Ladies and gentlemen, good day, and welcome to the Cyient Limited Q1 FY25 Results Conference Call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, Executive Vice Chairman and Managing Director. Thank you, and over to you, sir.
Thank you very much, and good evening, ladies and gentlemen, and welcome to Cyient Limited's earnings call for the first quarter of financial year 2025. I'm Krishna Bodanapu, Executive Vice Chairman and Managing Director of Cyient. Present with me on this call are Karthik Natarajan, CEO and Executive Director, and Prabhakar Atla, CFO and President. 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 emailed to you and is also posted on our corporate website. This call will be accompanied with an earnings call presentation and the details of which have been already shared with you.
In DET, to say the least, we saw a significant number of operational challenges this quarter, resulting in weaker than expected performance for this quarter. However, we are confident, we are very confident, I would say, of a robust recovery starting Q2, which will continue throughout the year, and this is backed by a strong order book, which includes a double-digit growth in order backlog and engagement health, both across our top customers, but also a robust addition of new clients in the last couple of quarters. Karthik and Prabhakar will cover these aspects in much more detail in the next few minutes.
However, coming to the significant highlights for this quarter, our credentials in the semiconductor electronic segment, both through Cyient DET and Cyient DLM, have enabled us to set up a wholly owned subsidiary to drive dedicated focus on turnkey ASIC design and chip sales through a fabless model for analog mixed-signal chips. What this means is, if you look at the semi, growth in the semiconductor business today, a lot of the chips that are being used are chips that take an analog signal, i.e., a real-world signal, a sensor, a sensory signal, be it based on light, sound, what have you, and convert it into a digital signal that can be processed by some computing equipment.
By turnkey, what we mean is we're able to design these chips, we're able to fabricate these chips, test these chips, prototype these chips, and sell these chips to our customers. We already have this ability within Cyient to provide an end-to-end service offerings for these turnkey chip designs. And now we believe that there is a significant opportunity along the line, along the lines of the value unlock of Cyient DLM, to actually create a separate business that can exclusively and dedicatedly focus on turnkey ASIC. This decision marks a significant leap forward in our commitment to innovation and excellence within India's growing semiconductor landscape.
You may have also seen a number of announcements that have been made in the last couple of months on various elements of semiconductor, be it semiconductor fabs or semiconductor OSATs, but we believe that we are one of the few and unique companies that are able to provide an end-to-end solution by leveraging various capabilities, including design, fab, OSAT, testing, et cetera. As you know, the global semiconductor market is in a significant growth phase, and it's expected to hit $1 trillion by 2030. The IESA, which is the India Electronics and Semiconductor Association, forecast the industry's growth to be $100 billion by 2030. We're well positioned to capitalize on these vast opportunities for growth and influence in this evolving market.
Our portfolio of over 600 intellectual property, covering a range of functions and technologies, long-standing engagements with key clients and global capabilities, gives us a strategic edge to achieve significant growth in this market. This unit will report to me, and I believe this move has immense potential, like I said, along the lines of Cyient DLM to unlock value for our shareholders. With this, I would like to hand over this call to Prabhakar, who will take you through the financial performance for the quarter.
Thank you, Krishna. Hello, everyone. Thank you very much for your kind participation on the call today. Before we proceed with the financials, allow me to make a comment on the segments and reporting. For the current quarter, the nomenclature of the segment under which we report our group performance will remain the same as the previous quarter, i.e., DLM, DET, and other. With the announcement that we made on the setup of a subsidiary to focus on our turnkey ASIC business, going forward in the year, we intend to report that business as a separate segment. But for the current call, the reporting will continue as earlier, and the focus of this call will remain the DET segment. Just so that we have enough time for Q&A, I will only call out the key numbers on each page of the presentation.
The Q1 FY2025 $ revenue for DET stood at $159.6 million, a QoQ degrowth of 5% in constant currency and a YoY degrowth of 3.6% in constant currency. In rupee terms, this revenue stood at INR 1,404 crores, with a QoQ degrowth of 5% and a YoY degrowth of 2.8%. Later in the call, Karthik will provide more color on the key drivers for the QoQ revenue movement, along with the full year view. The Q1 FY2025 DET EBIT margin stood at 13.5%, down by 256 basis points quarter-on-quarter. This QoQ movement was largely driven by the absorption impact arising from the QoQ revenue movement, and also our continued investment in sales and technology to support future growth.
We also focused on building capacity and capability in Q1 to service deals won in the previous quarter, which will flow into revenue in the following quarter. That had some impact on the above margins. The Q1 FY25 PAT for DET stands at INR 141 crore, translating into an EPS of INR 4.86 per DET. The Q1 FY25 DET FCF stood at INR 164 crore, with a negative movement of 30% quarter-on-quarter, owing to the seasonality of the accrual and release cycle in this business. The Q1 FY25 DET debt position stood at $46.7 million, a reduction of 14% quarter-on-quarter and a reduction of 44% year-on-year, in line with the focus that we have to retire debt proactively. Moving on to group numbers.
