra 6,690 4,252 7% 1.3 1.2 13% 16% 8.3 7.1 10% 12.5 10.7 18 18 -4% 3% 148%

Source: Thomson Reuters, Credit Suisse estimates. * Not covered stocks. Used consensus estimates for these stocks. For the covered stocks, used CS estimates.

Figure 34: Our TP of Rs625 implies reasonable assumptions for the DCF model

FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Revenue growth 14.0% 13.6% 12.0% 11.0% 10.0% 9.0% 8.5% 8.0%

EBITDA margin 14.0% 14.6% 14.6% 14.6% 14.6% 14.6% 14.6% 14.6%

Tax rate 23.0% 23.0% 23.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Net working capital (% of revenue) 12.5% 12.8% 12.8% 12.5% 12.5% 12.5% 12.5% 12.5%

Capex (as % of revenue) 2.5% 2.5% 2.4% 2.4% 2.3% 2.3% 2.3% 2.3%

Cost of capital 12.5%

Long term growth 4.5%


The stock trades below its two-year average P/E,

business momentum much better that last year

Cyient's stock currently trades at over 12x FY18E P/E. This is slightly below the stock's

two-year average of 13x and in line with the three year average of slightly above 12x.

More importantly, the business momentum is much better that what it was at the beginning

of FY17, which can driver multiple re-rating in the near term.

12 April 2017


Figure 35: The stock currently trades at below its two-year average P/E multiple

and is in line with its last three year's multiple—the business momentum is

much better as compared to the last year, though

Source: Thomson Reuters

Key risks

■ Currency: Cyient derives over 60% of its revenue in USD, and 13%, 11% and 8% of

its revenue in AUD, GBP and EUR, respectively. Any significant move in INR against

USD or cross currency moves between AUD/GBP/EUR, and USD could have a

material impact on the company's earnings. As per management, every 1% move in

INR/USD has 30-35 bp impact on operating margins. The earnings impact is also a

function of hedging gains/losses (the company hedges 70% of its net foreign currency

receivables over the next 12 months through forward contracts). We have used

INR/USD rate of 66 for FY18 and FY19.

■ High client concentration: Cyient derives 44% of its revenue from the top-5 clients

and 58% of its revenue from top-10 clients. Such a high client concentration can create

volatility in the financial performance. Cyient's high client concentration is also

reflective of its strong relationship with the leading players in most of the key industry

verticals it has a presence in. High client concentration is common with nearly all the

Indian Midcap IT Services companies, e.g., likes of Hexaware, Persistent Systems and

Mphasis have client exposure similar to Cyient.

■ Integration challenges on acquisitions: Cyient has an active M&A policy. The

company has done several acquisitions over the years and may continue to do so going

forward. This creates integration risks—failure to retain the key employees can materially

impact the business. The acquisitions may also fail to generate the desired synergies.

■ Execution risks in risk-reward/outcome based contracts: The company has

recently started offering risk-reward/outcome-based models, where the revenue flow

depends on the successful outcome of the prototype. Typically such projects are more

integrated (i.e., include components of idea generation, design and prototyping) and

help serving the client across the value chain, but they also have greater execution

risks. Such contracts are still small in the overall scheme of things (<5% of company's

revenue). The outcome based model is also gaining traction among the Indian IT firms.

0

2

4

6

8

10

12

14

16

18

Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

12m fwd P/E

12 April 2017


CS HOLT® framework also implies 30%+ upside HOLT is not part of Credit Suisse Research.

HOLT is a value-based, return on capital framework proprietary to Credit Suisse. HOLT

provides an objective view of over 20,000 companies in 65 countries using a methodology

that examines accounting information, converts it to cash, and then values that cash,

allowing investors to identify key drivers of value.

