Cyient Ltd

NSE:CYIENT

Earnings Call Analysis

Promising Growth with Strategic Setbacks

The company welcomed Nitin Prasad as a new board member, contributing valuable experience in sustainability-focused industries. It was also recognized for sustainable innovation with awards at the NASSCOM Design & Engineering Summit. Revenue grew by 17% year-on-year with an EBITDA expansion of 400 basis points, while normalized profit after tax (PAT) surged by 70%. Notably, the Aerospace sector reported a robust 27.5% year-on-year growth, marking the 6th consecutive quarter of expansion, even as Communications faced an 11% decline. Group revenue hit $214.9 million, a 22.3% increase year-on-year. The normalized EBIT margin rose to 14.6%, and PAT grew by 66%. However, free cash flow decreased by 47.7% due to planned cash consumption cycles, anticipated to recover in the second half of the year.

Steady Revenue Growth and Shareholder Confidence

In the latest quarterly report, the group's revenue hit $214.9 million, marking a strong 22.3% increase year-on-year in constant currency terms. Operating in a formidable state, the company's 11th consecutive quarter of growth signals enduring market confidence and translates into a generous interim dividend payout of INR 12 per share, thanking investors for their unwavering trust.

Profitability and Cash Flow Dynamics

Profitability has also witnessed a surge, with normalized EBIT margins rising by 232 basis points year-on-year to 14.6%. Despite this, free cash flow (FCF) saw a contrasting trend, declining year-on-year by 47.7% due to pre-planned cash consumption cycles.

Segment Performance: Aerospace and Sustainability Soar

The Aerospace division presented a 27.5% year-on-year growth, keeping up with its 6th successive quarter of increase. Sustainability initiatives are yielding fruitful outcomes, showcased by a remarkable 71.6% boom in constant currency year-on-year. Both segments demonstrate the company's successful investment and strategic focus in these areas.

Emerging Challenges in Connectivity

Conversely, the Connectivity segment experienced a decrease, both quarterly (8.1%) and yearly (12.3%), indicating a temporary softness in this market sphere.

Exploration of New Frontiers

The company is not shying away from diversifying its risk across new growth areas like Semiconductors, Medical Devices, Hi-Tech, and Automotive, which have collectively grown by 5.1% year-on-year in constant currency. Furthermore, the order intake has surged by 40%, paving the way for future revenue generation and solidifying the company's growth trajectory.

Commitment to Large Deals and the Offshore Model

The company's commitment to big engagements is evident through the closure of five large deals, amassing a total contract value of INR 41.4 million. The offshore revenue mix now stands at a healthy 44.2%, which is a positive indicator of the company's operational efficiency and market adaptability.

Contextual Industry Outlook

Despite a tough year for peer companies primarily due to underperforming 5G investments, government spending in programs like RDOF and BEAD are anticipated to kickstart growth in subsequent quarters. Looking ahead, Hydrogen-based green energy is poised to be a significant growth engine for the company over the next 3 to 5 years.

Automotive Sector Acceleration

The Automotive business is hitting the fast lane with robust growth of 30% in Q2 year-on-year, propelling the company ahead and indicating a favorable industry demand trend anticipated to pick up later in the year.

Fiscal Year 2024 Guidance

For fiscal year 2024, the company maintains its revenue growth guidance at 15% to 20%, expecting to be near the lower end of the range. Margin improvements are projected at about 150 basis points compared to fiscal '23. The forthcoming quarters may see further wage increases along with efforts to enhance operational efficiency and pricing, which the management remains confident about.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 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, Executive Vice Chairman and Managing Director of Cyient Limited. Thank you, and over to you, sir.

[Bodanapu Krishna, executive]

Thank you very much, and good evening, ladies and gentlemen. Welcome to Cyient Limited's earnings call for the second quarter of financial year 2024. I am Krishna Bodanapu, Executive Vice Chairman and Managing Director. Present with me on this call are Mr. Karthik Natarajan, CEO and Executive Director; and Mr. Prabhakar Atla, President and Chief Financial Officer.

Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available on our investor update, which has been e-mailed to you and also posted on our website.

This call will be accompanied with an earnings call presentation, the details of which have been already shared with you. Coming to the quarter, some of the highlights.

One, firstly, I'm excited that Nitin Prasad has joined our Board as an Independent Director, and we look forward to benefiting from his experience. Nitin is a dynamic and accomplished business leader, who has over 25 years of experience and has developed and launched and operated new business verticals in semiconductors, chemicals, energy and -- clean energy across geographies.

As you know, our sustainability and the associated industries of energy, utilities, mining are very important focus areas for our business. And we believe that Nitin will provide a unique perspective on solving sustainability challenges in these industries, having worked with some very large corporates. So we are excited to have Nitin join our Board. And please, join me in welcoming Nitin to our Board.