Group numbers are a combination of all the three segments we have, including Cyient DLM. The group revenue stood at INR 1,676 crores for Q1 FY25, which is a degrowth of 0.6% year-on-year, with an EBIT degrowth of 281 basis points year-on-year and a PAT degrowth of 18.6% year-on-year. The PAT movement on a YOY basis is not like to like. Since in Q1 of FY24, we only had partial duration with the minority interest in Cyient DLM, i.e., only for one month in that quarter, while in Q1 FY25, we have the full quarter duration computation of minority interest.
The Group FCF for the quarter stood at INR -15 crore, and the QOQ movement is primarily due to the cash consumption cycle in DLM business, which continues to grow at a steady and a healthy pace. With this, I would like to thank you again for your time and attention, and I'll hand over the call now to Karthik for a more detailed commentary on DET performance and outlook. Thank you.
Thank you, Prabhakar. Good evening. Good day, everyone, and on top of what Krishna and Prabhakar have talked about, and I'll kind of give a color for each of the verticals and how did they do for Q1. We had a challenging quarter for sure, and I'll provide more details about it in each of the slides that I plan to cover in the next few minutes. Transportation, which has come at $49.3 million revenue in Q1 fiscal 2025, had a degrowth of 7% in quarter-on-quarter, and then focus on the constant currency column, and year-on-year, -8%. Just to recap, aerospace has seen a growth over the last 12 quarters, nine of them, and the challenge continue on the way, and that's the reason why we have seen a degrowth in Q1.
Connectivity, which is come at $37.5 million, has seen a degrowth of -1.6%, year-over-year, -16.9%. And the good news is we have the highest order intake for connectivity in Q1, and we expect a strong recovery for the remainder of the years. And we are confident that this will really start getting into the growth in the future. Sustainability, which has come at $56.2 million, and this has seen a degrowth of -2.8%. Year-over-year growth continues to be at 8.8%. Just to reflect that this particular segment has seen a 10 out of 12 quarters of growth, and we do expect that the growth momentum will continue even in the future.
New Growth Areas, which has come at $ 26.6 million, and seen a degrowth of 1.6% in quarter-on-quarter and 3.8% in year-on-year. We do expect the highest order backlog from New Growth Areas, gives us confidence that this will start growing at double digits as we close the year. In terms of order intake, we ended up at $ 182.7 million, and this is with -5.4% in year-on-year growth. We also closed 5 large deals with a total contract potential of $ 52.4 million, and 2 from Connectivity, 2 from Sustainability and 1 from aerospace. The Connectivity deals have already started ramping up at the end of Q1.
That's one of the reasons why we had a miss in Q1, because we expected them to start almost at the end of the first month, but we ended up starting the project by third month, and which has been something that we couldn't avoid. Let's go to the next slide. Also, we continue to make progress in terms of our innovation and especially led by technology solutions team. I just want to highlight a few wins that we had for the last quarter, starting with modernizing the Enterprise Usability Platform for a hospital patient monitoring system, and to improve the clinical workflow efficiency for a healthcare customer. Followed with automation and process optimization solution for an industry port and an MES system for an energy processing plant.
It is a great win for us, and we expect this to scale up as we start.
Sir, sorry to interrupt, but the audio for you wasn't clear these last 10 seconds, approximately.
Okay. Is it better now?
Yes, this is much better, sir. Please go ahead.
And the third one, which I'll highlight, is on a win with the global automotive OEM to achieve the regulatory compliance on cybersecurity, and this is expected to grow as a practice as well as a growth area within automotive... And the other one which I want to highlight is a very interesting project on developing an ASIC for Active Neuromodulation with advanced electronics that gets into the neuro occupation device. And we expect this to be a significant win in terms of revenue as well as capability that we work on as part of the brain mapping program.
Highlighting two things, we have made significant progress on Generative AI, and we have won about 15+ projects in the last quarter, and covering various elements of product data management, engineering, information management, AI-assisted PMO, customer experience, customer support, product support, and we are continuing to see momentum as far as Generative AI is concerned. Now, going back to outlook, and as you'd have heard in the last few minutes, Q1 was weaker than expected, and we expect a strong recovery to begin in Q2. We've already started seeing them, and we do expect our H2 to be strong. And given the weak Q1 and single high digit growth for the year will be a stretch that we mentioned in our last earnings call.
We are being prudent and transparent in providing you with the guidance in Q1, which is considered to be flattish year-on-year in constant currency term. In terms of EBIT margin, as this is a function of revenue trajectory, we'll update you with Q3, but we are confident of reaching the margin range of previous year, the level of 16% by end of fiscal 25 as the revenue growth picks up. A little more color on the business indicators. Just want to reinforce what Krishna started off this discussion. To throw more light on key things that contributed to the Q1 performance than what we anticipated. The major factors are unanticipated delays or projects shifting to the right in Q1 and also ramped up later part of Q1. I think that really cost us, something that we were doing very earlier.
