Automation And US-Europe Restrictions Will Undercut Traditional Outsourcing

Key Takeaways

• Automation and AI adoption threaten core service demand, while protectionist policies may limit global expansion and future growth opportunities.
  
• Rising labor costs, talent shortages, and intensified competition risk compressing margins and causing volatile or stagnant earnings, especially due to reliance on vulnerable sectors.
  
• Strategic focus on high-value verticals, semiconductor growth, and recurring revenue streams positions Cyient for sustained margin expansion and broad-based earnings growth.

Catalysts

Provides geospatial, engineering design, manufacturing, networks and operations, data transformation, and analytic services in North America, Europe, Middle East, and the Asia Pacific.

• The increasing adoption of automation and artificial intelligence in core engineering and IT services threatens to reduce demand for Cyient's traditional offerings, which risks pressuring revenue growth rates over the long term as clients shift away from labor-intensive outsourcing contracts.
  
• Worsening protectionist measures and local content requirements in key markets such as the US and Europe could restrict Cyient's international client access, limiting its ability to expand revenues globally and making future top-line growth highly uncertain.
  
• Rising wage inflation and talent shortages in India, coupled with continued wage hikes and merit increases, may lead to persistent SG&A cost escalation and shrinking net margins as labor costs outpace the company's ability to offset with price increases or efficiency gains.
  
• Intensifying competition from both global technology majors and nimble niche players, especially in high-value and digital engineering segments like semiconductors and AI, could erode market share and compress pricing, resulting in stagnant or declining earnings despite headcount and leadership investment.
  
• With a significant reliance on vulnerable sectors such as aerospace and transportation, Cyient faces pronounced volatility in project wins and resource utilization; the ending of large projects or cyclical downturns will result in unpredictable earnings and prolonged periods of flat or negative revenue trajectory.

Cyient Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cyient compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cyient's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 9.3% in 3 years time.
• The bearish analysts expect earnings to reach ₹8.0 billion (and earnings per share of ₹72.54) by about August 2028, up from ₹6.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, up from 20.5x today. This future PE is lower than the current PE for the IN IT industry at 26.2x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.06%, as per the Simply Wall St company report.

Cyient Future Earnings Per Share Growth

Risks

• Cyient's strategic expansion into the fast-growing semiconductor business, backed by a strong IP portfolio, experienced leadership, and a robust partner ecosystem, positions it well to benefit from global tailwinds in chip design and AI hardware, potentially driving significant improvement in revenue and group earnings.
  
• The company is executing a deliberate pivot toward high-value verticals, such as aerospace, medical technology, and automotive, where its domain expertise and differentiated digital offerings have already delivered key client wins, suggesting scope for higher deal size and better net margins over time.
  
• Management's focus on annuity-based contracts, growing the proportion of recurring revenue, and leveraging long-term client relationships is likely to reduce revenue volatility and provide improved earnings visibility, supporting both short
• and medium-term margin expansion.
  
• Recent investments in advanced technology areas-AI-driven engineering, lifecycle management, and platform software-matched with recognitions from leading analyst firms, enhance Cyient's credibility and ability to capture secular demand in digital transformation, which can spur broad-based top-line growth.
  
• The stabilization and recovery of core business segments, especially transportation and aerospace, combined with measures to control costs and target a medium-term EBIT margin of 15%, reinforce the company's trajectory towards higher operating leverage and sustainable profit growth, contradicting expectations of a persistent decline in earnings or share price.

Valuation

• The assumed bearish price target for Cyient is ₹1050.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cyient's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1730.0, and the most bearish reporting a price target of just ₹1050.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹85.9 billion, earnings will come to ₹8.0 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 16.1%.
  
• Given the current share price of ₹1165.1, the bearish analyst price target of ₹1050.0 is 11.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.