I'm also proud to announce that we won 2 prestigious awards at the NASSCOM Design & Engineering Summit. One was in the area of enabling the blue economy by our last-mile hydrogen fuel delivery for marine and automotive application. And the second was for designing and engineering the world's most fuel-efficient aircraft engine.

Again, these are areas that we take a lot of pride in and we've put a lot of effort in because sustainability and the related industries are a big focus area for many of our customers and for all of us, in general. And I'm very proud that we have been recognized as leaders and have -- and for having done some cutting-edge projects in these areas.

In addition to these awards, we also received a Modern Network Management Award at the year 2023 ESRI Infrastructure Management and GIS Conference. ESRI is a global leader in local intelligence, and this recognition is an acknowledgment of our capability and powers in this space.

Before I hand over the call, I just want to highlight that the last quarter has seen the Aerospace business grow 27.5% year-on-year. As many of you know and as many of you have followed us for a long time, Aerospace is a key part of our business. And it is a business that has gone through a significant challenge, especially in 2019 because of some industry-specific issues, but of course, in '21 -- 2020, '21 and parts of '22 because of the impact that COVID has had on travel.

So I'm very proud now to report that not only has the business grown 27.5% compared to the same quarter last year, it has also grown 6 consecutive quarters. And that gives me immense confidence that we're in a very strong footing in one of the most important, if not the most important, vertical that has a huge bearing on our growth, and we're clearly the acknowledged leaders.

Having said that, as you would have followed some of our competitors, the communications industry is going through a bit of a lull. In our case also, there's about 11% degrowth in Communications for the quarter under discussion. But we're quite confident that this is a short-term blip.

So in summary, I would say that we -- I feel very, very confident about the derisking that we've got on the portfolio and where things stand. And that confidence will now translate into a very good visibility for the rest of the year, which I will allow Prabhakar Atla and Karthik Natarajan to take you through the more details.

With that, I would like to hand over the call to Prabhakar, who will take you through the financials. Prabhakar?

[Prabhakar Atla, executive]

Thank you, Krishna. Hello, everyone. I hope you're all doing well, and I hope you're all having a good day. The management team of Cyient has joined this call today from our offices in Hyderabad, India. I would like to first update you that we're having a pleasant day at Hyderabad. Temperature is a moderate 27 degrees Celsius, humidity is about 45%, wind speed is 10 kilometers per hour, and visibility is a clear 25 kilometers.

All of this, I guess, can be considered as healthy operating metrics of a pleasant day, especially in [ tropics ] under even perhaps what are typically termed as [ real ] indicators for a pleasant evening ahead.

With a small digression, for which I seek you pardon, please allow me to present the financial results of Cyient for Q2 of FY '24. Before we start, just as a small recap from our previous earnings call, i.e. the Q1 FY '24 earnings call. Cyient business has been reclassified since Q1 FY '24 into 3 segments, which you can see on the screen.

The presentation now -- under discussion now is for Cyient DET segment only. All numbers, unless mentioned otherwise as group, are for Cyient DET only. Some of the previous numbers have not been reclassified, given the impact on DET is minimal. With the quick recap, let us move on to the next chart, which is in a dashboard format for Cyient DET performance.

Before I walk you through the commentary, let me just summarize that we believe that our Q2 FY '24 witnessed a balanced and healthy performance, which is broadly in line with our expectations and is also tracking to the evolving industry scenarios and dynamic macroeconomic scenarios.

In terms of revenue, Q2 FY '24 U.S. dollar revenue for DET stood at 178.4 million, a growth of 1% quarter-on-quarter in constant currency and 17.1% year-on-year in constant currency. In rupee terms, the revenue stood at INR 1,476 crore, with a growth of [ 1.5% ] quarter-on-quarter and 22.3% year-on-year.

We have two key growth drivers behind this performance: Firstly, our core segments continue to witness strong growth Q-o-Q and Y-o-Y, including the key segments of Aerospace, Automotive and Sustainability. Our key clients, top 10 and top 30, continue to witness strong Q-o-Q and Y-o-Y growth.

At the same time, like Krishna mentioned earlier, we do see softness in Communication space in the short term, impacted by the macroeconomic scenario. And this softness played out in this quarter for Connectivity segment. With Karthik Natarajan, we will provide a detailed commentary on these topics later in the call today.

