Cyient: Midcap IT multibagger stock sees Morgan Stanley upgrade. Here's why

Morgan Stanley has upgraded multibagger midcap IT stock Cyient from 'equal-weight' 'Overweight', even as the stock has outperformed its peers and the broader market. The foreign brokerage said the IT stock will continue to see upgrades from hereon, even as it is trading at a premium to its own historical average. With improving execution, Cyient should continue to re-rate, the brokerage said while suggesting a base case target of Rs 2,000 against Rs 1,550 earlier. Its bull case scenario gives a target of Rs 2,700 and bear case Rs 1,035.

The stock is up 106 per cent year-to-date. It rose 0.74 per cent to Rs 1,682 on BSE.

Morgan Stanley suggested growth in large accounts and new client additions, pricing trends in existing clients and stable spending by clients in the engineering services vertical, as growth drivers.

"Revenue growth is becoming broad-based with aerospace leading the show, the rail vertical bottoming, and the portfolio vertical continuing to generate faster-than-company-average growth," Morgan Stanley said.

Cyient has surprised positively on Services business gross margins and the brokerage believes EBIT margin for Cyient may have bottomed in FY23. 

In its base case, Morgan Stanley is expecting services revenue growth CAGR of 16.4 per cent and EBIT CAGR of 31.2 per cent during F23-25. The bull case factors in volume ramp-up and improvement in margins. This case expects ramp-up at large clients and large deal wins, which may help revenue grow better than base case over F23-25. It also factors in better pricing on new contracts and price increases on renewals, which Morgan Stanley believes may help boost EBIT margins.

"The bull case weighting reflects a probability of a positive surprise from revenue growth, while the  bear case weighting reflects the potential for a slowdown in the demand environment. Cost of equity is 10.5 per cent and terminal growth rate is 4 per cent across scenarios. DLM - Market cap of Cyient DLM is used with a 20 per cent holdco discount," it said.

 

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