Cyient Limited (532175) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Cyient Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, Managing Director and CEO. Thank you, and over to you, sir.

Thank you very much. Good evening, ladies and gentlemen. Welcome to Cyient Limited's Earnings Call for the Third Quarter of Financial Year 2022. I'm Krishna Bodanapu, Managing Director and Chief Executive Officer of Cyient. Present with me on this call are Mr. Ajay Aggarwal, Executive Director and Chief Financial Officer; and Mr. Karthik Natarajan, Executive Director and Chief Operating Officer. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in our investor update, which has been e-mailed to you and is also posted on our corporate website. This call will be accompanied with an earnings call presentation. The details of the same have been shared with you. With that, let me take you through the highlights for the quarter. In U.S. dollar terms, we posted a revenue of $157.9 million, which is a growth of 11.7% year-on-year and 5.2% quarter-on-quarter. This translates to a 5.9% quarter-on-quarter growth in constant currency terms, that's 5.9% in constant currency. In rupee terms, we posted a quarterly revenue of INR 1,183 crores. This signifies a growth of 13.3% year-on-year or 6.5% quarter-on-quarter. The services revenue stood at $129.1 million, which is a growth of 11.9% year-on-year and 3.6% quarter-on-quarter or 4.4% in constant currency. DLM revenues stood at $28.8 million, a growth of 10.6% year-on-year and 12.8% quarter-on-quarter. We posted the highest ever group EBIT in Q3 at INR 1,642, crores, that's INR 164.2 crores. Group EBIT margin stood at 13.9%, up 27 bps year-on-year or marginally down by 14 bps quarter-on-quarter. Free cash flow for the quarter is at $1,596 million, a conversion of 71% on EBITDA and a conversion of 121% on PAT. Profit after tax stood at INR 131.7 crores or $ 1,317 million, which is a growth of 3% year-on-year and 8.5% quarter-on-quarter -- sorry, the tax growth is 38% year-on-year and 8.5% quarter-on-quarter. Also adjusting for 1 quarter where we had some extraordinary items, if you remove that quarter, this is also the highest profit that we have delivered after tax ever. Coming to some other highlights for the quarter. We secured a leadership position in Digital Engineering and ER&D study conducted by Zinnov. I'm happy to announce that Cyient has been recognized as an established player in ER&D and IoT services. Cyient has been ranked in the leadership zone across Aerospace, Communications, semiconductor, industrial and medical devices, all of which are growth verticals and very, very important verticals for us. We launched the management consulting practice, which will allow us to leverage our engineering domain expertise to solve business critical problems. The idea is more and more our customers are also looking towards us to articulate their challenges in terms of the operational and technological challenges. And we will then make sure that we first articulate the solution and then execute the solution. So the consulting practice that we have focuses primarily on organizational efficiency, asset optimization, digital transformation, technology adoption and so on and so forth and not necessarily on the management consulting side. So it's a very good synergy, and we're also already seeing good wins because of that and also because of the flow-through from the services revenue. We've been positioned as a major contender in Everest Group's 5G Engineering PEAK Matrix Assessment. And this is because we've been able to combine our domain expertise in network design with the latest technologies like digital twin, Geospatial intelligence, et cetera, and really we're able to position ourselves very well in the 5G rollout, which, as you know, is a huge growth opportunity going forward. We also hive off our SDR, which is a software-defined radio division, to our ICS renovation communication solutions. This is a company that specializes in communications products and solutions. We have been developing the SDR in reply to a tender from the Government of India, Ministry of Defense. It's a huge opportunity that runs into thousands of crores over many years. But it also will take some time for the opportunity to come to fulfillment, and therefore, we believe that it was best that we let a specialized player like ICS in this space, who also have a core portfolio of products, not just one communication radio, but a core portfolio of communication products. And that positions ICS very well to be successful in this bid. Cyient will get 15% stake in ICS. So we have a longer-term interest in this, which will also bode very well for us. And also we will remain their manufacturing partners, Cyient DLM will remain their manufacturing partner. We also have a royalty that will come because of the product that we have delivered. Also, the advantage with this divestment is we no longer have an obligation to restrict foreign ownership in Cyient, which was previously capped at 49%. And now we don't need to have a cap because we will not be directly bidding on India defense business anymore. With that, I'll just say that it's been a very, very good quarter. I want to thank everybody for your trust and your patience. We will give you more details in the next 40 minutes or so through the rest of this conversation. But thank you for your support this quarter. And I'll hand it over to Ajay, who will take you through the detailed financial performance of the company. Ajay, over to you.