In terms of EBIT margin, Q2 FY '24 DET normalized EBIT margin stood at 16.5%, highest in the last 11 years, and grew by 47 bps quarter-on-quarter and a healthy [406 ] bps year-on-year. I'd also like to mention that the Q2 expansion of 47 bps that we had in Q2 is on the top of the 93 bps Q-on-Q expansion we have seen in the previous quarter. In rupee terms, Q2 FY '24 DET normalized EBIT is highest ever at INR 244 crores, a growth of 4.5% quarter-on-quarter and 62% year-on-year.

The continued margin expansion despite the impact of wage hikes is driven by improvements in our operational performance, along with the cumulative benefit coming in from the optimized [ next step ] we've undertaken before in the previous quarter, which we have addressed in the previous earnings call as well.

In terms of Q2 FY '24 PAT, the Q2 FY '24 normalized PAT for DET stands at INR [ 133 ] crore, translating into a normalized PAT growth of [ 1.5% ] quarter-on-quarter and a healthy [ 17.8% ] year-on-year. This translates into a normalized [ GP ] of INR 15.77 for Cyient DET.

In terms of free cash flow, Q2 FY '24 DET free cash flow stood at INR 154 crore, a growth of [ 66% ] year-on-year and this translates into a conversion of 89% on normalized PAT for Q2.

As I close with charts, I would like to also draw your attention to the balanced progression among the several metrics.

With revenue growth of about 17% year-on-year in constant currency terms and EBITDA expansion of 400 bps, normalized PAT grew at 70% year-on-year while retaining focus on FCF improvement, which also grew by [ 66% ] and hence, my opening comment on balance and healthy performance in the beginning of the presentation.

In terms of group numbers, group numbers are a combination of all 3 segments we spoke about earlier, and I'll just call out a few comments.

At $214.9 million, group revenue for Q2 FY '24 grew by 22.3% year-on-year in constant currency. And the Q2 FY '24 normalized EBIT margin is at 14.6%, up by 232 bps year-on-year. Q2 FY '24 PAT stands at INR 183 crore, up by [ 66% ] year-on-year, while the FCF has [ degrown ] year-on-year by 47.7%, owing to planned cash consumption cycles we have seen in DLM business, which we will recover in H2 of FY '24.

I'm also very pleased to inform you that we've announced an interim dividend payout of INR 12. On behalf of the Cyient Board, the management team and all our Cyient colleagues across the globe, I would like to thank all the investors for their continued support, for their valuable [ confidence ] and very importantly, your kind trust, for which we are really very grateful.

With this, I would like to thank you all for your time, for your attention and for your interest, and I will now hand over the call to Mr. Karthik Natarajan for an update on the DET business performance outlook.

[Karthikeyan Natarajan, executive]

Thank you, Prabhakar, and good day, everyone. Hope all of you having a fantastic festive season, especially in India. And I'm pleased to share the details of the quarterly performance as discussed by Prabhakar just now. And happy to say that this is the 11th successive quarter of growth out of 13 quarters that we have been reporting for the last 13 quarters from Q1 of fiscal '21.

We had 2 quarters of flattish revenue and 11 quarters of successive growth that we have seen, which has been the steady performance over many quarters.

Having said that, I'll just pick up two of the key columns here and third from the left and [ fourth ] from the left, which are essentially the constant currency numbers for 4 of the business segments. I think we have talked about bringing a balanced portfolio. I think this is really starting to play off well.

And if you look at Transportation, it has shown 2.7% quarter-on-quarter constant currency growth with about [ 22.1% ] constant currency growth year-on-year. And as Krishna mentioned, Aerospace continues to see a [ 6th ] successive quarterly growth. And for this quarter, it stands at 27.5% growth year-on-year.

Connectivity, which has seen a softness in Q2, has degrown by 8.1% and year-on-year at 12.3%. Sustainability, which is starting to pay off well based on some of the investments that we made over the last 12, 18 months, and it's grown by 4.9% quarter-on-quarter and [ 71.6% ] in constant currency year-on-year, with an [ debt ] to normalize it for an apples-to-apples comparison, which is close to about 20% that we have seen the growth on the Sustainability business.

New growth areas, which is comprising of Semiconductor, medical devices, Automotive and HiTech, has shown a growth of 5.7% quarter-on-quarter and 5.1% year-on-year in constant currency, translating into overall DET growth of 1% in quarter-on-quarter and 17.1% year-on-year.

We also have seen robust growth in our order intake and -- which has grown 40% year-on-year, while [indiscernible] Q3 and Q4 was better than what we have seen in Q1 and Q2 and -- which gives us confidence that there is definitely stability that is coming back for most of our businesses except with some parts of the Communication business, which we'll talk about in the next few minutes.

Our offshore revenue mix stands at 44.2%. We have closed 5 deals, in terms of large deals, at INR [ 41.4 ] million total contract share, and 3 of them for Sustainability, which is coming with digital factory and the plant in [indiscernible] management around the Sustainability vertical, and 1 deal on patient health monitoring from Healthcare and Life Sciences and 1 deal for North American OEM for a certification support that we are extremely [indiscernible].

