Cyient DLM Stock Declines 12% After Q3 Profit and Margin Drop: A Detailed Analysis

Cyient DLM, a prominent player in the electronics system design and manufacturing industry, experienced a significant downturn in its stock price on January 22, after reporting a sequential decline in profits and a decrease in margins for the third quarter of FY25. The decline of 12% in its share price was a noteworthy event, especially given the company’s previous strong performance in the market. This blog explores the reasons behind the decline, the company’s financial performance, and what investors can expect moving forward.

Overview of Cyient DLM

Cyient DLM is part of Cyient Ltd., a global engineering and technology solutions company that specializes in electronics manufacturing and design services. The company’s offerings include the design, integration, testing, and production of electronic components and subsystems for original equipment manufacturers (OEMs). Cyient DLM serves various industries, such as aerospace, defence, automotive, and other high-tech sectors. The company operates across multiple regions, including India, Europe, North America, China, and Japan, catering to a diverse and growing customer base.

Cyient DLM Q3 Performance: Decline in Profit and Margin

The significant drop in Cyient DLM’s stock price on January 22 came in the wake of its Q3 FY25 earnings announcement. For the quarter, the company reported a decline of nearly 30% in consolidated net profit, down to ₹11 crore compared to the previous quarter. This marks a substantial decrease, and it also represents a 40% year-on-year decline from the same period last year.

Furthermore, the company’s EBITDA margin shrank to 8.1%, which was a noticeable drop compared to 9.2% in the same quarter last year. The sequential decline in both net profit and margins raised concerns among investors about the company’s future financial performance.

Key Factors Contributing to the Decline

1. Increased Operating Costs: One of the major contributing factors to Cyient DLM’s reduced profitability and margin was the increase in operating costs, specifically employee expenses and other operational costs. The company attributed some of the increase in costs to the consolidation of Altek Electronics, Inc. This electronics manufacturing services (EMS) company, specializing in PCB assemblies, box builds, and cable harnesses, added to Cyient DLM’s cost structure.
2. Slower Pickup in Inflows: Cyient DLM’s overall performance also suffered from slower-than-expected business inflows. While the company continues to secure contracts and expand its customer base in high-demand sectors like aerospace and defence the pace of inflows was slower than anticipated. This underperformance in inflows directly impacted the company’s revenue growth potential and contributed to the sequential decline in profits.
3. Margin Pressure: The erosion of margins was a direct fallout from an increased cost structure and pressure on revenue streams. In the face of a reported revenue increase, it was tough to maintain profitability for the company in the wake of an increased cost base. Sector-specific challenges, raw material cost increases, and disruption in the supply chain also led to the erosion of margins.
4. Macroeconomic and Industry-Specific Headwinds: The broader macroeconomic environment, along with specific industry challenges, also played a role in Cyient DLM’s weaker-than-expected performance. The global semiconductor shortage, supply chain disruptions, and increasing labour costs are factors that have put pressure on the company’s ability to maintain its margins. As a company serving high-tech industries like aerospace and defence Cyient DLM has been exposed to the volatility and fluctuations in the global supply chain.

Positive Takeaways of Q3 Performance

Although overall performance in Q3 was unimpressive, there are some positive takeaways from the Cyient DLM results that investors should look forward to:

1. Revenue Growth: Despite the decline in profits and margins, Cyient DLM’s revenue from operations saw a significant increase, reaching ₹444.2 crore in Q3FY25, compared to ₹321 crore in the same period last year. This represented a healthy year-on-year growth and was also an improvement over the previous quarter’s revenue of ₹389.4 crore. The company’s strong revenue growth indicates its ability to secure contracts and maintain a steady business flow, even amidst challenging circumstances.
2. EBITDA Improvement: Cyient DLM’s EBITDA also showed improvement, rising to ₹35.9 crore in Q3FY25, compared to ₹29.4 crore in Q3FY24 and ₹31.6 crore in the previous quarter. This shows that while the company faced margin pressures, it was still able to improve its operational efficiency in some areas, helping it to generate higher earnings before interest, tax, depreciation, and amortization.
3. Analyst Reactions and Forecasts: Following the release of the Q3 earnings, global brokerage firm Motilal Oswal Financial Services revised its target price for Cyient DLM’s stock, downgrading its earnings forecasts for the next few fiscal years. The brokerage now expects a slower pickup in inflows, which led it to adjust its valuation multiple downward from 70x to 65x for the two-year forward earnings.

Motilal Oswal has also lowered its earnings estimates by 3%, 4%, and 5% for FY25, FY26, and FY27, respectively, in light of the recent performance and the company’s slower growth outlook. Despite the downgrade, the brokerage retained its ‘Buy’ rating for the stock, indicating that it still sees potential for long-term growth, albeit with moderated expectations.

Technical Outlook on Cyient DLM Stock

From a technical standpoint, the stock of Cyient DLM has faced selling pressure recently. On January 22, the stock dropped by as much as 12% following the earnings announcement. The stock is down 18% over the last year, underperforming the broader market by a considerable margin. For some time now, the stock has been trading sideways, indicating the uncertainty of the market and apprehensions from investors about the performance of the company.

According to Ruchit Jain, Vice President of Equity Technical Research at Motilal Oswal Financial Services, the short-term trend for Cyient DLM stock remains sideways. He noted that the support for the stock is seen at ₹925, while resistance levels are around ₹992–₹1,000. A breakout beyond these levels could indicate a more directional move for the stock. Until then, the stock is expected to remain within this range.

Long-Term Outlook for Cyient DLM

While Cyient DLM’s short-term outlook is clouded with concerns over declining profits, margins, and slower growth in inflows, the company’s long-term potential remains intact. Cyient DLM is well-positioned in the growing markets of aerospace, defence and high-tech engineering, which are expected to see increased demand in the coming years. The company’s strategic investments in high-quality, high-demand industries, as well as its ability to serve large global OEMs, give it a strong foundation for future growth.

In the long term, Cyient DLM is likely to benefit from its diversified portfolio and its continued focus on high-tech industries, which are poised for substantial growth. Furthermore, its ability to improve operational efficiency and manage costs will be key factors in driving profitability in the future.

Conclusion

Cyient DLM’s Q3 FY25 performance has sparked concerns among investors, especially with the company’s profit and margin decline. However, the company’s strong revenue growth, increased EBITDA, and positive outlook in high-demand sectors provide some optimism. While short-term challenges remain, the long-term prospects for the company are promising, and its strategic positioning in the aerospace, defence and high-tech engineering sectors offers significant growth potential.

For investors, Cyient DLM remains a company to watch closely, with its next few quarters likely to be pivotal in determining its future trajectory. With a strong revenue base and ongoing efforts to manage costs, Cyient DLM could still emerge as a valuable player in the electronics system design and manufacturing sector, provided it navigates its current challenges successfully.

As always, investors should be updated on the company’s quarterly performance, new developments, and overall market trends so that they can make the right investment decisions.