Thank you, Krishna. Hi, everyone. I wish you all a very happy new year. I hope you and the families are staying safe. We had a good quarter in front of us. I think what we have seen is a very well-rounded performance. We have always said, if you remember our Investor Day that our focus, as a company, is on achieving the industry-leading earnings growth. And I think if you look at year-on-year numbers of our earnings growth, they are really reflective of also the journey that we expect for the full year, and we are very happy that we are getting there for the current year, and we'll continue to work to remain in that particular spot. Also, you would see that in terms of the cash that is generated in the company, I think it provides us the revenue to grow through the M&A. We have a good pipeline. We can talk more about it in the Q&A. And that also gives us this kind 38% higher return also gives us the ability to improve the investor returns to be similar extent. So the point I was making, there is a well-rounded effort in the company has Krishna highlighted focus on profitable growth getting to the industry-leading earning growth, focusing on the cash flow. Now let me come to the revenue statement as such. I think we had a reasonable achievement in terms of constant currency. We have 5.9% growth, and in terms of the dollar, 5.2%. If you look at in terms of services, we have given constant currency growth of $4.4 million -- 4.4% at $129.1 million. In terms of DLM, we have a growth of 12.8%, which is $28.8 million. We are at 10.6%. We expect the traction to continue. And we have some healthy double-digit growth across services and DLM. DLM definitely has been impacted by a little bit of supply chain challenges that are happening across the world and that we are -- that are impacting some of the semiconductor-related industries. So we are definitely getting impacted by that. But in terms of the capacity as well as the demand, we are very well set year-on-year to grow by 20, 30 years -- 20%, 30% each year, but this year, we may have a marginal growth, but I think DLM is also doing very well. The last one on the regional growth, you will see this quite each of the 3 geographies as of now are growing in double digits so, it's a well-rounded growth. If you turn to the profitability statement, I think one of the commitments that we have made was that in services, we want to stay at 15% to 15.5% kind of margin. We have achieved 15.6% in this quarter. And you will see this is despite the fact that we had some headwinds from lower billing days versus the pay days. We have additionally provided for some of the investments that are there into retaining the people. We continue to do the investments around improving the offerings for the customers. But despite that, without compromising into any of the growth areas, we will be able to generate 15.6% the EBIT margin, and that's also highest in recent past. And you see that, year-on-year, there is an expansion of margin, which is also very, very nice. And based on this kind of margin we have got in services, DLM, we continue to be at single digits, 6% is the margin in DLM. But overall, based on this, we have given 13.9% as the group margin. And we definitely are confident that these are sustainable levels in medium term. We can definitely continue to improve them. So we are confident for the year that we will keep growing and there will be a huge expansion in the EBIT margin as an outline in the industry, in line with some of the trends that we are seeing for the 9 months, we will continue for the full year. In terms of profit after tax, as Krishna said, a growth of 38% year-on-year, quite sustainable for the full year, the way we are looking at the tax, other income and the performance for the next quarter. So it's a really very nice performance. And as I said, this really gives us a lot of opportunity to increase the investor returns as well. I would let all of you go through it. What I would like to highlight, what were the headwinds, of course, the kind of business between some of the product-based business, especially in our semiconductor area, some of the areas which is low margin versus high margin in the field. Because of that, we had a headwind of about 80 bps, lower billing days I talked about, about 107 bps. And then there are some other reasons in terms of tailwinds, I think it's very nice that we are getting continuously improvement in operational matrix. And I'm sure Karthik will talk about it, but we are hitting very, very nice utilization number. Offshoring is also year-on-year, if you see, is improved by about 5%, and that's all resulting, and I think the volumes coming back do help us and there's a good focus on SG&A. So we are also getting the help of 1% plus in terms of the scale and the SG&A. And other items, I would say, overall, the margin is sustainable, and these are some of the reasons, and we can take both during the question and answer session. So last one, I think, as I said, apart from profitable growth, there continues to be a focus, on the cash generation, which all of you have been [indiscernible]. In terms of one of the important [ levers ] that's DSO, we are tracking very nicely. The CapEx is also doing well. You can see that when you look at the investor update, our DSO is one of the lowest that we are tracking. And we've seen that there is a further improvement that we can do. On basis of this, we have generated a cash. Currently, our cash balances [ $14, 768 ] million close to INR 1,500 crores. And what cash we have generated is about INR 1,596 million or about INR 160 crores, which is a conversion at 71%. We still have some improvement scope in DLM, where we have consumed some cash -- But I think as we move forward, I think we're also trying to make it definitely cash positive. So I'm sure that we will continue to be having the good conversion levels of 70% plus for the group and the services. With this, I'll hand over to Karthik to provide the business updates.