If we go to the deep dive of each of the business segments, and we continue to see growth across the board and led by 3 pivotal areas that we started working on for the last 2 years and digital engineering, autonomous world and sustainable planet. I think these are the 3 pivotal areas that we are working on. I think that continues to [indiscernible] off well.

And while we continue to see some macro challenges, geopolitical issues and conflicts arising from the Israel-Hamas and what we have seen for the last 2 years from Ukraine-Russian, I think they're continuing to form challenges, but we are still confident about what we see the future which is looking bright, and we are confident about how we will create sustainable growth for many years.

And to start deep diving Transportation as air travel keeps growing, the aerospace industry continues to embrace more of digitalization, they need to deliver more aircraft and [indiscernible]. And global demand for air traffic is likely to double in the next 15 years and -- which is taking 23 years in the previous [ doubling ] cycle.

And now, it can happen in the next 14 to 15 years and plus some of the growth that is happening through the geopolitical conflict that is happening globally from the different sides, and these 2 are essentially driving the growth as far as Transportation is concerned. Rail would be moderate, and we still see growth based on software and digital areas form Rail.

Connectivity, and this is second challenging year for many of our peer companies as well, and this is led by some of the 5G investments still not paying off. And also, their own investment towards fiber investments have been slowed down.

While we expect the government spending around RDOF and [ BEAD ] programs will continue to drive the growth, starting later this quarter or early next quarter, and we are expanding on our acquisition that we made from Portugal [indiscernible] into North American and Australian markets, I think that is paying off with an entry into an Australian operator in the last quarter.

Sustainability, I think, this continues to really build the momentum as we expected and led by energy transition and some of the new-age minerals like lithium, nickel, zinc, cobalt. I think that continues to drive significant demand, and this is led by the energy transition which is happening across global segments.

And we also see the [ equities ] market which is getting transformed towards the grid normalization, digitization, and that's going to be the biggest growth engine for the next 3 to 5 years. Apart from the hydrogen-, ammonia-based green energy and carbon-capture utilization and storage, we continue to lead the growth, and we'll talk about some of the key wins in many of the segments in the next few slides.

New growth areas, I think this is still led by Automotive. We have seen a robust [ 30% ] growth in Automotive business and we continue to see growth around electrification, autonomous and connected vehicles. And we have seen momentum in some of these areas.

And also in Semiconductors, where we are seeing a softness over the last 6 months due to the macro issues, and we do expect that the demand should start coming back by later part of this year. And this is going to be led by high-performance computing [ RBC incision ] and other segments that are likely to drive the growth from [ Semiconductors ].

So just want to pick up a few of the examples of the deals that we won last quarter. And semiautonomous drive [indiscernible] award in foreign industry construction equipment, and this is the interesting projects where we are trying to build an autonomous construction equipment for a customer. And first time, we are really engaged on working on a full-blown program for an industrial customer.

And also moving on technology enhancement for the navigation system and using [ limited ] services, including Android, also on Connectivity, and announcing the customer and fee management experience through technology and analysis [ for management ] solution and through copper and fiber network and carbon-capture solutions, balance the plant for hydrogen-based green ammonia production.

And if I move on to the next slide, a data platform that enables customers to see real-time on board in terms of their batch data from market resources to provide insights and predictions. Scientific engineers, we also partnered with Microsoft that we announced in the last quarter. And this is paying off with generative AI-based programs that we are taking into our customers. And this is one such win that we have to report from the last quarter.

And digital platforms and customer experience, and we are developing asset management solutions, integrated to a [ PLM ] system for a Mining customer. And we also have won a project on [indiscernible] power software testing using the solution we built called for [ Cyfas ], and this is for a framework that help our [indiscernible] systems and software, and this is AI powered.

So with that, I would just conclude some my side of updates, and we are confident about what we see the business to shape for the rest of the year, and I'll come back for Q&A to provide time for [indiscernible].

[Prabhakar Atla, executive]

[indiscernible] the fiscal '24 guidance, and we are keeping our 15% to 20% guidance that we have given earlier with the commentary that we expect it to be around the lower end of the range. And EBIT margins, we have guided about [150 ] basis points improvement as compared to fiscal '23, and we are holding on to the same numbers here.

With that, we'll go open for question-and-answers.

[Operator]

[Operator Instructions] We'll take our first question from the line of Ruchi Burde Mukhija from Elara Capital.

[Ruchi Burde Mukhija, analyst]

Many congratulations for the resilient performance. I have two questions. First, what has led to the margin expansion? And a second one, could you please share what you see as outlook for your Communication vertical as we move ahead?