And also rail as a sector continues to be under stress, and, we are seeing some of the challenges, continuing for us in terms of the spend is shifting and the uncertainty is continuing. As far as fiscal 2025 lead indicators for strong performance in H2 and also medium-term outlook is concerned. Having said that, there are encouraging trends and factors that gives us comfort and confidence for a very good recovery through the year. We are seeing double-digit growth in order book as compared to fiscal 2024. And, we are also seeing our top 10 customers have seen a significant growth in year-on-year terms, in terms of double digits. And also the core segments, be it in terms of aerospace, energy, and top of the connectivity recovery that I talked about, is very encouraging.
We already ramped up two of the large deals in connectivity that we signed during the quarter of 1 fiscal 2025. Our medium-term outlook, our three years remain intact as we don't see any shift in the fundamental growth and the core segments of growth that we have outlined earlier. We are also investing in technology areas that matter for our engineering business, which will also position us as an innovative partner for our customers. With that, I'll probably hand it over back to the moderator for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to please use handsets while asking a question. Ladies and gentlemen, we will now wait for a moment while the question queue assembles. The first question is from the line of Sulabh Govila from Morgan Stanley. Please go ahead.
Yeah. Hi, thanks for taking my question. So first question, just starting with the obvious. So, what is, in this quarter, the performance this quarter as well as the guidance? So what has, you know, surprised us negatively in one Q versus what we were expecting at the beginning of the first quarter, which led to the high single digit guidance and versus the current guidance? Because it doesn't look like it can be a specific client or a vertical issue. So just wanted to understand, what's gone wrong in our process and, you know, what has negatively surprised?
Yeah, no, thanks, Sulabh, for getting this question. Like what I highlighted, I think we did expect it to be a soft Q1, and that's what we guided, as we knew at that point of time. And some of the projects which were supposed to ramp up and the deal need to get closed, got shifted to the right by about six weeks, at least about four to five projects. And that really created an unexpected delay in terms of revenue recognition and within the quarter. I think that is definitely what has contributed. We did anticipate some softness in terms of rail business. I think that was definitely what we have used in our guidance as Q1 being soft.
Understood. So, if I understand this correctly, what you're saying is this is a 1 quarter blip, and that's what has happened and, 2Q should normalize. That's the correct understanding?
Yep. No, absolutely, Sulabh. I think you summed up rightly, and we do expect the recovery already begun in Q2, and we expect to see a sequential growth for the next few quarters.
The second question is that we mentioned that the growth will start from 2Q onwards, while the presentation is saying that the outlook is strong for 2H. So does that mean that 2Q outlook is better than 1Q, but it will be weaker than 2H? And if that's the case, then you know, this guidance itself is implying a 3%-3.5% CQGR. So what's giving us confidence on delivering this guidance as well?
Yeah, based on the order backlog that we spoke about and top ten customers growth being intact, and some of the deals that we signed in Q1, and we expect a stronger recovery from connectivity. I think that's why we are saying our Q2 will be strong and we do expect H2 will be better than H1.
Understood. Understood. And the last bit is that, when we say that, we have taken steps to align the supply to the demand, is that relevant to aerospace as a vertical or the company in general? Could you explain that?
Wait, can you repeat the question for me? I missed it the first time.
We mentioned in the presentation that we have taken steps to align the supply to the demand. So is that relevant to aerospace as a vertical or the company in general?
Yeah, that was specific to aerospace and, where we have seen the demand is shifting to on-site and across the geographies beyond what we have seen in the last two, three years, from North America to Europe to Japan. And we are building up the supply that is required for us to step up and, which is the part that we mentioned as far as aerospace is concerned.
Understood. Well, thanks for taking my question.
Thank you. The next question is from the line of Kawaljeet Saluja from Kotak Securities. Please go ahead.
Hey, hi. You know, my question is also on the obvious over here. I mean, Karthik, I remember asking this question about guidance because it seemed a little bit aspirational. When I, when we basically, you know, I asked the question last time around. I'm still trying to, you know, get my head around how could the magnitude of miss be so large? You did talk about perhaps 4-5 projects, you know, getting delayed. But even 4-5 projects in itself cannot lead to such a disastrous 1Q. When I look at the composition of revenues, the decline is broad-based across verticals. So couple of things. One is that I'm just trying to understand whether there have been any lapses in sales execution, you know, or processes.
Or, you know, is it the fact that, you know, the entire guidance process in itself had a significant participating? Help me reconcile the math over here.
Yeah, sure, Kawaljeet, I think I do acknowledge that this is definitely a miss, and in terms of our forecast accuracy, our ability to really link it back to the guidance, I think that was definitely visible in the quarter. Also, given the macro uncertainties and the broad-based issues that we have seen from customers and project decisions and delays that we are seeing, it really becomes difficult to really ascertain for a specific quarter how much of revenue will come and what we need to do to ensure that we are able to deliver on them. Especially if we get a letter of intent from customer, we are ready to ramp up, and the customer wants to defer the project by four, six, eight weeks, it is difficult to anticipate some of those issues.
I think that's what really played out, and we are trying to refine the process, and we are trying to see how do we factor in some of these issues. Especially what we have seen in the last six months is something that we have not seen in the last four years. And I think we hope this is something which we are really able to improve, and we apply some of the learnings in the last six months to really refine our ability to predict and guide the market.