CYIE’s CFROI® has been on an uptrend since 2011, underpinned by healthy double-digit

revenue growth and improving asset efficiency. With expanding CFROI levels, CYIE has

also delivered strong Economic Profit (earnings in excess of the firm’s opportunity cost of

using capital) growth over the same period. Based on consensus forecasts, CFROI is

expected to moderate further to 12% in the near term.

Figure 36: Cyient Ltd CFROI® (LHS) and Economic Profit trend (RHS)

Source: Credit Suisse HOLT LensTM

.

Cyient Ltd—what’s priced in?

Beyond IBES consensus revenue growth and EBITDA margins in FY18, CYIE’s shares

are currently priced for no revenue growth along with margins falling by half to 7.5% by

FY20. Expectations appear conservative relative to the company’s historical track record.

(Link to HOLT Scenario)

Even if CYIE fails to deliver revenue growth in FY19/20, a scenario where EBITDA

margins remain at historical lows of 14% yields a HOLT warranted a price of Rs620 (32%

potential upside). (Link to HOLT Scenario)

https://holtlens.credit-suisse.com/dal/TM0kfTfysUeAqxs

https://holtlens.credit-suisse.com/dal/TEowDVBFIRYen9n

12 April 2017


Figure 37: Cyient Ltd’s market-implied scenario

Source: Credit Suisse HOLT LensTM

.

Additional information about the Credit Suisse HOLT methodology is available upon

request or for additional information about the Credit Suisse HOLT, please contact Shawn

Lee ([email protected], +65 6212 3370)

mailto:[email protected]

12 April 2017


Appendix

Company profile

Cyient is a leading player in engineering services (presence in aerospace/defense,

transportation, semiconductor, and industrial, energy and natural resources verticals)

network engineering (communication vertical) and operations management (verticals such

as utilities). With Rangsons acquisition in 2014, the company also ventured into design led

manufacturing business (small scale prototype manufacturing), with an intention to provide

services through-out the value chain to the clients.

The company was initially formed as a GIS service provider (map digitisation services) in

1991 by Mr. BVR Reddy. The company ventured into engineering services in 2000's, with

its first contract with Pratt and Whitney, which is now the company's largest client and also

a strategic investor in the company. The company expanded its engineering services

capabilities to other industries as well, including transportation (with Bombardier as a key

client), semiconductors (through Time to Market acquisition, and IBM as a key account -

IBM later sold its semiconductor business to Global Foundry), industrial, energy and

natural resources (with clients such as Caterpillar). Over the years, the company also

moved up the value in the GIS business with services around asset utilisation to the utility

industry, and networking services to the communication industry.

Cyient went through a strategic restructuring in 2014. It rebranded itself (from erstwhile

Infotech Enterprises), appointed Krishna Bodanapu (son of the founder—he spent several

years in the company in sales, marketing, account manager, and recently as COO) as MD

and CEO (the founder and then CEO BVR Mohan Reddy assumed the role of Executive

Chairman). The company moved to a vertical (business unit) organisation structure (from

earlier service line driven structure), with a focus on further building domain specific

capabilities.

Figure 38: Revenue break- up by business units Figure 39: Revenue break-up by service lines


Aerospace/Defense32%

Communication20%

Utilities and Geospatial

15%

Design Led Manufacturing

11%

Transportation8%

Industrial and ENR8%

Semiconductor4% Medical and

Healthcare2%

Engineering services, 54%

Communication (networking) and Utility & GIS, 36%

Design led manufacturing,

11%

12 April 2017


Board composition and management team

Figure 40: Cyient: Board composition

On Board

since

Designation Background

Mr BVR Mohan Reddy Since inception Founder, Chairman He founded the company in 1991. He served as the Chairman of NASSCOM (National Association of

Software & Service Companies) in FY16, as the Vice Chairman in FY15, and has been a member of the

Executive Council. He has also served as the Chairman of the Confederation of Indian Industry (CII),

Southern Region (2008-2009)

Mr Krishna Badanapu 2014 MD and CEO Krishna Badanapu initially joined Cyient as a Sales Manager, engineering services in Europe. He later held

the dual roles of marketing manager for the company's aerospace vertical and key account manager. Before

being elevated as CEO in 2014, he worked as the COO. Prior to Cyient, Mr Badanapu was with Altera

Corporation, a leading semiconductor manufacturer in California. He holds a bachelor's degree in electrical

engineering from Purdue University and a master's degree in business administration from the Kellogg

School of Management.

