Citec Group Oy Ab (532175) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Citec Acquisition Conference Call. 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 risk and uncertainties. A detailed statement in this regard is available in our investor update, which has been e-mailed to you and also posted on our corporate website. This call will be accompanied with earnings call presentation. Details of the same have already been shared with you. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, Managing Director and CEO. Thank you, and over to you, sir.

Thank you very much, Stephen, and good afternoon, everyone. Thank you for joining us, especially on a short notice on the acquisition update of Citec. Like we said in the release, it is the largest acquisition to date for us, and therefore, we thought we should take a few minutes to give you the rationale and explain what -- explain the rationale to the acquisition and also how we plan to integrate it and more importantly, leverage it going forward. Before I get started with that, can I also introduce a few of my colleagues who are on this call. We have Mr. Ajay Aggarwal, the Chief Financial Officer; Mr. Karthikeyan Natarajan, the Chief Operating Officer; Dr. Narasimham, Chief HR Officer of Cyient. They are all here on the call. I also want to welcome Mr. Johan Westermarck, who is the Chief Executive Officer of Citec, who's joining us from Finland on this call today. And we'll hear from Johan at the end of Ajay's remarks on the financials in a few minutes. So I will let Johan give a little bit more of a tweak on Citec at that point. But with that, if I refer -- take you through quickly the positioning and just to refresh everybody. Over the last couple of years, we've been refining our positioning and consulting [ debt ] industry-centric technology solutions and there are 3 elements of it. The first element is the consulting piece where we are presenting our clients articulate the problem, flesh out the problem and then articulate a solution. Industry-centric, we're also -- main expertise, which has really played out and secured us for a long time. That plays in where we've brought in, obviously, as many of you follow us quite a bit. We've brought in significant amount of differentiation in the industry in the area of communications. And ultimately, the Technology Solutions piece, this is really the evolution of the business, where through the technology organization, we're able to build, deploy, articulate and monetize the Technology Solutions. So the idea behind our positioning is really that we're able to help our clients both through a combination of our consulting experience, our domain experience and our solution capabilities, solve problems that really matter to them and using technology to solve these problems. And this might not be very new for many of you given that you've followed us quite a bit, knowing this is how we positioned the organization. In that context, one of the industries that we've been meaning to strengthen is the process and plant engineering industry by way of the plant engineering related sectors. And in that context, we signed definitive agreements to acquire Citec. Citec signed to buy 100% of Citec who are instead an organization that provides plant engineering-related services. But of course, as an addition to that engineering, consulting, product engineering and technical documentation. Primarily the clients are energy companies and some mining companies, especially on the product side. Why did we do this deal? It helps position Cyient very strongly in plant engineering. Cyient already had a small plant engineering capability. But with the addition of Citec's significant plant engineering capability, which will make us one of the largest independent plant engineering companies. And the sector is growing quite well. And also the next point is, which is very important is, that sector also adopted a number of newer technologies around digital and the digital capabilities, which we've built a lot of good solutions. So it helps us take the solution portfolio of science and the technology portfolio of science into these process industries. It gives us access to multiple global companies in the energy process plant. And also, it's a bridgehead into other process-related industries, such as pharma, food processing, et cetera. And lastly, it also helps to diversify our portfolio of industries. As you know, there's been a few industries which have gone to a bit of cyclicality. And we talked a lot in part about some of the diversification of risk and moving away from this cyclicality. And we believe this gives us a fantastic opportunity to diversify into these plant smart engineering-related industries, which then add to it to some of the capabilities that we've already built in mining, in plant engineering, and also in mining. It creates a very solid portfolio of us. We are calling the customers' MEU, which is mining, energy and utilities which is another big industry. But the MEU sector will be very well positioned for Cyient to be in the market. The key strengths of Citec are the scale in plant engineering. Obviously, there's a lot of energy transition that's going on with the adoption of capability -- or with the -- imperative to move towards more and more clean energy, including hydrogen, biomass. And also, both Citec bring some have very strong capabilities, and we believe that this will position Cyient in a unique manner. And like I said, this will make us one of the largest independent plant-engineering companies, and we're very excited to not just what that market will do, which I'll talk about, but more importantly, how our technology portfolio plays into that market and which should be a game-changer for us. If I can just introduce Citec, and in a few minutes, I'll also then request Johan to talk about it in a little bit more detail. But it's a company that was founded in 1984, headquartered in Vaasa in Finland. That's where a lot of the energy OEMs are. But the capabilities include plant engineering, product engineering. Primarily, we will be then based in the Nordics: Finland, Norway, Sweden. But also we're good -- we'll then get good capability in France and Germany. But I said one of the most benefits of Citec is also more than 50% of their staff is already based in India. So what that does is, Citec already has built the global engineering model and has done it very successfully given that more than 60% -- 50% of their staff is in India so that a company unlike us in very complementary industries. So when we first came across this business, it was a no-brainer, if I may put it that way, for us. And again, I'm very excited to be responsible that now we will work closely and integrate with Citec. There'll be about 500 employees. And in terms of financials, last year's revenue was roughly EUR 610 million (sic) [ $680 million ] with 13% (sic) [ 14% ] EBIT margin. And in a few minutes, again, I'll request Ajay to talk about this in a little bit more details. If we go to the next slide. There are 3 areas that we're again very clear on where we can bring value. The first is what I talked about, plant engineering. Plant engineering is an industry which is where the outsourced addressable spend is almost $2.5 billion growing at 6%. So that makes it quite an exciting market for us. This is obviously -- that's a good growth market. The second piece where I talked about bringing our digital capabilities around the various things that we've built, like as we've talked to you about, the multiple times around asset management, smart plants and so on so forth, smart factories and so on. That's a $3 billion TAM, and that's growing 15% to 20%. So that makes it quite exciting for us. And last piece, Turbomachinery. These are the equipments that includes things like steam turbines, gas turbines, pumps, compressors, which also aligns closely with our more traditional Product Realization business, and we have a number of customers. There's a little bit of an overlap. But thankfully, there's a very good complementary set of customized. But that's the market, as you know, they're quite familiar with, this is the traditional engineering that we've done. And Citec also has a very strong capability there, and that market has grown 3% to 5% about $1.1 billion and actually has a little bit of an extension. Turbomachinery is actually very similar -- I take that back. Turbomachinery is similar to aero engines because both of them are rotating gas turbines. And it again complements very well, and that's why we also see synergy and the ability to move around. But net-net, we believe that this is a market of $6 billion to $7 billion And this is only the engineering for gas power plants and the other areas, not the overall spend, but just an outsourced engineering spend that we can address is about $6.6 billion, growing at 10%. So it's a great market. We have a unique and differentiated capacity. So the future looks quite promising and quite exciting. And we're really looking forward to partner with Citec in this journey. If I may then double-click a little bit into the plant engineering, especially around the power plants. If you look at it, the global install capacity is growing 3% to 3.5% every year, and it's expected to grow. Of course, areas like coal, which is not really a focus area for us, have stagnated. But the 2 areas that are growing quite a bit are obviously the renewables and also the natural gas sector and hydro also to some extent. But these are the 2 areas that are growing. And these are the areas that Citec actually does quite well in. And I want to -- and if we go to the next slide, if you look at the renewables, most renewables, and this is a very interesting thing for us to keep in mind, most renewables actually have a gas backup because as we all know, solar and wind can have a bit of a reliability problem because we don't get 24-hour support out there. So both of these sectors have a gas backup. And that gas backup, which is the core of the turbine that keep backed up both in the equipment and in the plant, is growing at 8.5% CAGR. So we believe that this positions us very, very uniquely in the market because there's not many markets of this size, which grow 8.5% as a market. And Citec has a differentiated position in this market, which is growing at a fairly aggressive pace. So net-net, my point is if we just dig deeper into the whole logic of why we did it, it is a great market. We found ourselves a very good niche position. And that position is actually growing at 8.5%. So it positions us very well in that sector. And of course, there is the adoption of digital, which is growing at 10% to 15% -- or 15% to 20%. And of course, last year with Turbomachinery. So we found ourselves in a very, very nice position at this spot, which we believe will help us grow and achieve good growth into the future. And if I may just take you quickly through the next slide. This is a good summary. We see that in the immediate term, we will do well in the energy and in the marine and mining. In the mid term, we'll then extend into wind and solar in a lot more sustainable manner. And then in the longer term, it will put us in further adjacencies with nuclear turbines, selling parts, selling to customers to all type of strengths. I'm happy to answer questions. But before that, I'll first request Ajay to take us through some of the financials of the transaction. Ajay, over to you.