Have these learnings been incorporated in the new guidance of flat is revenues?
Yes, Kawaljit.
Can you just help me in what areas have you incorporated these learnings?
I think it is about how do you really create a very strong view of our forecast, and trying to look at the probability-adjusted ones that we are trying to cover from various business units that come in, and where do you think we need to really apply some discounting factors? And how do you think we have a better view of confirmed one as close to the reality as possible? I think that's how we are trying to really refine them. And also some of the sales leaders have been aggressive in terms of their forecasting and what we need to do to apply some Gage R&R to really make sure that we are able to rationalize them as part of what we need to factor in our guidance. So we work on that end.
Right. And second, is that you did speak about macro challenges, but when I look at the performance of all your peers, et cetera, none of them had a performance which was, you know, remotely as weak as you all. So what kind of macro challenges are you referring to? Or once again, you know, my question is that, are there execution, sales execution challenges or process lapses?
Yeah. So I think I would say if you look at, I think this was one of the questions sometime last year from one of the analysts. And when you really look at what kind of annuity businesses that we have versus project-based businesses, and the challenges come from project-based businesses. And whenever the project gets completed, the next project doesn't come on time or it gets delayed, that seems to cause a gap. And we are trying to really strengthen those segments, especially Sustainability and Connectivity, with huge dependency on project-based business, and how we can bring in better predictability into that. On top of certain seasonal issues that come in, for example, Europe has more holidays and vacations in Q.
What do we need to do to factor them in on top of what we have just talked about in the last few years?
Right. Karthik, you mentioned that, you know, the order book has grown, but when I look at the order wins, in the second quarter, it has declined YOY, so where's the disconnect?
... Yeah, so if you look at what we are talking about order backlog, which is another part that we are also seeing, when we have this order book that we have taken in the last nine months, and what is executable order book that we are carrying today, and we are seeing that growing by double digits, and that's just what that gives us confidence. Yes, I think there is a year-on-year drop, which is seen as far as Q1 is concerned. I think that we do expect should get normalized during the course of the year.
The final question is that in connectivity, the weakness has been ongoing for the last 2 quarters, 3 quarters, 4 quarters, you know, I don't know what it is, you know, but it's been for some time, and every quarter the discussion has been when things may pick up in the subsequent quarters. So, you know, is basically the environment... Of course, I understand the environment is difficult, but, you know, are there again, you know, changes or improvements that you need to make in connectivity or to get a better handle of business and growth prospects?
I think there are 2, 3 things that we did make during the last 6 months, including strengthening certain leadership across the sales as well as on the delivery side. And we also brought in a better predictability in terms of how these models are being constructed along with customers, and starting to engage the customers more to assess their plan for the year and what is the certainty of them. I think all of them gives us confidence that we do see a growth for the remainder of the year. And we are also factoring in certain risks in terms of how we think we need to anticipate certain project delays and what we need to do to make the turn as part of our fourth quarter.
Got it. Thank you.
Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks for the opportunity. Question relates to the previous two participant. Karthik, I think last time when we gave the guidance, it was 25th of April. We were already one month into the quarter, so we should be knowing about the delay in the product projects, right? So why still we guided for a high single digit and there is a big miss. And I've been surprised to see the reason being cited being railways. Railways as a percentage to revenue, if I'm not wrong, has become not a needle mover. So even if it declines by 20%, it will not impact the revenue growth very high. So it looks like there has been a miss in the segments outside connectivity and railway, which we did not anticipate. What has led to this?
Yeah, Sandeep, again, sorry to repeat the same messaging, but if you look at the project delays and reference, and there are two business units which have heavy dependency on projects, both on connectivity as well as sustainability. And, transportation, we talked about the softness in rail. And, the good news is new growth areas started firing, and, we do hope that continues for the rest of the year. And to your point, I do acknowledge that it was a mess in terms of how the forecasting activity that we had, and that's what we are trying to correct as we move through the year.
Okay. The ask rate to achieve the guidance is 3.2%, and generally, Q3, Q4 are not seasonally great quarters for enterprise IT as well as engineering R&D, with one of your peers already calling out on unseasonal furloughs to start in the 2Q itself. How are we confident about even achieving a 3.2% kind of ask rate, which looks not an easy task?
I think with also mix of businesses that we are in and the kind of holidays and vacation seasons that we have factored in, we do expect that the H2 will be stronger than H1, for us and for our portfolio of businesses. And we also have the validation from the leaders across the company, along with the customers that we are working with. So that's what gives us confidence that H2 will be stronger than H1. Coming back to furloughs, if you look at some of the segments that we are in, and be it on aerospace, energy, and connectivity and other parts, and we do see that the momentum is already seen from Q2, and we expect that to continue.
And if you look at specifically in aerospace, the supply chain issues that are significant challenge, and the demand is very robust for most of our customers. They're unable to meet their demand because of the supply chain and some of the new employees that they brought on board and related to the production and quality issues. So they want to fix most of these issues, and we don't hear furloughs from many of the customers that we work with as far as aerospace is concerned. But we do expect H2 to be stronger, stronger than H1 as far as the other business segments are concerned. So that's what gives us confidence about our plan for the year.
