Update on the Indian Equity Market:
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Cyient announced the acquisition of Citec on 25th April 2022 for EUR 94mn. Citec is a plant and product engineering services company that serves customers in the energy and mining industry.
Excerpts of an interview with Mr. Krishna Bodanapu, MD & CEO, Cyient on CNBC-TV18 on 25th April 2022:
- The idea behind Citec acquisition is to expand Cyient’s footprint into plant engineering space where Citec is well-positioned. This is a good opportunity for the company to diversify the risk which exists in its current product portfolio and this acquisition helps to eliminate some cyclicality from the markets where the company operates.
- Citec primarily operates in plant design and plant engineering. All the new plants are coming that especially focus on diversifying from some of the traditional sources of energy and focusing on renewables such as hydrogen, LNG, etc. These are the unique capabilities that Cyient is getting with this acquisition.
- Margins of Citec are approximately similar to what Cyient generates. Citec has a good global mix and has strong capabilities in Europe, especially in the Nordic countries. Citec has a large team in India and it has built a good balance of domain expertise and cost.
- Bodanapu said they see similar growth potential in the Citec business as that of Cyient. The growth of Citec will converge more towards the Cyient growth including the guidance that management provided of 13% to 15% in the next one or two years because the company has to leverage some of the synergies and harmonize some of the operations. The company expects double-digit growth in the immediate term and then converges into Cyient’s growth.
- From the revenue side company expects good synergies because Citec primarily operates in three areas such as plant engineering, digital plant engineering, and product engineering where the capabilities of Cyient align very well with the Citec capabilities.
- In terms of the transport business the growth in this segment will be a little bit lower but the company seeing the recovery in the transport business as the defense business continues to do well, the engineering work started to happen and the maintenance, repair, and operations continue to come up steeply. The company expects the transport growth will be lower but other sectors will deliver good growth.
- Bodanapu said, the company is going to add a significant batch of freshers over the next few months. The supply crunch coupled with significant wage inflation and a rise in the other expenses is likely to cause inflation in the mid-single digits. The company expects there are going to be headwinds, especially with the cost inflation but also the company seeing good tailwinds where the company broke the linearity of adding people to add revenue.
Asset Multiplier Comments:
- We believe that this acquisition helps Cyient to diversify its product portfolio and services because it is heavily concentrated in aerospace, rail transportation, and communication. Post this acquisition the company can expand its presence in Energy, Industrial, and Plant Engineering which currently contributes ~2% of total revenues.
- Citec will provide access to multiple European-based global companies and this will also provide a cross-selling opportunity for Cyient.
- We think that this acquisition enables Cyient to expand its presence in the Europe region, especially in the Nordic countries with the help of the strong brand value of Citec where Cyient has a relatively smaller presence.
Consensus Estimate: (Source: Marketscreener website)
- The closing price of CYIENT was ₹ 899/- as of 27-Apr-2022. It traded at 17x/ 15x the consensus earnings estimate of ₹ 53/ 61 for FY23E/FY24E respectively.
- The consensus target price of ₹ 1,140/- implies a P/E Multiple of 19x on the FY24E EPS estimate of ₹ 61/-
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