Mr Alain De Taeye 2010 Non-executive Director He is the member of the Management Board at Tom Tom. He serves as a Supervisory Board Member of

Telematics Cluster/ITS Belgium and of the Belgium/Indian Chamber of Commerce & Industry. He has served

as a Director of Nemerix SA since March 2006. Mr De Taeye holds a university degree in civil engineering

and architecture from the State University of Ghent, Belgium, and the Business School of Antwerp.

Mr Tom Prete 2013 Non-executive Director Tom Prete is Vice President of Engineering at Pratt & Whitney. He leads Pratt & Whitney's Global

Engineering organisation. Mr Prete joined Pratt & Whitney in 1988 and has served as chief engineer for

Operational Military Engines, director for Global Services Engineering, and chief engineer of Hot Section

Engineering.

Mr John Wiedemer 2016 Non-executive Director

(Alternate Director to

Tom Prete)

John Wiedemer is the Vice President of Engineering for Module Centers at Pratt & Whitney. He leads an

organisation of approximately 1,600 engineers with primary responsibility for the technology development,

design, analysis, production support, and field support of the components and modules that make up Pratt &

Whitney engines.

Independent Directors

Ms Andrea Bierce 2014 Independent Director Andrea Bierce has over 30 years of industry and consulting experience in the financial services. Currently,

Andrea works with some of the world's largest financial institutions in the areas of governance, enterprise risk

management, compliance and reporting. She is also a member of the Board, UBS Bank USA as a Director.

Mr Harsh Manglik 2012 Independent Director Harsh Manglik served as Chairman & Geography Managing Director, Accenture India, and was a member of

Accenture's global Executive Leadership Team. Mr Manglik was Chairman of NASSCOM and continues as a

member of its Executive Council. He was an invited member of the Confederation of Indian Industry (CII) and

has served as director on the board of the National Skills Development Corporation (NSDC).

Mr John Paterson 2014 Independent Director John Paterson retired as President - Marine & Industrial Power Systems at Rolls-Royce. In this role he also

had responsibility for chairing the Supervisory Board of Tognum, a 50/50 joint venture with Daimler, covering

all the reciprocating businesses within Rolls-Royce.

Mr K Ramachandran 2009 Independent Director He is currently engaged with the Aditya Birla Group as Advisor to the Chairman for the group's Higher

Education Projects. He spent 17 years with Voltas (a TATA Group company) in the electrical power industry

and spanned manufacturing, marketing, sales and project management. He eventually headed the Electrical

Business Group as Business Head and General Manager (Operations).

Mr M M Murugappan 1997 Independent Director He is Vice Chairman of the Murugappa Corporate Board. He is also the Chairman of Tube Investments of

India Limited, Carborundum Universal Limited, Wendt India Limited, and Murugappa Morgan Thermal

Ceramics Limited. He holds a master's degree in chemical engineering from the University of Michigan.

Mr Som Mittal 2014 Independent Director Som Mittal is the former Chairman and President of NASSCOM (2008-13). He has held corporate leadership

roles in the IT industry at companies such as Wipro, Digital India, Compaq and HP. He is on the governing

board of several educational and social organisations and is also a board member of Axis Bank, EXL Service

Holdings, Inc. and IIT, Indore.