Thank you, Ajay. Very good morning and evening to everyone, and wish you all a fantastic new year. I'll probably give more details about each of the verticals. I'm trying to really take the last column of the table that is on the topmost chart. And we have seen a growth of 5.6% year-on-year from transport business, and this is led by Aerospace and which is growing at 14.5% this quarter as compared to Q3 of fiscal '21. And as we said in the last 3 quarters, I think the Aerospace is slowly coming back. We don't really call this as a full-blown recovery. We are seeing green shoots from a few of our top accounts, and we want it to be a broad-based for the next 3 or 4 quarters. And Rail Transportation has shown a degrowth and this is led by a significant amount of work moving to offshore and also some of the challenges in the industry in terms of consolidation. And the Communication and Utilities, I think they continue to get a growth of 10% plus, and we have seen 3.2% growth quarter-on-quarter. I think we are also having a few large deal wins that we'll talk about in the next few slides. And portfolio of sectors and -- has grown by 24.5% year-on-year and leading us to do a services growth of 11.9%. And portfolio of services, which comprises of 6 segments and 4 of the segments are leading with growth of -- in excess of 20% year-on-year. I think that's definitely a great time for us to gain momentum for the year as well as the year to come. And in terms of order intake and services order intake is up by 12.8% and group order intake is up by close to 16%. I think it gives us confidence as we start heading into 2022. And also large deals, we are close to 7 large deals. We have been talking about at the last 2 quarters. I think we are gaining momentum. We are still on course to really bring more large deals for the next few quarters. And incidentally, there are 4 deals, which are more than $10 million plus. And the number of deals that we are participating in the large deals have tripled in the last 12 months. I think that gives us confidence on accelerated growth over the next few years. And also [ $5 million-plus customers has grown from 24% to 27% and $1 million customers has grown from 76% 77% ]. I think this is also showing that on mining that is really starting to happen. So if you're also trying to give a color of the growth that we are seeing, I think, which is led by our pipeline is up by 25% -- 27% as compared to the same time last year. Our order intake is up by 16%. Our revenue is up by 12%. And also, interestingly, the top 30 customers have grown by 15% year-on-year. I think this is showing the effect of account mining, and also led by new age tech. We started talking about it from last quarter. I think this is led essentially by digital software and networks. I think we are seeing that this business is growing twice the growth rate of the company. And this is definitely something that we are really excited about. We are continuing to make investments, and we'll talk about some of the new projects that we are doing and also the kind of solutions that we are building in the next few slides. So if you really look at it, 15% growth from top 30 accounts, 22% growth from new age tech areas is helping us to grow at 12% year-on-year. So this is a slide that I was referring to. And if you really look at it, some of the key highlights that I'll just pick up off the cloud migration and multi-module transport billing platform, and this is one of the customers who really want to bring this for a major city in U.S., and they were really moving for -- this is the revenue for the customers and their customers, too. And we are really part of building an innovative solution that will really have a very high uptime. And this is going to be the industry benchmark for the customer. And as far as Digital is concerned, we started working on Intelligent and Connected Products and Automation and Edge AI and Sustainable Energy. I think some of these areas are really giving more momentum in the form of customer engagement. And Medical, we had a couple of key project wins and patient monitoring system where we are building the test automation and which is going to really switch between the sensor probes and the companion models, along with the patient monitors. And also in the form of Automotive Embedded Software Factory, and this is going to be another growth engine that we are going to accelerate for the next 12, 18 months. And some of the wins in Communications on the 5G where the Small Cells Design & Deployment, I think is coming into play. And Aerospace, where we are also trying to bring more digital rate growth as far as aerospace is concerned. And this is shown with the Global Command Center that we set up for one of the customers for aftermarket services. Moving on to specific industry verticals. Transport, we're just trying it to break it into 2 parts; the aerospace and rail. And the aerospace continued to see a challenge, especially for the long distance, but the regional aircraft recovery is getting better, and we are starting to see some green shoots both on the aftermarket [ Embedded ] and digital areas. And the rail business, as I shared earlier, I think we are seeing growth on the aftermarket and digital. And as we talked about, there is a cost efficiency and supply chain optimization initiatives from some of the customers who are getting consolidated. And there will be some synergy benefits they want to drop on and that's going to have some short-term impact. But we expect the long-term growth is intact and we continue to see momentum in this business as well. DLM and [ indiscernible] continued to show sequential growth in Q3, and the challenges continue on the order fulfillment due to the [ material's ] availability and the longer lead time from the suppliers, and that's continued to be a challenge even in [indiscernible ]. Moving on to communications side. We are seeing the sequential growth in comms and this will continue to expand. And we also announced the 2 major deals that were coming from communication vertical. And some of the areas, which is going to really grow is led by a rural digital opportunity fund (RDOF), which is called in U.S. and also the fiberization and 5G private wireless and I think this is going to really create a significant opportunities for us to work upon. Utilities has shown a continuous growth for the last 2, 3 quarters, and we also won a major program for our customers, and this is to deploy cloud-native next-generation, special information system for them. And this is another segment which will continue to grow for the quarter to come. Portfolio of sectors and automotive, I think the outlook remains very positive, and we start seeing significant opportunities around electrification and softwarization. And these 2 are the key areas of growth that we are really betting on as far as automotive is concerned. And mining and natural resources are continuing to see a growth, led by digital as well as some of the engineering areas related to the mining. If I move on to Medical, and this is one segment which continues to show a positive momentum, and we are likely to see this growing even for next few more quarters. And what is driving this essentially led by software and digital. I think these are the 2 things that are really driving the growth. And we also announced a deal, which allows us to do a quality and regulatory services for a customer. And we also added about 3 new logos from Med Tech and Life Sciences segments, and we are continuing to be bullish on the medical technology areas. Semiconductor has witnessed a positive growth, and we are also seeing momentum from some of the large customers that we have been able to make an entry to. And we have continued to bullish on the demand, but the supply needs to be managed as far as making the fulfillment happen in this domain. Energy, Industrial and plant engineering, and we are continuing to see a growth as we have seen in the first half of this year, and we will start seeing some of these areas to get into growth trajectory in the next year to come. Geospatial has had some challenges and there were some issues that we had in terms of customer mix. And I think this is likely to start getting into growth trajectory in the next 2 quarters, and we are starting to see a lot of opportunities within our existing engagements like mining, communication and utilities. And we continue to see that with automation and artificial intelligence, combined with spatial systems, we'll see a growth for the year to come. With that, back to you, Krishna.