Thank you very much, Krishna. I'm very, very delighted to report further to what Krishna said in terms of this acquisition. You all have received this weekend about our earnings goes up 40% and also the industry-leading earnings. And some of you also had a concern around the revenue growth. I definitely see that this is a great initiative by us to widen the portfolio and not only have the industry-leading earnings growth, but also get back to the industry-leading revenue growth. In terms of how we specifically impact the details in terms of the financials, we are trying to complete this closing [ briefly ]. That's the most likely scenario fits our team, we should be able to -- we would be able to consolidate it for 11 months in this particular year. And that's how when you look at the numbers, the first column for '23, we have given you the numbers for 11 months, how we'll look like for '23. In terms of growth, first, if we say that we already gave an outlook of 13% to 15% growth for organic. So this is incremental to what we talked to you on the earnings costs. Over and above that, we expect an addition of about this number $83 million to $87 million based on the 11 months financials. In terms of the margin, we are planning to make this as 14% to 16% kind of a margin business. Last 2 years, it has been about 15%. So when you look at the 13% number in Krishna's presentation, that was more of adjusted EBITDA. You see for the last 2 years, we have consistently given about 15%. And the last year number is significantly higher than 15%. But we are looking at 14% to 16%. We also have already embarked all of the initiatives and expansion. Good thing obviously in India is an opportunity for further optioning as well. Right now, we are at a level of 20%, 22% in terms of the offshore revenue. And there are other initiatives that are possible. I'm sure Karthik can address some of them as we proceed into the questions and answers. So we are very confident that unlike in the past, you had a concern that we are compromising on quality of our revenue or the profile of our EBIT. I want to assure to the investors that this was not be diluted to us. Except for the first year, we have to make sure that we make certain investments in upgrading the agency cybersecurity and some of the things that are required in terms of integration of the business. But that, we have to spend some amount. And because of that, there will be a little headwind on the margin for the past. And we've also quantified how much would be the impact of that as we see it right now. It is accretive. We also quantified it for you. This is over and above what we are expecting. I talked to you as part of our outlook. So it's absolutely accretive. And we are looking at -- you are seeing existing [ vintages ] taking about 50% debt to make sure that our belief is in line with our strategy, and there's huge, huge potential for us to make investments. And we're not compromising in any way in terms of the cash and the opportunity to sort of make sure that we have a nice cap budget. So in that perspective, you know all of the acquisitions we have made 50%. Because this also means that we can be financing completely tied in for interest and foreign exchange at rates which are marginally lower than 3%. So it brings down at a cost of capital into the tax liability down and that I have been explaining to all of you time and again. Similar approach we are taking here. And when I say the DLM accretion, the DLM accretion is after taking into account that particular cost of debt. Free cash flow is in line. For the last 2 years, where free cash flow conversion has been 60% on average. The DSO is about 80, 85 days. But we will make sure that we will run a campaign and we'll get in line. That's what we can commit in terms of free cash flow. As you know, this entity will have the benefit of European tax rates does have a little scope for improvement in our ATR based on the proportion of PBT. And we also looked at in terms of a good win-win between the sellers and the buyers to make sure that whatever is our EBIT is accretive and all of our issues are positive on this particular transaction. And this becomes clearly very exciting acquisition for us to widen our base and to deliver you not only industry-leading other growth, but also the industry-leading revenue growth. With this, I will invite Johan to make some comments that he would like to make about Citec. And then, of course, Johan will also be available during the question-and-answer session. So I hand over to you, Johan. And after that, we can take the questions.