12 April 2017


Figure 41: Cyient: Senior leadership team

Year of

joining

Designation Background

Mr John Renard 2000 President - Utilities &

Geospatial BU &

President EMEA

In his previous role, John Renard served as geography and sales head for the EMEA and India regions. Before

that, he managed the worldwide business operations of the utilities, telecom, and data transformation, and

analytics business units. Prior to Cyient, Mr Renard ran his own consulting practice in France. He lives in London

and has a Master's Degree in Geography and Management Studies from the University of Cambridge

Mr Anand

Parameswaran

2008 Sr. Vice President -

Aerospace & Defense

BU

Anand Parameswaran has earlier led Global Sales and Delivery for the heavy equipment, transportation, hi-tech,

consumer, and medical business unit. Before Cyient, he worked in various leadership roles at companies such as

Wipro and Cognizant. He received a degree from Birla Institute of Technology and Science (BITS), Pilani, India.

Mr Brian Wyatt 2009 Sr. Vice President -

Medical Tech BU

Brian Wyatt joined Cyient as Vice President, Strategic Initiatives for North America in engineering services. Prior

to that, he was Vice President, Business Development at TopCoder Inc (crowdsourcing software development).

He also spent over ten years as a strategy consultant. He has a bachelor's degree in economics from Boston

College and a master's degree in business administration from the Kellogg School of Management.

Mr NJ Joseph 1998 Sr. Vice President -

Strategy & Marketing

He currently heads the Corporate Strategy (including S3 strategy execution) and Marketing functions. He also

plays an active role in assessing opportunities for inorganic growth and post-merger integration. Prior to this role,

Mr Joseph was strategy head for the Networks, Operations, and Data Transformation businesses. He has a

bachelor's degree in electronics and communication engineering from Kerala University.

Mr PNSV

Narasimham


Global Human

Resources

He has extensive experience of over 25 years human resources. In his previous role, he served as the Chief

People Officer and Executive Vice President at Microland Limited. Mr Narasimham holds an MBA degree in

Human Resources.

Mr Prabhakar Atla 2004 Sr. Vice President - Rail

Transportation BU

Prabhakar Atla has over 20 years of experience spanning sales, product management, client relationship

management, and business leadership. He is a graduate in engineering and holds a master's degree in business

administration.

Mr Rajendra

Velagapudi


Business Excellence

Prior to Cyient, Rajendra Velagapudi designed and analysed powertrain systems for commercial and off-highway

equipment. He began his career in 1987 at Ford's Truck Division, later transitioning to Bajaj Tempo and Bharat

Earth Movers Limited. Mr Velagapudi holds a degree in mechanical engineering from Siddhartha Engineering

College (India) and master's degrees from Madras Institute of Technology (India) in automobile engineering and

Cranfield University (UK) in design.

Mr Sanjay Krishna 2000 Sr. Vice President -

Communications BU &

President - APAC

Sanjay Krishna has over 19 years of international business experience. Mr Krishna is on the advisory board of

Deakin School of Engineering, Australia and is also an esteemed member of Engineers Australia. He has been

awarded a Fellowship for his contribution in the field of engineering. In the past, he has held offices as Director of

Geospatial Informational Technology Association (GITA, ANZ). Mr Krishna has a degree in international marketing

from IIM (Bangalore, India). He has also studied strategic thinking and action at Melbourne Business School.

Mr Suman Narayan 2017 Sr. Vice President –

Semiconductor BU

Suman Narayan has over 20 years of experience in the high-tech electronics and semiconductor industry and

has served in various leadership roles at ON (Fairchild) Semiconductor and Texas Instruments. Mr Narayan

holds a degree in Electrical Engineering from PSG Tech, Coimbatore India, a Master’s degree in Electrical and

Biomedical Engineering from the Iowa State University, and an MBA from the University of Texas.

Mr Sunil Kumar

Makkena


Utilities & Geospatial BU

Sunil Kumar Makkena was one of the first three associates of Cyient Ltd. He executed and led various general

management functions across operations and delivery, business development, marketing, and account

management, including the integration of a captive unit. He holds a bachelor's of technology in engineering and

communications from Andhra University and completed an executive management program in business

management from the IIM, Kozhikode.