So taking all that into account, the outlook for the rest of the year is essentially that we will grow in double digits in the services business, at least in dollar terms, and constant currency should also be more or less there. We are now seeing some significant impact in the DLM business due to supply side challenges. But what we're also seeing is, we are able to mitigate some of the good -- the profitable revenue against it in the sense that, while there is some revenue challenge with the DLM business into Q4, where we might not deliver the 15% to 20% numbers that we thought we would earlier in the year, but from a profit perspective, we don't see any change because we have prioritized the higher-margin businesses, and we've prioritized delivery on the higher-margin businesses. So if anything, the slightly lower revenue number on DLM will lead to a better EBIT margin and the same EBIT number irrespective of the BLM revenue. So overall, I think we're in good shape, and we seem to be doing quite well against the targets. From an EBIT perspective, the full year EBIT will improve by 350 bps. Obviously, this will lead to being among the best EBIT performance in the sector. So we're quite proud of that. And lastly, we will maintain our FY '22 effective tax rate around 25% or slightly lower, but around that number. So with that, I will hand it back for questions and answers.

[Operator Instructions] The first question is from the line of Vikas Ahuja from Antique Stock Broking.

My first question is on the DLM guidance, which used to be -- which was 15% to 20%, and now it seems like it will be more like 12%, 13%. So I mean, do you -- so we have been seeing some positive momentum on the services side. So do we think that, overall, when we look at the consolidated revenue, the mess on DLM would be somehow offset by the positive momentum in services? And secondly, I mean, this -- the mess we are expecting in Q4 because of the global chip shortage, do you think it will go into maybe Q1 on -- Q1 of FY '23 as well? Or this is more of a 1-quarter phenomenon?

No. So to answer your question on the first part, absolutely, I think the services business is very strong, and we continue to see the momentum on it. I think there, we're very confident on what is happening and based on if you also look at the order intake, which was up 15% year-on-year, I mean quarter-on-quarter, it was up much higher, but Q2 is a bit of an aberration. So even like-for-like, the order intake is very good, and therefore, the momentum that is there in the business is quite strong from the services business perspective. On the DLM business also, again, I want to say that there is a significant shortage and I'm sure you've heard all about the global semiconductor shortage and the chip shortage, and that is something that's also impacting us. And that we will -- we believe that will continue at least for another 12 to 15 months, and therefore, this uncertainty will remain in the DLM business. But again, I want to say our team has done a fantastic job on prioritizing where the margin is and where the money is, and therefore, what are the customers that we need to prioritize. And therefore, while there is a bit of a change on the revenue outlook for DLM, from a profit perspective for the group, we don't have much of a change in outlook because we're able to mitigate it by making sure that we are still delivering on the right kind of contracts.

Yes. Krishna, also on headcount growth, which is largely flat, and it has been on the lower side in past quarters as well. Is it because we were not anticipating such a high attrition? Or is it some hiring challenging? Or maybe we are -- we may think growth may be lower -- a little bit low on the lower side next year as well? And secondly, on the growth outlook, I know for formal FY '23 guidance, we may have to wait for Q4. But any qualitative commentary you can -- you would like to give? We have underperformed peers on revenue growth by a margin this year. And our growth in FY '22 has been in line or maybe tad lower than pre-COVID averages. And we do appreciate the growth in Q2 and Q3 has picked up significantly. But how should we look at the growth in coming years versus peer or maybe industry? Any qualitative commentary would be really helpful.

So on the net headcount addition, I'd say a couple of things. One is, I think attrition has been a little bit higher, and that's showed up on the growth being -- or the headcount growth being a little bit lower. But also, I'll say, we've had some operational challenges in the past that we are addressing, right? If you look at utilization, our utilization was definitely much lower than where it should be. And now, of course, utilization is quite high. And if anything, I think we've pushed utilization as high as we can. So one is, I wouldn't read too much into the future because I think we -- for the first half of the year or the first 3 quarters -- excuse me, we really needed to use the capacity that we had efficiently, and we had to push the utilization numbers up, et cetera, otherwise, we wouldn't have shown the margin increases that we have shown. The second thing is, having said that, we also have some good ways of building that capacity, which doesn't show up as head count increase, which includes working with partners, working with subcontractors in some cases, and so on and so forth. So the overall capacity that we have that is available to us actually has increased more than what the headcount shows. The last thing, having said all that, in Q4, we are ramping up quite a bit in terms of the headcount addition because, like I said, I think a lot of operational things that we could have done and should have done, we've done that is utilization, effective use of subcontracting in India and so on and so forth. Again, this is not subcontracted revenue where it's a flow-through. This is really the work responsibilities with us and parts of the project we use external resources to execute. So this is good subcontracting in that sense. But we've used all the operational tools at our disposal, such as this, and now we're ramping up quite significantly on the headcount. We're anticipating the headcount addition in Q4 will be -- the net headcount addition in Q4 will be in line with the first 3 quarters of the year, or will be equal to the first 3 quarters of the year. So we are -- we needed to stabilize operations and also make them efficient before we went out and added too many people, which is where we are at the moment. Karthik, do you want to comment.