Thank you so much. Can you hear me?

Yes, sir. We can hear you.

Very good. Okay. So thank you, and first of all, I want to say that I'm really excited about this journey that we start now together with Cyient, so some huge opportunities there. But I would like to go through with you a few things. One brief update of Citec, what kind of company we are and what we are focusing on. And then the second part is what are the opportunities we from Citec kind of see of this partnering with Cyient. So first, Citec is a multi-disciplined engineering company. And we focus on plant engineering, product engineering. We also have technical documentation and digital solutions. And the majority of our business is in the energy sector, so really strong foothold in this area. And that is interesting because there's so big transition happening in the energy sector with renewables and so forth. Today, we are approximately 1,200 experts. And our offices, we are located in Finland, Sweden, Norway, France, Germany, India. And our head office is in Finland, a smaller town called Vaasa. And we have 2 locations in India, one in Mumbai and the other one in Pune. And our business model that we have, so business model is that we have really strong knowledge competence close to our customers. We have several OEM customers, technology companies and our organization is located very close to the deal to help them with engineering work. And once we have done this understanding packaging, then we do the majority of the work with our experts in India. And what we provide our customers is competence, flexibility and cost efficiency. And this is highly valued from our customers. And this has to be with superior quality. So this is what we do at Citec. And when it comes to second thing, how do I see the future together now with Cyient. As I said I'm truly happy that Citec and Cyient are partnering and started to build the future together. The journey starts now, and we will start to do the planning integration step-by-step going forward. And what's really interesting, what we see the value from Citec side is the big organization, the global organization that Cyient has with over 14,000 experts through the global company. This will help us serve our customers globally. And then the other thing is the strong competence, the strong offerings and especially the digital offerings that Cyient has. This will really give us a new -- the digital offering to a new level to our customers. So I'm really excited about this journey that we are about to start now. So thank you from my side, and over to Krishna.

[Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal Financial Services.

Krishna, I just wanted to start with the revenue expectation for FY '23 from the acquisition. Because if you look at the commentary, which Citec shared in their December filing to European debt exchanges, they were talking about expectation of EUR 100 million revenues. While the numbers which you guys are quoting are giving an impression of the growth being flattish for the next fiscal year. So If you can just help us understand, has there been any change in market view from their end? And also, if you can help clarify the factors which kind of kept them from growing over last 7 to 8 years. The growth -- the company has not seen a meaningful growth over last many years despite a single small acquisition also. So what really is changing in the current environment?

Johan, may I request you to answer the question? I think there's 2 parts of it. One is from your filings in December to now, we are looking at a different growth trajectory because the expectation was EUR 100 million in tax filing. Maybe you could answer that through EBITDA, then move on to the second half.

And Johan, if I can help you, if you look at the numbers that we have given in this presentation, which comes to around -- for 11 months, what we are talking about the number of $83 million to $87 million, which is only for 11 months. And if I take it for 12 months, it will be something like $93 million. Just want to clarify, Johan. This is for 11 months.

Yes. Thank you. Unfortunately, the line is a bit bad, so I did not get all the questions -- didn't hear exactly. So from that perspective, it's very difficult for me to answer. But if I just said that our midterm -- what we have come out is to say that our midterm target is to reach EUR 100 million. And this is what -- on the revenue side. And we are on that path. And I don't see -- there is opportunities and the transition that's happened in Europe in the energy side is something we're really looking into at the moment. So unfortunately, I didn't catch all the questions, so I'm not able to answer more than that.

Yes. That's helpful, Johan. I think just to clarify Johan's point, in fact, guidance that they have given is for the midterm. And to just correlate it to Ajay's numbers, that would be $93 million or so for this year give or take. And I just say that, that will actually be a good growth compared to the previous year. And also the first quarter of the year has gone quite well. So we're quite confident in the number that Ajay talked about. In terms of the second part of your question, I think there's been a lot of focus that Johan and his management team over the last 2 to 3 years have brought in terms of the profitability. If you look at the -- while the growth has been flat from a revenue perspective, from a profitability perspective, we have actually done a fantastic job. And the margins have grown from mid-single digits to almost the 15% number as an EBITDA number. So the focus has really been that. And from our perspective, the good thing has been that, one, is we see the strength of operations now that all the hard work has been done by the team. And the second thing is the growth is on top of a comeback. If you look at the $93 million number compared to the $80-some million number that they would have done last year, that's a quite significant growth. So it's a good point in time for us to have come in.

So Krishna, Ajay, just to clarify the numbers, which the company has reported are in euros and your guidance is in dollars. So EUR 80 million versus an $84 million, $85 million are fairly comparable. I don't think that growth is being factored into your guidance. If you can -- so that was just the point I wanted to highlight. And also if you can just give an overview on how do you see the medium-term EBITDA margin? The company last quarter delivered an EBITDA margin in mid-20s. So is that something which was more of a one-off?

If I can just take that Krishna, see, one, is we have done an extensive sort of due diligence together, including that some of the initiatives take time to pick up. So we will benefit not from the guidance that was given. We have built it from, as Krishna said, from where we have left the year. And what gap you are seeing is more like between the -- I said that the number I'm getting is 11 months if we analyze it and then the gap will be about $20 million, which is the $92 million versus $110 million to date and it's in dollars which Krishna said is for midyear. But I would say that we have done our due diligence. And our business is not quite what guidance has been given. We have used experts. We have used our business team. We have spent a lot of time, a lot of people have long there. So we are very confident of what we are giving as our outlook for the business. And I would not read too much into it, except saying that, that is the ambition and the target they were saying. We as a company at times are willing to commit this number of close to $83 million to $87 million for this year and $100 million plus/minus $2 million for the next year. As far as margin is concerned, yes, I think the last year margin as such you see was 17%. The year before that was also about 15%. And we have also looked that when a smaller company gets integrated into us, we also looked at the B2B perspective, what are the one-offs, for example, given you look at the COVID impact and setting off travel, getting out some space and all that. So I think it is after a lot of due diligence when we say that we can look at a margin of 14% to 16% with one-offs in first year for the investment that we will make in integration. We've done it after a lot of due diligence. I would not go for that dis-integration. I would say we trust our due diligence and this is the outlook that we are giving you.

