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Citec acquisition to add Plant Engineering capabilities

CYL announced the acquisition of Sentiec Oyj (Citec) on 25th Apr’22 for a net enterprise value of EUR94m. Citec was founded in CY84 and focuses on Plant and Product Engineering services. It has customers across the Energy, Process, O&G, and Manufacturing space.

Deal bolsters CYL’s Plant and Product Engineering capabilities in Europe

The acquisition of Citec (CYL biggest acquisition till date) should help the latter bolster its capabilities in Plant Design Engineering and Process Engineering – areas where the company has limited exposure (sub-USD10m).

The acquisition will help CYL increase its presence in Europe (Finland, Norway, Sweden, Germany, and France) and India. With a total workforce of 1,200, split equally between India and Europe, Citec already has a good exposure to the Indian delivery model.

This acquisition is interesting from a strategic perspective as there is a lot of focus on R&D outsourcing and technology upgradation in the Plant Engineering space.

While the deal’s valuation is inexpensive at 1.2x EV/sales, we will keenly watch CYL’s plan for growth acceleration at Citec, given the lack of any meaningful growth in the last nine years (FY13-21 revenue CAGR of 1.7%). CYL has a target to grow Citec’s business at 6% CAGR over FY22-24, which does not look very ambitious

Inexpensive valuations

Citec earned a revenue of EUR22m/EUR80m in 4Q/CY21, with EBITDA margin at 18.7% in CY21.

The integration timeline of 10th May’22 implies 11 months of integration and a revenue accretion of 14% for FY23.

The deal would be EPS accretive (4-5% in FY23), but is expected to be margin dilutive (30-50bp) for FY23 due to one-time integration costs.

Valuation and view – maintain Buy

We continue to see a strong rebound in ER&D spending, led by higher outsourcing and larger deal sizes. We expect CYL to deliver 12% USD revenue CAGR over FY22-24.

The growth momentum in verticals such as Communications, Semiconductor, Utilities, Automotive, Medical Devices, and Mining is expected to continue for the next two-to-three years. Aerospace is expected to bounce back to pre-COVID levels in FY23.

Although near-term growth may be soft, better margin will compensate for the growth. We expect an 11% PAT CAGR over FY22-24.

We maintain our Buy rating on attractive valuations. Our target multiple of 17x FY24E EPS implies a TP of INR1,000/share (upside: 11%).

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