Yes. On the demand side, because what I'll say that is I think demand is definitely getting more robust and more clear as we start moving into the next financial year. And what I would really say that is what are the demand drivers, right? The customers want to get products faster. They want to add more technology, digital into the products and how they're going to deliver the products to the customers, including their customer experience. And also the hyper connectivity, this is going to be another major pool that is likely to happen, whether it is on satellites, whether it is rural connectivity, whether it is about 5G leading to densification of urban cities or private wireless. I think there are a multitude of connectivity technologies that are going to be at play. And we are definitely bullish on how the connectivity would probably drive a significant amount of growth. And also the sustainability part, whether it is the electrification, smart grid, renewables, I think that is another segment that is likely to see a significant growth. And also the supply chain resiliency, I think many customers want to have some form of redundancies, some form of -- if they have some silicon, can they really manufactured out of 2 fabs rather than one. I think these are likely to create some newer opportunities for us. And so the demand is definitely robust. And we do see structural change in the form of demand for the next 3 to 5 years, where the growth of industry could be in the range of mid-teens. I think we are really gearing up ourselves to get to that. And some of the indications of pipeline growth, order intake and then the revenue growth are giving us confidence that we really want to get ourselves to be along with the industry or right of the industry.

Next question is from the line of Sulabh Govila from Morgan Stanley.

I had a couple of questions. So first one is that with respect to the divergence in growth with respect to the top 5 clients as well as the company average. So this divergence would you say is driven by the top client in rail transportation? Or if you could provide some color as to what led to that topness in top 5?

Karthik.

I would say I think it's a mix of both -- sorry, I couldn't get your name.

Sulabh.

Sulabh, so I think what we are seeing that is definitely a combination of that, and we have seen our top 5 clients. As compared to that, the rest of the 15 and next 10 have really shown significant growth. And that's where we have seen the top 30 accounts growing at 15%. And in some form, it also helps us to derisk the client concentration that we had earlier. And which doesn't mean that we won't really grow the top 5 accounts. I think we do see that there will be some form of consolidation that has happened, which is likely to get us back to the growth path in the next 2 to 3 quarters, as I mentioned earlier.

Sure. That's helpful. And the second bit is that with respect to the order intake that you've reported, if you could provide some directional sense as to how much of this is executable over the next 12 months? And any directional color as to how that would have moved over the past couple of quarters?

What Krishna just talked about earlier. I think we have seen the 16% growth in terms of order intake. If you take even YTD, which is year-to-date for first 9 months of the year, we have seen a similar trend of 16.5% or so. So we are continuing to see that the order intake is growing, which is a sign of how things would happen. I think it's a function of ability to fulfill customers wanting to make this done in the next 12 months. And I would say about 80% to 90% of this business will be [indiscernible] next 12 months. Some may get carried forward beyond that. But what we are reporting is essentially how much of it would get converted it would be, I would say, about 85% to 90%.

Got it. And then on the guidance bit, again, on the service guidance bit, the change from the CC revenue growth double digit to the USD growth. So this change in guidance, I mean, what sort of is leading to this negative surprise on the guidance on the revenue front?

Yes. So first of all, the difference between the CCN dollar will be very marginal. It's not very significant. Now in terms of just looking at where things stand and looking at what can be executable for the rest of the quarter that's where the changes. Again, like I said, the difference between USD and CC will be very marginal.

Okay. Got it. Got it. One last bit from me is, given that the attrition rates are holding on, would you say that the wage hikes or the intervention that we would need to do in QY '22, would be higher than usual that we do in a year? And if that's the case, then what would be the margin levers given that offshoring is already higher than 50% and utilization is at peak levels?

So I think the -- that's a realistic assumption. I think the interventions will be higher and the salary corrections will be higher. But I think there are other levers that now our customers are very receptive to, I think, including automation is one big lever. I think there's a number of things that our customers are now allowing us to do in terms of automation because even to run some of the scripts to some -- run some of the bots, et cetera, having access to data used to be a challenge previously. But now because of the imperatives of automation, we're seeing that access and therefore, for us, our ability to do automation more. The second thing is price increases. We're starting to see that customers are being quite realistic and quite receptive because they're facing the same challenges that we are facing. And therefore, that's the second opportunity. I'll say the third opportunity, which also, in our case, is quite significant is, as we started ramping up our capabilities and competencies in digital, we had to do a lot of external hiring this year. But I think over the last year through a program called Bridge, we have also done a lot of training internally and some of these resources are now becoming ready. And similarly, because we have built externally and the lateral hires were really for the higher order capability, now that we've built the higher order capability, we will be able to hire a lot more of the more junior resources for these skills. So we can also correct the pyramid in some of our growth areas, which we couldn't do last year because we were really in a sort of a mad dash to build that capability, which honestly, we were maybe a little bit behind the curve.

Got it.

We are on par with in terms of capability, we can become a lot more rational in terms of how the pyramid works.

[Operator Instructions] The next question is from the line of Sandeep Shah from Equirus Securities.

Karthik, just wanted to understand what is happening in railways and also in the aerospace. Just wanted to understand if it doesn't recover in the next couple of quarters to the full pace as a whole, does that make you worry where FY '23 growth could not be as big as the services revenue growth, which we have achieved in FY '22 because the aspiration is to grow at a mid-teens as a whole. But does that worry you? Or you believe enough tailwinds are there in the rest of the other segments, which makes us comfortable that we can easily surpass what we have done in FY '22 in FY '23 as a whole?