[Prabhakar Atla, executive]

Ruchi, thank you very much for the question. Thank you for joining the call. Our quarter-on-quarter margin improvement has two key drivers: The first is that we have an improvement in the operating performance. Our gross margin improved quarter-on-quarter, and this is happening from improvement in utilization and also some continued rate hikes, which is focused in the last -- in the previous call.

The second is we continue to have benefits from indirect cost optimization, which we have done previously. So these two are the key drivers for the quarter-on-quarter continued margin expansion.

I hand over to Karthik to address the question on Communications.

[Karthikeyan Natarajan, executive]

Yes. So Ruchi, I think we have talked about last quarter, and we said we do expect softness on the Communications segment,, driven by the broader capital cycle that has happened over the last 2, 3 years and taking a breather with the higher interest rates. And probably this will take some time before we start recovering.

Having said that and specific to the fiber business that we do have significant exposure to and are starting to see in few pockets, and there was a slowdown that the we did not anticipate earlier and some of those projects which have been put on hold, we do expect that this should really jump back sometime early Q4. And we also knew at this point of time, [ H1 to H2 ] will be flat in terms of Communications business, and we will start seeing some of the growth by early next year [indiscernible] or next financial year.

[Prabhakar Atla, executive]

Let me just also add that within this framework, our largest customer in Communication continues to grow quarter-on-quarter and year-on-year.

[Operator]

We have our next question from the line of Sulabh Govila from Morgan Stanley.

[Sulabh Govila, analyst]

So first question is more of a clarification from one of the remarks that you made. So is there any sort of an impact on the -- from the geopolitical issues that we are facing in the Middle East on the sector or Cyient in any way? So I just wanted some clarification on that.

[Bodanapu Krishna, executive]

Yes, absolutely. On the Cyient DET business, we do not have very much business in [ Israel ]. On, of course, DLM, we do have business in Israel. And about 20% of our revenue and 20% of our supply chain comes from companies in Israel. So there is a bit of dependency.

Of course, the first concern that we had was the safety of our employees, not that we have many, but we have a few in Israel in the DLM business, of course, our suppliers and customers. So firstly, that was the first concern, and I'm glad to say that everybody is safe, though, of course, everybody has an impacted family and/or an impacted colleague.

Having said that, we don't believe that there is going to be much of an impact on the DET business in any way in Israel. Similarly, on the DLM business, like I said 20% of the business comes from there, but we're also quite confident that Israel is actually a very resilient country. Of course, there is going to be significant [indiscernible] really what we do in Israel, but really the focus [indiscernible] our employees and their families [indiscernible].

[Sulabh Govila, analyst]

Understood. My second question is with respect to the guidance that we have in which we've tended to guide towards the lower end. So for us to do the bottom end of the guide, the [indiscernible] is not wrong, is upwards of 3% in the next 2 quarters.

So just trying to understand how confident are we in terms of delivering that sort of growth rate in the environment we are in. And whether would you expect that to gradually pick up, which would mean that 4Q would be better than 3Q, so just some understanding there?

[Unknown Executive]

[indiscernible] what extent, our order intake has grown by 40% year-on-year, and this is led by some Aerospace and Sustainability. And we do expect to see [ the customers ] will continue to grow for both [indiscernible]. That's the confidence on which we are trying to hold our guidance to the lower end of the range.

[Sulabh Govila, analyst]

Understood. And then would you expect it to gradually pick up the growth in 3Q versus 4Q?

[Unknown Executive]

I hope so. Yes.

[Sulabh Govila, analyst]

Okay. Okay. And then my last question on the margin split. We are already at 250 basis point higher than last financial year. So just trying to understand, given that we are expecting strong growth in 2H, are there any margin headwinds that we are facing due to which we're keeping the margin flat from here on?

[Unknown Executive]

We're still holding on to the previous margin guidance. There is still some work to do for the rest of the year. So at this point in time, we've hold on to the previous guidance [ range ] as we work through a very [indiscernible] to go through to the following 2 quarters.

[Operator]

We have our a next question from the line of Kawaljeet Saluja from Kotak Securities.

[Kawaljeet Saluja, analyst]

I have a couple of questions for Karthik. Karthik, the first question is that you have seen the recent announcement of Ericsson, so comments of Ericsson, wherein they expect the network spending to remain muted in calendar year '24 as well. Now [indiscernible] I think we do have an exposure to that market. Now assuming that market remains muted, do you think that the impact will [ filter ] through your Communication's performance or are there offsets available?