And if I may just add one more thing to this, sort of in some ways, while the project-based business has hurt us this quarter because of the delays in moves. The good news with some of the project-based businesses, it's also under our control in the sense that we get a feel for the project. And therefore, what we're seeing, at least in the last couple of years, is our ability, therefore, to manage furloughs is a little bit easier because we have a project rather than a set of tasks that we're performing. So in that sense, we've reviewed this, and in that sense, I think it also gives us a little bit more confidence that we can manage the furloughs that have typically hit us.
Because if you then go back into some of the more traditional aerospace, historic aerospace businesses, which were more task-based, there the impact was much higher. Whereas with the project-based businesses, the impact is a bit more manageable.
Okay, and just a related question. When you say H2 is stronger, that doesn't mean 2Q, QoQ growth would be lower than the QoQ growth, which you expect in 3Q and 4Q, because you are also commenting a strong 2Q, right?... Yeah. Okay. And just in terms of capacity, so is it fair to assume the capacity issue is more in on-site location versus offshore, but your employee adds still show the decline on a Q-o-Q rather than a ramp-up?
Yeah, I think, to answer the same question, like what we asked in the previous question, we are also trying to build the flexibility of contingent versus permanent hire, and especially on project-based businesses. I think that gives us confidence in terms of how we think we can meet, and we still have some uninflated capacity as far as Q2 is concerned, so that will start being put into use for bringing up the revenue for the next two quarters.
Okay. And last question on margins. I think your initial remarks implies that now 16% would be achievable only by 4Q of FY 2025, rather than the whole year, because of the weak start at 13.5%. Is it the right understanding?
Yeah, that's correct.
Okay. Thanks, and all the best.
Thank you. The next question is from the line of Aaron Armstrong from Ashmore. Please go ahead.
Hi. Thanks very much for taking the question. Can you talk a little bit more about the challenges that you had this quarter, please, in terms of how many of those related to in-house execution? So availability of manpower on-site versus not on-site mix, those kind of things that are within the control of the company, versus how many of those kind of delays, those projects moving to the right, how much of that was driven by corporates wanting to kind of delay or postpone for their own kind of reasons?
And I would say, about difficult to put a specific number, but I would just roughly say about a third of each of these issues of project deferrals and delays, about a third of them, and about a third of them we did anticipate, and about a third of them is a combination of supply-demand matching, especially with some of the demand that we started seeing from on-site locations.
Thanks. And can you give a little bit of context in terms of addressing some of these in Q2? So, for example, on on-site locations, can you talk about some of the kind of new hirings that you've made or kind of project deferrals? Is that now kind of slowing down, kind of early indication? I know it's very early in Q2, but what kind of visibility you have on that sort of things?
We are confident about how this quarter looks at this point of time, and we have already started ramping up some of the projects from June, as I indicated in my earlier comment. And that gives us confidence that, this quarter will be a good quarter for us, a strong growth quarter.
Thanks. Maybe final follow-up, if I may, please. Just in terms of kind of headcount availability, how much that impacted you in Q1, and so for Q2, how many hires have you made, on-site? Are you putting more people in U.S., Europe, Japan, any of those more so? Is it, is it mainly on the aerospace, or is this also relevant for the connectivity piece? Anything you could share there that's a little bit more specific, please?
Alan, I would say it's more of a broad-based headcount addition that we look at, and we don't share specific numbers at which locations and how many are we adding every quarter. But we are prepared for the supply and capacity that is required for us to reach or announce a quarter-over-quarter growth for Q2. I think that is something we are ready from the supply side.
Thanks. Could you share a headline employee headcount number, quarter-over-quarter?
Okay. Maybe you can take the top line number, okay with that?
Yeah, sure. Okay. Thanks very much.
Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Yeah, hi. Thanks for taking my question. So my question was on the margins. Now, I understand that on the revenue growth part, if the growth is more in this quarter, our entire full year guidance gets shifted by, let's say, a couple of quarters, and that is why the cutting guidance. But as far as I'm able to understand the business, the missing margins in this quarter would have been because, as you mentioned, some of the projects were deferred. They were not built. You had employees who were not being billed, and that is why they drop in the margins. And if you're expecting those projects to recover in Q2, why the deferment of guidance for margins? The...
I mean, if we have already reduced the headcount in this quarter, as for you, quarter two and H2 should be strong and should be growth in the quarters again. So the projects which were deferred, they should start the billing again, and the employee utilization and all those things should pick up, and hence your margins. I understand maybe a bit here and there, but reaching the 15% margins by the end of Q4 seems a bit, I mean, I'm not able to reconcile the math. Can you please help me understand that?
So before that, just a couple of things on this. So the current year, the FY 25, from where we currently are, our margin will be a function of our revenue, quite significantly from our perspective. Because the costs we have ahead of us are given. We will have the wage hike, we will continue to make technology investment, we'll continue to make sales investment. All the right things to do, we will continue to do. Therefore, the comment that we made was margin is a function of revenue trajectory, and we are therefore confident of bringing it back to where we were in the previous year, right towards the end of the year.