Mr Tom Edwards 2010 Sr. Vice President - UTC

Account & President -

North America

Prior to Cyient, Tom Edwards had a 26-year sales career at IBM, where he rose to global Channel Sales Leader

in the System Technology Division. Mr Edwards graduated from Clarkson University in Potsdam, NY, with

degrees in management and marketing.

Ms Katie Cook 2010 Sr. Vice President -

Industrial, Energy &

Natural Resources BU

Prior to the current role, Katie Cook led the North American sales and account management. Prior to Cyient, Ms Cook

spent 16 years at IBM, where she guided clients in improving supply chain efficiency and customer experience. She

received a bachelor's degree in both mathematics and education from the University of Idaho (USA).

Mr Ajay Aggarwal 2011 Chief Financial Officer Before joining Cyient, Ajay Aggarwal was Chief Corporate Controller with Tata Chemicals. Prior to that, he was

associated in various capacities with reputed organizations such as Reliance Industries, Kirby Building Systems,

P T Polysindo and J K Synthetics. Mr Aggarwal is an FCS, FICWA, and holds an engineering degree from BITS,

Pilani, India. He completed the corporate finance program at Euromoney, UK.


12 April 2017


Shareholding structure

Figure 42: Cyient Limited: Shareholding structure

Dec-14 Dec-15 Jun-16 Dec-16

Founders 22% 22% 22% 22%

First Carlyle Ventures (aggregate holding) 15% 15% 15% 15%

Carrier International Mauritius (UTC group) 14% 14% 14% 14%

Other FII 23% 26% 28% 29%

DII 13% 10% 8% 7%

Others 13% 13% 13% 13%

Source: BSE, Credit Suisse

12 April 2017


Key operating metrics

Figure 43: Cyient: Key operating metrics

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Revenue (US$ mn) 104.0 111.0 114.7 117.4 114.3 118.4 118.4 120.9 124.0 136.5 135.8

% growth QoQ (cc) 7.2% 7.4% 5.3% 4.5% -2.3% 4.2% 0.2% 2.6% 2.0% 10.3% 0.6%

Revenue (ex Rangsons, US$ mn) 104.0 111.0 114.7 108.2 108.3 108.2 107.7 108.7 114.6 123.0 121.0

Verticals (Ex Rangsons)

Aerospace and Defense 33.9% 33.3% 31.2% 34.5% 35.8% 36.2% 37.7% 38.9% 38.7% 36.8% 35.6%

Transportation 11.2% 10.4% 10.1% 10.4% 10.4% 10.6% 10.2% 10.0% 10.3% 9.4% 9.4%

Industrial, Energy and Natural Resources 12.1% 12.2% 11.5% 12.0% 11.8% 11.4% 10.8% 10.3% 10.0% 9.3% 9.3%

Semiconductor 5.8% 6.1% 5.9% 5.6% 5.6% 5.3% 4.3% 4.4% 4.3% 4.1% 3.9%

Medical and Consumer Electronics 1.7% 1.3% 1.2% 1.5% 1.4% 1.5% 1.5% 1.7% 1.9% 1.9% 1.9%

Utilities and geospatial 20.2% 20.3% 20.9% 18.8% 17.9% 15.8% 15.7% 16.8% 15.8% 16.7% 17.2%

Communication 14.2% 15.4% 18.3% 16.4% 16.2% 18.4% 19.4% 17.6% 18.9% 21.8% 22.7%

Geographies (Ex Rangsons)

Americas 60.9% 63.9% 65.0% 63.7% 64.0% 64.1% 63.6% 60.2% 60.0% 59.1% 58.0%

Europe, Middle East, Africa and India 29.3% 27.4% 26.8% 25.8% 24.0% 24.1% 23.2% 25.5% 24.6% 24.0% 24.0%

Rest of APAC 9.8% 8.7% 8.2% 10.5% 12.0% 11.8% 13.2% 14.3% 15.4% 16.9% 18.0%

Client metrics (Ex Rangsons)