[Karthikeyan Natarajan, executive]

Sure. Thanks for the question, Kawaljeet. And I'll answer this in two parts. One is we have made an acquisition called [indiscernible] about 15 months ago. And they do have wireless side of the business. And some part of the business has got impacted in Q2. We expect that part to recover in Q3 and Q4 as we see things to date.

And because of some of the key spend that is required from the customers in U.K. and Europe and led by the platform that [indiscernible] team has been able to build over the last 3 years, and that has been definitely successful with many of the customers, which helps in reducing their cost of operations.

And two, they are also supported by the energy savings platform, which is the second to none that we've worked on for the last 2 years. This is more relevant today than ever before because of the energy prices that we've seen in [indiscernible]. So those two things would lead us to see a kind of growth in Q3 and Q4.

And the fiber side of the business and significant CapEx that has been budgeted by the government about 18 months ago, and this is being distributed to all the states, I'm talking about [ EV ]. And that is likely to start getting into contract awards labeled in Q3 or early Q4. And we also expect that, that funding will drive at least a significant growth over the next 6 to 12 months on the fiber spending.

And we are betting on that. Many customers who are spending on their phone, I think that is going to be curtailed in the near term. And we do expect that government-sponsored or government-supported initiatives will help them to spend that money over the next 6 to 12 months.

[Kawaljeet Saluja, analyst]

Okay. that's helpful, Karthik. The second question is that any line of visibility on the refresh of the narrow-body aircraft platform? And let's say, if you don't have visibility, then without that, what's the kind of runway and [ longevity ] of growth that you can have in [ aircraft ]?

[Karthikeyan Natarajan, executive]

Yes. So I think we still don't have any clear visibility of when the narrow-body refresh will happen. And it's definitely due. And at the same time, when you have geopolitical situation, one is doing very well, unless there is a compelling reason why both of them need to really get into a new upgrade.

So that may probably happen over the next 2 to 3 years. We're still waiting for a firm decision from one of them soon. I think that will force the other one also to follow suit. And in the meantime, what is likely to happen is that with spending in defense likely to be a key issue and -- whether it is about aftermarket, MRO, all of them are likely to see some momentum.

And we do expect the defense spending will continue to rise over the next 2 to 3 years gi,v,en the conflict situation that we are seeing across many geographies worldwide. And we do expect that this will probably take the growth for a while.

Having said that, the commericial side of the business have not really fully recovered, and the supply chain challenges still remain, and that needs to resolve over the next 12 to 24 months. So we hope all of them will start converging into some of the new upgrade programs in the next 2 to 3 years to continue to grow beyond that.

[Operator]

We have our next question from the line of Mohit Jain from Anand Rathi.

[Mohit Jain, analyst]

Yes, sir, first is on the pricing benefits that you spoke about. So is it complete as of Q2 or we should expect some benefit in Q3, Q4 as well? And a related thing is, should we assume pricing benefits are largely narrow? Or is it broadly spread across verticals? And then I have a follow-up.

[Karthikeyan Natarajan, executive]

So there is still some more growth left for us -- firstly, thank you for the question. There is still some more growth left for us to do to see that we continue to receive price benefits [indiscernible], and we'll continue working on that.

To your second question, it's not specific to Aerospace only, it is broadly [indiscernible].

[Mohit Jain, analyst]

And second was related to Q3 furloughs, I think you spoke about some slowdown in Q3 and then pickup in Q4 or do you expect the growth to be more evenly spread, given we are anticipating [indiscernible]?

[Karthikeyan Natarajan, executive]

Yes, Mohit, I think we still don't have a clear view on how the furloughs would play out. And given the demand situation on the Aerospace side continue to be robust, and we don't expect to be any different as compared to what we have seen last year and the supply chain issue [Technical Difficulty].

[Operator]

I'm sorry to interrupt, sir. You're not clearly audible. Can you come closer to the microphone?

[Karthikeyan Natarajan, executive]

Is this better?

[Operator]

Yes. Yes, sir.

[Karthikeyan Natarajan, executive]

Okay. So what I was saying that is, Mohit, we don't have a clear view on the furloughs yet, and the Aerospace industry has a robust demand and we continue to see -- as all of us are experiencing on a daily basis, I think most of the flights are running full. And probably the capacity is still not available to meet the demand that is raising on the Aerospace domain.

So that would really require some additional work that need to be supported, so we still hope that some of the projects would still continue to be [indiscernible] in holiday season. And we still don't have clear view, we will kind of keep you updated.

Just to share additional information, we do expect Q4 to be better than Q3 and maybe we would probably skew towards Q4 more than Q3. And we don't expect any other impact on the furloughs from other segments.

[Mohit Jain, analyst]

And you're also anticipating some recovery in communications vertical also in Q3, is that what you said earlier in one of the remarks?