No, Sandeep, I would say, I think what we are starting to see is if we take aerospace, I think the regional aviation have definitely recovered to 90% of pre-COVID levels. And if you really start looking at it, it's about the intercontinental and the long haul flights, which is still about 50%, 60%. I think that probably would take another 12 to 18 months. We hope the pandemic is moving towards the endemic in the next 6 months, which really leads to opening up of the air space and which will probably be something should happen sometime late 2022 or early 2023. So that's the kind of assumption that we already had in our planning. And also, we talked about this earlier. We don't expect the recovery of aviation to come back in a hurry, and we're starting to see some green shoots. We are seeing the digital adoption in aerospace is definitely high. And the aftermarket side of the business is definitely getting into a growth trajectory. So we are tapping into some of these areas of growth that we are seeing. And one of the deals that we announced as part of the large deal is for helping the customers with aftermarket repair development through digital solutions with augmented and virtual reality and how do we think we can start predicting the failures and how do we help them on repaid solutions. So some of them are definitely interesting for customers to look at with digital. And that's something we are likely to see as potential opportunities for us to tap into. On the rail, we do have about probably top 6 out of 7 customers as part of our client base. So we do see that, that's likely to come back to growth trajectory maybe in the next couple of quarters. So whatever we talked about is taking that into our planning.

Okay. Okay. So this is helpful. And second, the new Gentech, which is growing double the pace of the company's revenue, any approximation in terms of what is the revenue contribution today? And what was it 1 year back?

And that's about 25% to 27% currently, Sandeep, and that used to be about 18% to 19% earlier. So that's the growth that we are starting to see over the last 12 months.

Okay. Okay. And just a bookkeeping to Ajay. Depreciation and amortization cost has come down. So should we build this as a going forward in terms of the percentage to revenue? Or you believe there is some amount of aberration as a whole?

So we can build it going forward.

Okay. And just, Ajay, I wanted to understand. I think, ESOP-related costs may start coming to P&L thing from 4Q of this financial year, plus attrition at 29%, 30%. So your guidance indicates a marginal dip in the fourth quarter EBIT margin. So do you believe the margin could continue to remain a narrow band in the fourth quarter, and that may give you an exit rate to even remain confident for FY '23 as a whole?

When we are giving the fair point in terms of the ESOPs, we do have to accrue quarterly in terms of the amortization of those ESOPs. We have started with very small amount in this particular quarter since it was listed around 27th of December. For the next quarter, when we are talking of 350 basis points improvement year-on-year, we have already taken that in our forecasting. And when we are saying that we will be able to sustain the margin, we are confident that there are some headwinds. But also, if you see, there are some tailwinds. For example, we did have some onetime things in terms of the Western holiday-related extra pay days and things like that. So what we are saying is, after taking into account these items, we are looking at quarter 4 as stable margins and 350 basis points is more like a round off. So to that extent, you're right, there could be 10, 20 basis points here and there, both for quarter 4 and for the year. But I think we are saying we will be able to sustain it.

Okay. Okay. And just last thing, on the BLM, are we saying the growth could go to mid-single digit to high-single-digit or it's double-digit and similar to revenue growth for the full year of FY '22?

For the full year of FY '22, I think we are looking at, I would say, low-single-digit kind of a growth based on some of the challenges specifically that we have in quarter 4. But I think in the medium term, we are saying that both from capacity and demand perspective, subject to some of the things stabilizing on semiconductor, we should be able to get to 15%, 20% kind of a growth in the medium and long term.

Okay. Okay. And Krishna, comment about EBIT being largely there for the whole year with no change in targets. Is it -- are we talking on EBIT margin? Or are we talking on absolute EBIT as a whole because EBIT margin continues to remain at a mid-single-digit to 6% as a whole versus our earlier target of reaching to a double-digit kind of EBIT?

I meant absolute EBIT, which means that EBIT margin should actually go up with some of the revenue going down because the revenue that we've deprioritized is actually a low margin revenue.

[Operator Instructions] Next question is from the line of Mukul Garg from Motilal Oswal.

Krishna, I just wanted to follow up on this DLM issue, which is there for next few quarters. You said for the full year FY '22, the DLM growth rate will be in low single digit. That implies that we are going to lose quite a bit of business in Q4. So where exactly is this challenge coming in, and what we can kind of do to kind of contravene that over the next few quarters?