The wage hike and the investment in technology would have been part of our business plan, which we drew at the beginning of the year when we gave the guidance for the fully flat year margins for the full year. That doesn't change the math, right? That basically remains status quo as it was three or four months ago.
No, you're right. Absolutely right. Absolutely right. And therefore, the arithmetic also works in that way. If we start putting the foot on the pedal to visit ahead of us, 13.5% where we are in Q1, we also have to go through all those numbers to get back to earlier now. So hey, the summary of this as the primary marker for us going forward the next couple of quarters.
Mm-hmm.
Getting back to the previous years, margin range towards end of the year. But you can make a pickup as we get into Q3. This is the trajectory of revenue growth between Q2 and Q3, of which we are confident. So we will be constantly focusing on the margin is what I would say.
Sure, sure. That's helpful. On the order book side, I think, we mentioned that the order book saw double-digit growth, but the order intake for the quarter was weak, at around -5% year-on-year. So any color on why the order book, order inflow in this quarter was on the softer side, which specific verticals, and how do you expect the order inflow number to pan out over the next remaining quarters of the year?
I would say at a broad level, we have seen a strong order intake as far as Connectivity and New Growth Areas are concerned. And some of the orders from Sustainability and Transportation, I think they will probably come through during the bottom of the year. And we do hope the order intake will start converting into order backlog, that we'll start executing. And as I again stated in the beginning of the call, we are still at double digits order backlog as far as executable orders are concerned, and we do hope it catches up during the year from where we are seeing today from Q1.
Noted. Just one last question, sir. I think, we've built on the revenue, guidance part a lot. Maybe just one my final word, I mean, just one, small question on my side. I mean, as we, as Sandeep mentioned in his earlier, comment, the CAGR required for the next three quarters is around 3.2%. How strongly have we stress tested this number? I mean, what could potentially lead us to, basically, miss this number as well? Could... I mean, are there other projects which you are expecting again to really start in Q2 and Q3, which can potentially get, delayed and could cause us to slip again?
Or do you think we've stress tested this, guidance enough, and it should be, easy, I mean, it should be doable for us from where we are sitting today?
We have been prudent about how we want to guide forward, and we understand the challenges that we had in the last quarters. I think that's where we are confident about getting this being practiced for the year. I think it takes in certain elements of risk and opportunities which are balanced in terms of what we are providing the guidance for.
Got it. Okay. Cool. Thank you so much for taking my questions, and wish you all the best for the rest of the year.
Thank you. The next question is from the line of Shradha from Asian Markets Securities. Please go ahead.
Yeah, hi. Couple of questions. Would it be possible for you to break down the declining revenue in aerospace and defense within transportation specifically?
Sorry, Shradha, we are not breaking up from the four business units that we are providing the color on, and we are not breaking up for each of the business units with subsegments. I think that is something too detailed for us to share, and you can assume that bulk of the revenue that is there in transport is coming from aerospace.
Okay. And secondly, if I look at your top client revenue contribution, it suggests that the weakness in revenue came from clients beyond top ten. So is the understanding right, that the top ten client, top ten, top five clients held up well, and weakness was more beyond top ten or top fifteen accounts for us? And are those accounts so significant for us to have a 5% decline in revenue in one quarter?
Yeah. So we did have one or two accounts from the top 10, had a minor decline. But if you look at all the top 10 accounts' revenue, that has grown year-on-year in double digits. And we don't see the top 10 accumulated revenue of all the top 10 customers as a concern. And yes, you're right, in terms of just the arithmetic works out, that there must have happened some kind of a decline in one of or two of these customers from top 10. But it's not significant enough that we really try to aggregate the revenue for all the top 10 clients when you compare from Q1 of 2024 to Q1 of this current year.
Right. And just the last bit, I understand that you are talking of increasing your investments in sales and technology, but I also see an increase in your G&A expenses. And I mean, the logical thinking is one, when you're going into a bad cycle of aero, you would want to keep a control on the overhead expenses. So why this increase in G&A in this quarter?
Thanks for that. Shradha, the way it goes, some part of technology investment that may also go into G&A. That is what you see. There are a few one-offs also in the current quarter.
Sorry, I didn't get you. Sorry, can you please say it again?
You're right. Some part of the technology investment may be going to G&A.
Okay.
There are a few one-offs in this quarter, too. Not significant, but they're still there.
Got it. Okay, sure. Thank you.
Thank you. The next question is from the line of Dipesh from Emkay Global. Please go ahead.
Yeah, thanks for the opportunity. I just want to understand first about the reclassification. So geospatial vertical, now it is part of services. So can you help us understand implication on the reported four business unit because of that?
... It is marginal, Dipesh, and it cuts across more than one or two business units, and it is marginal in terms of how it is distributed across the world.
No, because sustainability, let's say, for example, you reported 3.5% a decline. If I look at the reported number, it seems to be growth, so there is a sizable difference. So that's why if you can provide some detail about it, or maybe if you can provide comparable numbers for prior quarter.