[Karthikeyan Natarajan, executive]

I would say, we will recover by Q4 and [indiscernible] compared to H1 on the Communication vertical.

[Operator]

We have our next question from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Sorry to again ask question on the guidance. Why How confident are we even for the lower end of the guidance? Because one of your peer has actually downgraded -- peer has downgraded its growth guidance for FY '24, with expectation of macro impacting the client decision making in the last few weeks, which may impact the growth in the Q3, Q4.

So my question is, what are the assumptions in terms of ask rate of 3.3% compounded Q-on-Q even grow at 15%? What are the assumptions baked in? Are you -- because one of your statements on Communications, you said that 2H for Communication would be flattish versus 1H. So are you baking in almost a flattish Q-on-Q growth in the Communications?

[Karthikeyan Natarajan, executive]

Yes. I don't have specific numbers to offer on the Communication for Q-o-Q, Sandeep. But like what I shared earlier, and we have seen our intake growing by 40% year-on-year, this is essentially led by Transport and the Sustainability segment. Within Sustainability, we see that Mining and Energy, both are looking good. And Mining customers have a difficult period because of the pricing issue, but that is also making them to drive some cost out, and that will help us for the next 2, 3 quarters.

And for the Energy side, some of the programs that we already won and we are likely to win during Q3 would help us to see the growth for both Q3 and Q4. So that's where our confidence comes from. And we have not assumed any disproportionate furloughs from Aerospace for Q3 because of the domain -- because of the demand situation that we see and how our customers are asking us to provide additional help during this quarter.

[Sandeep Shah, analyst]

Okay. Okay. And Karthik, just wanted to understand, do you believe CY '24 could be the year where a new engine for Aerospace design phase could be launched? Or it may be in CY '25 rather than CY '24? And will it further elevate the growth prospects of Aerospace starting from next year?

[Karthikeyan Natarajan, executive]

I'm not sure whether there is any new program that is going to be announced unless the OEM is going to lead the way. And there are multiple concepts that are being worked upon, and there is no firmness in terms of specific program launch, Sandeep.

I would also add on to top of that, there will continue to be derivative programs that will continue to happen as the need to reduce the emissions and increase the efficiency of the engines and some form of electric-supported engine, which will reduce the capacity of the engine that is needed. And I think the sustainability is going to drive significant changes to the aircraft and the Indian programs.

And that is where we see the demand in the near term. As well as the MRO and aftermarket support and with most of the aircrafts running over time, and they need to be maintained and supported. And this would be the second growth engine that we see for the near term.

[Sandeep Shah, analyst]

Okay. Okay. And the last question to Prabhakar, I just wanted to understand what are the headwinds, tailwinds which would be there in the second half, especially on the wage hikes, any pending wage hikes in the second half? And one of the participants has already asked, I think first half, we are at 16.3 versus upper end of the guidance and 16.2 and the EBIT margin. So is it fair to assume directionally still there is an upward bias in Q3, Q4 versus first-half margin?

[Prabhakar Atla, executive]

As we spoke in the previous call, the wage hikes in this year are annualized, so we can expect to see some more wage hikes to be coming in the next few quarters. There is still some more work to do on the price increase indicator and other operational levers we've been working on.

So therefore, I'm saying a number of moving parts out there. We are very confident of the range that we have given in the previous call. And at this point in time, with your permission, we will stay with that guidance range.

[Operator]

[Operator Instructions] We'll take our next question from the line of Nilesh Jethani from BOI Mutual Fund.

[Nilesh Jethani, analyst]

My first question was from a little longer-term perspective, from a 2- or 3-year perspective, considering sort of demand for MRO, et cetera, what can be the revenue assumptions directionally, not quantifying or required to quantify it? But directionally, what can be expected beyond '24? Or you believe this MRO requirement is just in the interim period and could see some declining trend?

[Karthikeyan Natarajan, executive]

So Nilesh, I would just say that we don't have any view for fiscal '25 yet. So as we start building up, we'll share the details with you. But we do expect that the cycle may last a few more quarters before it flattens out and because of what I shared both on commercial as well as the defense program.

And one of the large [ fighter ] aircraft, which has been put into service about 7 to 8 years ago, is coming up for service, and they will get the first engine being serviced in this quarter. And they said, in the next 5 years, they need to service about 1,000-plus engines.

So -- which essentially means there could be short- to medium-term demand that will continue, and we do see that we are able to grow at double digits. We don't have any specific firm view of whether it would be in teens or early teens or late teens, we are not able to make that assessment yet.

[Nilesh Jethani, analyst]

Got it. That was helpful. Second question was on the Transportation piece. So there, there were earlier comment that Europe, et cetera, the Rail department or works towards that is seen basically bottoming out. We wanted to understand after bottoming out, are we seeing any trends of growth or number stays there itself?