See, I think, like I said, we have to prioritize the product that we're going to ship because the biggest challenge that we have there is the availability of the chips, and that's not changed any -- or that's only getting worse in many cases. So my point, therefore, is that we have business. If you look at the spread of business that contributes to DLM, there is a business which is quite good margin. I mean there's a business where we make more than 10% to 15% EBIT kind of business. And there is business where we basically breakeven, maybe make a little bit of EBIT, but we still do it because of capacity absorption, there's some legacy contracts and so on and so forth. So what we're doing now is we're making sure that whatever chip availability that we're getting and we are sourcing really goes towards the businesses that can do the 10 -- 8%, 10% kind of EBIT at least at a minimum. Obviously, that's not ideal. And I think that also leads to the question of sort of the longer-term fit and sustainability of DLM in Cyient. And we are also looking through that to make sure that there's a logical reason and what would the logic look like going forward in terms of how Cyient and DLM would fit together. But leaving that aside for now, what I will say is, therefore, we -- the chip problem won't get solved at -- in a hurry, right? It's going to be -- all estimates are that it will be another 12 to 18 months, and therefore, we will have to wait for another 12 to 18 months for some of that stability. But 2 things will happen. One is, whatever we have planned in terms of the absolute EBIT, we have a clean line of sight. I mean, while revenue growth will be, I'd say, more in the mid-single digits range. But having said that, whatever the original EBIT growth was in DLM from an absolute perspective, that will actually still hold. So therefore, the EBIT margin growth will be a little bit more in Q4, and therefore, for the year, which is the good news. Now some of the demand or all the demand is actually getting pushed out. So we will see this demand in FY '23 and going forward, but still taking into account the hypothesis around how we are managing our business, we also want to drop some of the lower-margin business using this opportunity because that's really not the right business in the longer term. So net-net, yes, there will be a little bit of a revenue challenge. But, like I said, the revenue will get made up through the next few quarters as chip availability gets eased, but it will be more than a few quarters because, like I said, it's another 12, 18 months. But having said that, what was supposed to get delivered in Q4 still has to get delivered in Q4, which is that we won't be able to deliver it. And therefore, in Q1, Q2, we will see better growth because some of the components have 25, 30, 40, even the worst that I heard is we are ordering some components now with a 2-year lead time, which means that as the confidence come, we'll still be able to deliver.

Sorry, just to dig a bit deeper into it. If you look at the Q4 implied number and the run rate that would imply that taking into consideration that these -- the supply scenario will remain challenging for, as I said, like at least next one year, how confident you are that you will still be able to grow in FY '23 assuming that the same kind of -- the same kind of decision making in terms of priority towards higher-margin DLM business will continue in rest of FY '23?

See, we'll still be able to grow because the supply that we have sourced now is starting to come in. If you look at it, the problems really started about 6, 8 months ago. So a lot of the supplies that we now are supposed to get in, especially in Q3 and Q4 have been disrupted. So the supply will be there. I mean we -- at least for delivering a 15% to 20% growth like Ajay said next year, we're quite confident because the demand is absolutely there and the demand is booked and its sealed. It's really about the supply. And given that we have 15 months now til the end of next year, we're quite confident that 15% to 20% growth is there, for sure. We will -- and at the same time, again, like I've said previously, that the growth would have been much, much higher if we didn't choose the right kind of business and deprioritized lower-margin business. So as we add newer, better business, and there's some good pipeline, which we'll convert this quarter, as we add those businesses, we will be prioritized. But again, I want to assure you that from an EBIT perspective, we don't have a problem in DLM from an absolute number that we were planning to deliver for the year, we will still deliver it. And we will show at least a 20%, 25% growth in EBIT for next year because not only that 15% to 20% revenue growth is there, margins will continue to get better because of the quality of revenue.

Sure. And the second question was on the supply side, on the services portion of business. We continue to manage our profitability quite well there. Given the constraints which are there on the supply, is it likely that you have to take some near-term interventions in either Q4 or like higher-than-expected historical hikes next year, which can materially impact your profitability?

I think that both sides of that equation as I explained, earlier, we will -- some areas, we will have a historically -- the hikes will be higher than what they were historically. But also, I think there are some good opportunities for us. Like I said, pricing is one lever, pyramid correction is another lever, automation is the third lever. And all of them are also starting to play out. So while we will have the headwinds in terms of -- hikes will be a little bit higher than what they are usually -- or they will be higher than what they are usually, but I think the opportunity to correct those with the tailwinds is also quite significant, and therefore, I don't see margins under pressure going into FY '23.

Next question is from the line of Abhishek Shindadkar from InCred Capital.

Congrats on a good execution. My question is for Krishna. Krishna, I appreciate the [indiscernible] that you highlighted for the DLM business. My question is, wouldn't it would have been prudent for us to kind of lower the BLM number in the previous quarter rather than doing it this quarter? I mean anything changed substantially in this quarter for you to kind of move from 15 to low single digits? And wouldn't it have been a little prudent to kind of plot in the previous quarter to improve the predictability of the business.

No, Abhishek. I think the reality of that business is what it is, right? I mean the -- we had a line of sight. We had supplies coming in. And in the last minute, the supply has got fold and that's just reality that we are facing in that business. So in that context, I don't think we could have set the expectations any differently. And also, if you look at the most important metric, which is on the profitability side of the P&L. We're still doing what we can to maintain that guidance, and we are being very prudent and smart about how we manage it. So in that context, I don't think it would have been any more prudent to have just given -- taken just the lowest because we can always set expectations very low, but I don't think that's our intent. Our intent is to be realistic. And looking at what was happening at 3 months ago this quarter, that's how we set the expectations. Of course, the supply side of the chips has changed quite dramatically. At the same time, again, I want to reiterate that I think we're doing what we can in that business to remain competitive. Also make sure that the most important part of that equation, which is cash flow and EBIT, we're still keeping to what we said we would do. So I think this is the best we could have done. And we will be prudent and we have always been prudent, but I think we also have to be realistic.

Our next question is from the line of Sandeep Shah from Equirus Securities.