Top 5 36% 37% 37% 35% 36% 35% 35% 36% 40% 43% 44%

Top 10 51% 52% 50% 50% 51% 50% 49% 51% 56% 57% 58%

20 mn+ 3 3 4 4 4 4 2 2 3 3 3

10 mn+ 8 9 9 8 8 9 10 11 10 10 11

5 mn+ 19 20 20 20 22 21 19 20 19 19 21

1 mn+ 55 54 56 55 59 60 60 62 60 56 60

Offshore mix (Ex Rangsons)

Onsite 52.2% 53.5% 55.2% 56.7% 56.1% 56.3% 56.6% 59.3% 59.3% 59.9% 59.6%

Offshore 47.8% 46.5% 44.8% 43.3% 43.9% 43.7% 43.4% 40.7% 40.7% 40.1% 40.4%

Employee metrics (Ex Rangsons)

Total 12,539 12,759 12,777 12,367 12,336 12,026 12,186 12,498 12,965 13,216 13,094

Utilisation (%) 74.3 74.8 75.8 73.8 75.4 76.1 76.7 72.7 73.5 78.0 78.3

Voluntary attrition (%, quarterly annualised) 15.3 12.7 13.3 17.2 18.8 21.6 20.6 18.4 19.9 22.7 22.6

Involuntary attrition (%, quarterly annualised) 2.2 6.3 2.6 2.4 2.6 3.2 1.8 1.6 3.1 4.0 1.9

Overall attrition (%, quarterly annualised) 17.5 19.0 15.9 19.6 21.4 24.8 22.4 20.0 23.0 26.7 24.5

Currency mix (%)

USD 62.0% 63.0% 65.0% 67.0% 67.0% 67.5% 68.0% 67.5% 67.0% 63.8% 62.5%

EUR 16.0% 15.0% 15.0% 12.0% 15.0% 14.4% 11.0% 10.1% 15.0% 8.6% 8.2%

GBP 7.0% 8.0% 8.0% 8.0% 8.0% 8.5% 8.0% 9.1% 8.0% 10.9% 10.7%

AUD 12.4% 11.0% 8.0% 7.0% 6.0% 7.0% 8.0% 8.2% 6.0% 12.0% 13.1%

Cash generation (Rs mn)

Cash and cash equivalents 7,358 7,184 8,003 6,565 6,614 6,523 7,650 7,743 8,025 8,064 8,627

Capital expenditure 219 134 167 214 170 179 225 204 196 244 263

OCF (Ex Rangsons) 706 785 1,072 1,139 505 1,026 1,420 1,094 722 607 1,680

FCF (Ex Rangsons) 487 651 905 924 374 887 1,208 910 571 380 1,432

Rangsons FCF -118 83 -175

Order intake (US$ mn)

