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On acquisition spree!

Cyient announced acquisition of Celfinet, a Portugal-based international wireless engineering services company focused on providing end-to-end ‘network planning and performance optimisation’ services. With this acquisition, Cyient aims to strengthen its wireless engineering practice to support communication service providers (CSPs) and enterprises in deploying their pervasive connectivity networks at scale. This will also enable enterprises to build networks to harness the power of 5G and drive their own digital transformation journey. The communications vertical currently accounts for ~28% of Cyient’s services revenue and grew 8% YoY in FY22. The acquisition will also strengthen Cyient’s presence in Europe, where Celfinet has a strong footprint, and help scale Cyient’s wireless business across North America and Australia

Cyient will acquire Celfinet for EUR41mn (~US$44mn) valuing it at 2.4x EV/Sales at CY21 sales of EUR17.1mn (~US$18.3mn) and 12x of CY21 adjusted-EBIT. 65% of the consideration is to be paid upfront and the remaining 35% as an earnout over two years subject to business performance. The transaction is accretive on EPS and EBIT margin from year-1 and is expected to close on or before 20th Jun’22.

Celfinet is Cyient’s third acquisition in FY23 YTD, the previous two being Citec (plant and product engineering company- link) and Grit Consulting (expertise in metal mining and energy). The three acquired companies will together contribute 21% to Cyient’s revenues. The total amount to be paid for the three acquisitions is ~US$181.8mn, which includes combination of upfront and earnout-based payments (vs cash and investments balance of ~US$209mn as of FY22 for Cyient). Previously, Cyient made one large acquisition in the DLM space in FY15, i.e. Rangsons, under the current leadership. It would be key to watch if Cyient can integrate these acquisitions successfully.

We had earlier estimated revenue growth of 28.1%/12.8% in FY23E/FY24E for Cyient. Post the acquisition, we add US$15mn/21mn as inorganic contribution from Celfinet resulting in revenue growth of 30.6%/13.4% for FY23E/FY24E. Though Celfinet’s EBIT margin (21.1% for CY21) is higher than that of Cyient (13.9% for FY22) and the acquisition is EPS/EBIT-accretive, we believe increased integration and depreciation costs should result in EBIT margins of 12.8%/13.9% for FY23E/FY24E. Our EPS estimates remain largely unchanged. Cyient is currently trading at 15x/12x on FY23E/FY24E EPS of Rs53/65. We continue with our BUY rating for Cyient and value the stock at 15x FY24E EPS of Rs65, arriving at a target price of Rs977 (earlier: Rs961).

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