Okay. I'll ask Mayur and Krish to work with you on that.
So, second question is about the guidance. I think earlier participant tried to get sense about downside. If you can help me understand what can bring upside. In terms of now, let's say, you are seeing good recovery, double digit billing tech order book growth, top 10 client doing well. So if you can give me sense about what can bring upside?
Yeah, so we don't want to be too optimistic at this point of time, since we are coming off from a low Q1. I think it's very important for us to execute well for the next two quarters, and before we get too optimistic about how things would look. But I think given the nature of where we stand and understand from our customers, and we are confident about the growth for the next three quarters and the recovery that it could happen from Q2, and we are very confident of it. How will it manifest for the upside? I think we do see an upside for sure in many areas, and it would require a few things to happen well into Q1, Q2, and most of our customers continue to start opening their purse.
Our decision-making has to happen sharply, and we've seen a difference to the extent of 3-6 months in some of the areas. If they really start reducing the gap, I think that would probably give us an upside till the end part of the year.
Sure, and last question is about rail, and I think, I think you alluded, alluded couple of times. Can you give just sense about, let's say, now, contribution from rail? How big is rail after couple of quarters of decline, what we always used to highlight?
Sorry, Dipesh, I couldn't get your question.
What will the contribution from railway now for us?
Yeah, we are not really calling out any sub-segment breakup, Dipesh, and it is part of the Transportation vertical. Like what I covered earlier, the bulk of our revenue come from aerospace, and that's where we leave it at.
Thank you.
Thank you. The next question is from the line of Nitin Sharma from MC Pro Research. Please go ahead.
Yeah, thank you. Most of my questions have been answered. Just one question on the semiconductor business, what are the timelines and the investment requirements?
So, we're still working on those. The timeline is probably going to be towards the end of this financial year. Just looking at the various things that we have to do in terms of splitting the business and many other steps to it. In terms of funding requirements, also we're working on it. We are both working on what is the funding requirement and also, of course, the source of funding. So I would say we'll have a better update for you towards the end of the calendar year with the target of the execution towards the end of the financial year.
Understood. Thank you.
Thank you. The next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Yeah, hi. Thanks for giving the opportunity. Karthik, I wanted to understand structurally on the aero side, I mean, is there a structural change happening on the outsourcing? I think clear the air around this. There are talks that the Boeing CEO has been called to reduce the outsourcing. I mean, one of our quarter can be weak, but is there a structural change on the outsourcing side? That will be helpful. Second question was on the guidance part, and you know, the guidance that we have given now, flattish kind of a revenue. How much is there in the books?
I mean, what part of the guidance is coming from the order backlog, which is already there in the books, and what part of the guidance are you considering from new deals, which you will win in this particular financial year and that you expect to ramp up? Some clarification around that will be helpful. Yeah.
Sure, thanks, Mihir. To first point, we don't see any structural change, and if at all there is anything, I can only tell you that most of our customers need a lot of help. And there are first time employees of 600,000 covering both blue collar and white collar in the aerospace, and this is more than 40% of the workforce. This is the first time that this is seen after 1942, as shared by one of the customers. And I think they have to really get them trained, get them digitalized tools and processes, and get them ready to deliver on the right quality and production schedules.
I think that's a challenge that exists for this industry, and we don't expect this should get any better, at least for the next 2-3 years, and it will at least take 2-3 years for it to ease. We are seeing a lot of interest from customers around the manufacturing, engineering, aftermarket, digitalization, integration with various tools and systems. I talked about some of the AI-assisted PMO. I'm trying to help them through the supply chain. I think a lot of this is the request that come from customers, and I don't think there is any change that we are seeing which are structural in nature. Having said that, supply chain issues and the top two clients in the aerospace and do have their own challenges, but they need a lot of help as far as engineering, manufacturing, and aftermarket is concerned.
Sure. So just one extension to this. I mean, is there any pressure on reducing outsourcing?
I don't think so. And there, there is nothing that changes structurally for them to really, yeah, make those changes. And one thing that we are also seeing, like what I covered in my initial commentary, it is also expected to be a little more on-site centric for the next few quarters as they are going through the challenges on manufacturing and aftermarket, which are more closer to the branch, helping them to improve the productivity and quality of the employees. I think that would really require more on-site intervention than
Got you. So my second question was on the guidance part. You know, there's the latest guidance which is there. How much is coming from the orders that you already won and part of the backlog? And how much of part of the guidance is coming from new deals that you will win, and you expect that to ramp up in the balance part of the year?
Typically, our order backlog covers about six to seven months of work ahead, and this has been the trend that we have seen over the last three years. And, rest of them still that needs to be won and added to this backlog.
Okay. So 60, 70 is a rough split?
Yeah.
Sure. And just one last question was on the semiconductor business. I mean, you mentioned you would be taking the end-to-end responsibilities. I just wanted to get a clarification, what is going to be our roles and responsibilities? And what part of the value chain will we ourselves be doing on Cyient Limited books, and what will be done under the manufacturing to other contractors?