[Karthikeyan Natarajan, executive]

See, what is happening is for many of the governments, they have a fixed budget, and they need to really prioritize where they need to spend on. With some of the challenges that are seen over the last 2 years, I think the homeland security and defense getting prioritized over other public infrastructure. And that is a broad view that we saw. And there are many programs that have been won by our customers.

They're waiting for clearances or funding to be approved for them to start the program. So there could be some unpredictability in the near term and -- because of what we are seeing on a broader geopolitical issues seen globally.

[Nilesh Jethani, analyst]

Got it. And one last question would be on the order wins and revenue conversion. So a lot of peers in the IT services commented that there has been some delay in offtake or -- in the recent deal wins. From a Cyient perspective, the recent order in -- I wanted to understand how is it transiting into the revenues for us.

[Karthikeyan Natarajan, executive]

Yes. I think while they do take time to make decisions and -- which may get moved to the right and there could be deferrals, delays. But once they make a decision, they want to execute them faster. So we have seen both sides of the coin, where they said some of the programs are shifting to the right.

But once they make a decision, they want to make sure that the timelines don't change for the end date. So they really want to execute them faster. So -- which is definitely what we seek, and there could be uncertainty around this based on higher interest rates and with inflation being high. And I think everybody is trying to prioritize certain investments for the near term as compared to the long term.

And those decisions are on a regular basis. And we don't see any significant change in that over the last 2 or 3 months that we have seen. But we never know how things will pan out for Q3 and Q4. And we don't know whether the Fed would increase the interest rates again and would it really create a soft landing or hard landing. There is a lot of discussions that are happening around the world.

So we don't know how things will pan on for Q3 and Q4. And based on our current confidence and we do see that once the project is awarded, they want to really get them on a faster execution side.

[Operator]

We have our next question from the line of Shradha from Amsec.

[Shradha Agrawal, analyst]

Yes. Karthik, on the Transportation bit, even in one of the large rail transportation clients, we were seeing higher offshoring, which was impacting revenue for us. So have we got to a stable run rate in that account or are we still seeing the impact for higher offshoring in that particular account?

[Karthikeyan Natarajan, executive]

So Shradha, we don't want to respond on specific customer-related issues. And I would just say broader commentary that I gave for Rail is still valid. And we do see some unpredictability because of the project start from their customers, and that's one of the key issues that is stating the segment.

And two, there are some specific customer issues and some of them getting merged and integrated, and some of them have gotten approvals to get integrated, so that's going to be part and parcel of the [ regulating ] task. And we don't expect any significant change in the near term as far as the Rail business is concerned.

[Shradha Agrawal, analyst]

Okay. And on the new growth area of this segment, how big would Auto be in new growth area? And how do we see the visibility of growth rates in Auto going into next year?

[Karthikeyan Natarajan, executive]

I think we do have an aspiration of getting this to be at least about double digits percentage to the revenue over the next few quarters. I think that definitely is our aspiration. And we have seen growth as we announced a few deals last quarter, and we talked about one of the perception system we are building for an industrial equipment this quarter.

And we continue to see across the embedded digital services, cybersecurity, cloud, I think those areas are continuing to see interest from the Automotive customers. We do hope this will continue for a few more quarters.

[Operator]

Ladies and gentlemen, that was 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.

[Bodanapu Krishna, executive]

Thank you, and thank you very much for your support, ladies and gentlemen, and taking the time out to be here this evening. As you know, we are facing some very uncertain times in the world with some of the geopolitical issues that are going on. But I want to assure you that we've built a very robust portfolio. And also, we've built a very derisked portfolio.

As many of you know, while we've had some challenges in Aerospace previously, there were other businesses like Comms picked up the stack. And now there are challenges in Communications. Aerospace is really picking up the stack.

So I just want to also highlight that we feel quite confident that we've built a derisked portfolio. And as Karthik has said, there is some very good visibility towards the guidance that we have provided.

So thank you very much for all the support that you have provided. I also understand that it's been a busy couple of days with a lot of other calls. But I'll just take a moment to invite you to our Investor Day, which will now be held on 8 December, 2023 in Hyderabad.

It will be an all-day session for those of you who invited -- who attended our previous Investor Days, you will recall that this is a great platform to understand our evolution, performance, aspiration and execution plan. On behalf of the entire Cyient team, may I extend our warm invitation to all of you to join this event.

It will be our pleasure to host you at the event and hear your perspective and feedback. Our team will be in touch with you to coordinate the logistics. Thank you once again. I look forward to seeing you in December.

[Operator]

Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us and you may now disconnect your lines.