Just the thing -- sorry to dig slightly deeper on railways. I think I wanted to understand as we work with most of the EMs. So what has happened from a client where consolidation is happening because we work with both sides of the M&A as a whole? So you also said that there is an offshoring which is happening [Audio Gap] Is it the volumes from both the clients are coming down? Or is it more offshoring, which is leading to a predictability issue even for the next couple of quarters for the railways as a whole? And how do you see this sector panning out in the FY [Audio Gap] could you take almost second half in terms of delivery or it can start recovering on a Q-o-Q basis from 2Q itself or 1Q itself?

Sure, Sandeep. I think this was led by probably a very significant amount of work being done at on-site that is structurally moving towards offshore. So obviously, it is good for us in terms of margins. So we continue to see that expanding. It is not about the volume. I think we are still doing the same volume or slightly ahead of the volume that we have done earlier. But the sheer nature of onsite to offshore changes by 3:1, right? So I think that's where we were really seeing the impact. But moving forward, I think we will continue to see in terms of on-site to offshore change. I think that is definitely good for our margin. But probably the second half of next year, we will start seeing the growth coming back in terms of revenue. Because when we really start shifting the work from on-site to offshore, there is going to be an impact on the revenue, and that would probably start setting up for a better year next year.

Okay, okay. And just on the M&A, as we have said in the presentation, a lot of M&As in the pipeline. So just wanted to understand that one message, which is coming out [Audio Gap] connected vehicles, electrical vehicles are driving growth for many of the players from India as a whole. So any of such kind of an acquisition because we are a late high growth areas like auto. So taking [Technical Difficulty]

Sandeep, sorry to interrupt, your voice is breaking.

I think the intent of the question is clear, and I'll answer that. I think that's -- That's the intent, Sandeep. I think we want to focus on areas that can provide us disproportionate growth, where we are also maybe not as strong as we would like to be. So we've clearly articulated the are. I'd say there's both elements, right? There's both the strengthening the core element where we still -- we're still looking at opportunities in sort of the more traditional areas where we're strong, but it gives us consolidation opportunity and also with the transformation that's going on, it enables us to bring our digital capabilities, et cetera. So we're looking at sort of, we call it strengthen the core, but we also are looking at accelerating on the new areas. We call it 5 pillars of growth that we've articulated. And we'll talk about it a little bit more in the -- in the Investor Day, which we hope to do this time in May. But in these 5 pillars, we are looking at these kind of acquisitions. And sort of I'd say the next-generation vehicles because it could include many things, including electric vehicles, autonomous driving and so on forth -- ADAS and so on and so forth. That's definitely a part of the focus of M&A. And also, I'll say there's some good opportunities in the pipeline there also. So it's -- I'd say we have a good thought-out strategy. It's clearly defined. We know what we will pay. We know how we will integrate based on which bucket it falls into, and this is definitely a focus area for us.

And this is [indiscernible], what is the reason for a Q-on-Q [indiscernible] in cash spent? [Audio Gap] Is it the dividend or anything else to call out for a decline on Q-o-Q? And just one suggestion, in the presentation we will be tracking more consistent to even a long-term treasury, which we used to include in the fact sheet from this quarter excluded the same, I guess details about cash and bank balances.

Ajay, do you want to take that?

Yes, yes. Sandeep, definitely, I think I'll take your input, and we'll work with you. I think we want to maintain the highest levels of disclosures. We will definitely align on that. Let me look into that. In terms of the net cash, I think interest dividend is up-to-date. Otherwise, I think there is no other unusual items, and some outflows would be in terms of investment in case of the SDR, which would be about INR 10 crores. So there -- otherwise, there are no significant outflows other than that.

So I didn't get your voice for people -- what was the investment apart from dividends?

The SDR radio that you have done the arrangement, there is an outflow of about INR 10 crores during the quarter.

This is related to M&A-related investment banking charges?

This is related to our arrangement of the software-defined radio SDR.

But I think, Ajay, we are selling the business, right? So think to have an outflow here?

No, no, we're not selling the business. We transferred the technology and we also have a -- the product needs to be finished in the development phase for which that was the amount that would be roughly required. So we gave them the technology and the INR 10 crore investment for the 15% stake.

Okay. Okay. And just last thing, Ajay, here, there would be entry, which would be reduced from the intangible asset, which is sitting as a net block in the balance sheet for this radio business, which we are using as a whole or divesting as a whole?

Yes, I think it will be somewhere in the capital work in progress and now it will go into investments.

As there are no further questions, I now hand the conference over to the management team for closing remarks. Over to you.

Thank you very much, and thanks to everyone for participating this evening. Like I said, it's been a good quarter, and I really appreciate your support and your patience through this journey. We have positioned ourselves really well, and we see the momentum behind us into Q4 and more importantly, into the next year. I think while there are always one-off niggles, I think we're managing through them. I think the chip shortage, for example, in the DLM business is an unforeseen event, but we're managing profitability quite well to balance off for that. In the DLM business, of course, the services business is doing quite well. from both revenue growth and profitability perspective. So I think we're very well positioned into the next quarter and going forward. And we are quite committed to making sure that we build on this and deliver superior performance. like we have in Q3 and for this to continue into the future. So with that, thank you very much for your support. Thank you very much for your trust, and we will speak again soon. Thank you.

Thank you very much, members of management. Ladies and gentlemen, on behalf of Cyient Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.