So, it's actually quite similar to what happens in DLM, in the sense that the... If you look at today in DLM also, where we have end-to-end projects, that is, we have the design responsibility and the manufacturing responsibility. Our design is being done in Cyient Limited or in Cyient DET, and manufacturing is being done by Cyient DLM. But the overall responsibility is with Cyient DLM, so the responsibility, liability, et cetera, with Cyient DLM. So in the semiconductor, the Cyient Semiconductor also will follow a similar kind of a model, where the whole idea is that there's a lot of chips that newer companies or non-semiconductor companies are using, examples of which are automotive companies, medical companies, and so on, so forth.
So Cyient Semiconductor will take the overall ownership for the entire project, starting from design all the way to, sourcing and, supplying. Of course, sourcing in that case will be typically through a fab like a TSMC or a GlobalFoundries. So, Cyient Semiconductor will take the overall ownership. We still anticipate that much of the design will still be done in Cyient. So we don't anticipate the design capability to be built out of Cyient. That capability will still be leveraged, very much like what is happening in Cyient DLM.
Okay, understood. That's it from my side. Thank you.
Thank you. The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities. Please go ahead.
Hi, I have two questions. In one of the slides in our presentation, you mentioned that India's ER&D the contribution. So the current delay, does it change the long-term outlook? Second, for FY 2026, any coloring you can share on demand front and what are the discussions ongoing with the client for FY 2026?
We are currently working on to ensure that we are, meeting our guidelines that we have set out for fiscal 25. As we start developing our plans for 26, we'll definitely share the outlook by end of financial year. And like what I shared in the next three years, we do see that the recovery, coming back strongly, and we do hope the U.S. election would end as, and the interest rates should start going down, inflationary pressures should start getting eased. I think all of them should help us just to start spending on innovation. And I think that's been something which is muted for a while. We do hope some of those, investment that are on hold should start coming back.
From a long-term outlook, I think we do see that this is going to be much more critical than ever before, with the softwarization of products and digitalization of the entire value chain, and how the impact of automation and AI will have a role to play. I do see that DET has a very important and pertinent role to play in terms of supporting our customers on R&D. Given that there is a demographic change that is at play and with retiring, as well as the increase in spend towards software and digital, I think that's only still intact. It's only going to accelerate, if not staying where the current levels are.
Okay, and just one more last question. In the aerospace and defense side, some of our clients are facing some reaching the engine part and component related issue on timely manner. So is that situation normalized or better than before, or still they're facing similar issues on supply side?
We don't want to comment on any specific customer issues, but if you look at the broad challenges for the industry remain, then our customers' demand is very robust, and they have demand in excess of 20%+ . But the challenges are led by what I talked about in terms of supply chain, barely adequate workforce, and which require to be trained, and lack of digitalization that they have not invested in the past. I think all of them are contributing factors why they won't be able to realize their demand. And I think that's where they are seeking our help to maneuver the challenges that they have.
Okay. Thank you. Thank you all the way.
...Thank you. The next question is from the line of Karan Uppal from PhillipCapital. Please go ahead.
Yeah, thanks for the opportunity. First question is on the margins. So Karthik, you mentioned that you are anticipating, you know, pickup in aerospace as well as in connectivity, and specifically in aerospace, you mentioned that, you know, the de-ramp ups are happening on site. So would that be a pressure to the margins, given that wage hikes will also be there, and you have also talked about investments in technology, and I can see that your S&M investments are, S&M spends have also gone up. So, are there risks to margin guidance as well, and what are the levers to offset these headwinds?
I think that's what Prabhakar talked about, Karan, and, whatever that we are talking about for Q4, and we have factored in all this that you mentioned, and that's the reason why we are not giving specific number for Q2 or Q3.
Okay. And when are you planning to give wage hikes?
In starting this quarter.
In Q2? Okay. Okay, sir. Thanks. Thanks a lot, and all the best.
Thank you.
Thank you. Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to Mr. Krishna Bodanapu for closing comments. Over to you, sir.
Thank you very much, and thanks everybody for being on the call this evening. As we talked about, it has been a tough quarter, and it has been a series of events that we did not anticipate at the beginning of the quarter, especially in terms of some of the project closures, et c. But what I do want to reiterate and give confidence on is much of what we were expecting to happen in the beginning of the quarter has happened towards the end of the quarter. Therefore, that gives us a very strong confidence that we will see good growth starting from Q2 onwards, because I think to one of the comments, it just cannot be backended.
We will see growth starting, good growth actually, robust growth, starting from Q2 onwards. And based on the order backlog and what we're seeing from our customers, we're quite confident that the rest of the year will be quite good. Unfortunately, the compounding effect of Q1 is what it is, and that's why the guidance might not look so appealing. But I just want to assure everybody that the rest of the year is quite in order, and we're also quite confident that we will be trajectory out of here is quite comforting to all of us here. And both from a revenue and margin perspective, we will continue to have a good set of quarters. Sorry, good set of quarters going forward.
With that, thank you very much for your support, and if there's any further questions, if you reach out to Mayur, one of us will answer them for you. Thank you.
Thank you.