Services (current FY) 83.8 81.3 96.4 130.2 124.9 112.1 105.9

Services (beyond current FY) 20.9 6.6 73.7 30.2 8.1 21.2 83.0

Services total 104.7 87.9 170.1 160.4 133.0 133.3 188.9

DLM (current FY) 6.1 11.5 9.8 9.8 12.3 9.3 9.4

DLM (current FY) 0.2 3.1 4.0 1.4 2.2 2.1 4.3

DLM Total 6.3 14.6 13.8 11.2 14.5 11.4 13.7

Source: Company data

12 April 2017


Companies Mentioned (Price as of 10-Apr-2017) Akka Tech (AKA.PA, €42.5) Alten (LTEN.PA, €69.9) Altran Tech (ALTT.PA, €15.415) Assystem (ASY.PA, €31.8) Bertrandt AG (BDTG.DE, €89.0) Bombardier Inc (SVS) (BBDb.TO, C$2.22) Cyient Limited (CYIE.BO, Rs473.05, OUTPERFORM, TP Rs625.0) HCL Technologies (HCLT.BO, Rs832.8) Hexaware Technologies (HEXT.BO, Rs210.95) Infosys Limited (INFY.BO, Rs952.95) International Business Machines Corp. (IBM.N, $171.2) L&T Infotech (LRTI.NS, Rs722.6) L&T Technology (LTEH.NS, Rs791.25) Mindtree Ltd (MINT.BO, Rs445.55) Mphasis Ltd (MBFL.BO, Rs557.7) Persistent Systems (PERS.BO, Rs564.55) Tata Consultancy Services (TCS.BO, Rs2421.15) Tech Mahindra Limited (TEML.BO, Rs443.25) Telstra Corporation (TLS.AX, A$4.58) TomTom (TMOAY.PK, $3.95) United Technologies Corp (UTX.N, $112.88) Wipro Ltd. (WIPR.BO, Rs503.35)

Disclosure Appendix

Analyst Certification Nitin Jain and Anantha Narayan each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities . As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

12 April 2017


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (54% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Cyient Limited (CYIE.BO)

Method: Cyient is likely to have the best in class earnings CAGR over the next two two years, in our view, and given the structurally strong positioning, and solid business momentum, we value the company at 14x FY19E P/E (price-to-earnings). Cyient's engineering services peers trade in the range of 14-18x CY17E P/E, with single digit to low double digit earnings growth expectations. Though not exactly comparable, the mid-cap Indian IT peers trade at 12-17x CY17E P/E, with an average growth expectation of 11% EPS (earnings per share) CAGR. We thus have an OUTPERFORM rating on the stock with a target price of Rs625.

Risk: The key risks to our target price of Rs625 and OUTPERFORM rating for Cyient Limited include any significant appreciation in INR or adverse cross-currency moves, client-specific issues (given high client concentration), acquisition indigestion and execution risks on the new outcome based projects.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (UTX.N, HEXT.BO, TCS.BO, IBM.N, BBDb.TO, TLS.AX, HCLT.BO, INFY.BO, WIPR.BO, TEML.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (HEXT.BO, IBM.N, BBDb.TO) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (TCS.BO, IBM.N, WIPR.BO, TEML.BO) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (IBM.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (HEXT.BO, IBM.N, BBDb.TO) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (UTX.N, HEXT.BO, TCS.BO, IBM.N, BBDb.TO, TLS.AX, MINT.BO, HCLT.BO, INFY.BO, WIPR.BO, TEML.BO) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (TCS.BO, IBM.N, WIPR.BO, TEML.BO) within the past 12 months A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (CYIE.BO, HEXT.BO, TCS.BO, IBM.N, BBDb.TO, TLS.AX, MINT.BO, HCLT.BO, WIPR.BO, TEML.BO) within the past 12 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (PERS.BO, LRTI.NS, MBFL.BO, LTEH.NS, CYIE.BO, HEXT.BO, TCS.BO, MINT.BO, HCLT.BO, INFY.BO, WIPR.BO, TEML.BO)

https://plus.credit-suisse.com/

https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html

https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html

https://rave.credit-suisse.com/disclosures/view/selectArchive

12 April 2017


For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=294126&v=2kvd9r4mpzpjmab1czmbdg25e .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (IBM.N, BBDb.TO) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (India) Private Limited ......................................................................................................... Nitin Jain ; Anantha Narayan To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private Limited ......................................................................................................... Nitin Jain ; Anantha Narayan

Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse ’s disclosure website at https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.

https://rave.credit-suisse.com/disclosures


https://rave.credit-suisse.com/disclosures/view/report?i=294126&v=2kvd9r4mpzpjmab1czmbdg25e

https://rave.credit-suisse.com/disclosures/view/report?i=294126&v=2kvd9r4mpzpjmab1czmbdg25e


12 April 2017


This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk.

This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited,

Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

https://www.credit-suisse.com/who-we-are

cyient limited - research-doc.credit-suisse.com

Documents