The next question is from the line of Sandeep S. from Equirus Securities.

Yes, yes. Just wanted to check, when I checked the annual report of Citec, they also have a debt about EUR 27 million on their books. So just wanted to understand whether that debt also being transferred to Cyient books? And over and above that, we will be financing this deal with 50% of the debt. So considering this, EPS operation may be slightly lower.

So I would say that we are very clear as a policy that once we do all the transactions, debt-free cash-free, and if you look at in some way, we are looking at the number that we have given [ from the beginning ] and then we have a debt on that, and we have a cash. So those will be the closing adjustments. As far as the debt is concerned, we are still examining talking to some of the bondholders, talking to their advisers and how we deal with it. And our most likely preference will be to discharge it, they are looking at 2 options, whether we take 50% of that on debt, again, sub 3% or to get through -- just give us some time along with the closing the EBITDA margins.

So is it -- just to clarify, the debt which is currently sitting on Citec's book was EUR 27 million, EUR 28 million will not be transferred to the Cyient book, right? It's...

That is right. It will not be transferred. It will be retired as part of the closing in simultaneous or precondition which we are working. So as and when we have our quarter 1 call, there will be no debt on that particular asset for us. And as I said, some of the details, we are working with them in terms of time line.

So this retirement of debt would be done by the previous management, right?

So we are working on those details. Yes, our condition is that. But if you ask me, in my opinion to -- we are working in a very collaborative spirit. I think we are all making sure. So in principle, it will be retired. It will not come in our books. And we are working together to sort out this target, that's what I can say.

Okay. Okay. And just a second question, Ajay, I just wanted to understand what would be the acquisition amortization of the purchase consideration, what proportion would be allocated towards the acquired intangible and how you will amortize? Any color on that?

So I think the next steps would be that as part of the closing, we have to do that typical asset allocation and proportion of purchase consideration. I don't have that report right now. So we have made some estimates based on our past historical numbers. Give us some time. After we announce the closing and in the quarter 1 call, we can explain to you. Right now, we're doing some estimates based on our historic conditions.

Okay. And just last thing, the acquired company has a healthy EBITDA margin of 18.6%, 18.7% in July '21. So is it fair to say at EBITDA level, this margin is sustainable? Or do you believe this was largely driven through because of the savings in COVID times, which may not repeat going forward starting July '22?

So I would say 2 comments. Yes, I think in near term, we are baking in 14% to 16%. You are right, some of the cost is related to COVID. And we also have to be careful when you are buying a business and it is up for sale, so I would say 14% to 16% of what we are looking at near term. But yes, there could be opportunity during already a footprint into India and can we have that and all. We are looking at that whether we can go back to those levels. But I would say year-end, medium term, for the next 2 years, I would say, the margin of 14% to 16%.

Ajay, I was talking about the EBITDA margin, not the EBIT margin. So what you are talking is 14%, 16%...

Mr. Sandeep, sorry to interrupt. Your voice is breaking up.

I think to Sandeep's point, what I did say, basically, this is the EBIT margin. Now EBITDA you can extrapolate out a bit, obviously, we focus on EBIT more than EBITDA. So we are talking about the EBIT margin.

Mr. Sandeep, you have any other questions?

No actually, I couldn't be able to hear the management what they said in the previous question they replied.

See, what we are saying is that looking at some of the next steps in terms of purchase consideration, which will decide some of the amortization now. Right now, we would be able to say that the 18.6% or whatever you're referring to is not purchasable. 14% to 16% is what we are targeting for year 1 and year 2. And then further, we will work on including the margin. Between EBIT and EBITDA, give us some more time, we will not be able to comment right now.

The next question is from the line of Shradha Agrawal from Asian Markets Securities.

Just wanted to understand how does the volatility in the gas sector impact the financials of the acquired entity?

So I think the way that we've looked at it and the way that we want to set it out is that the projects that Citec works on are quite long term in nature. But that's quite supportive of not just the gas sector, as one of them. But as we talked about, the involving of the renewable energy almost always comes with gas backup. So it's a balance of these 2 things. So while there is going to be -- so that's fine. The second element is also if you look at with all the volatility now, there's a lot of debate in terms of energy transitions, in terms of rebalancing the sector, diversifying the sources -- there's a lot of background. I think whoever needs to be on mute, please. So there is -- all these things start to come in. So taking all that into account, we are quite confident that Citec and of course, then add Cyient with some of the capabilities that we have will become very differentiated player. The second thing is a lot of Citec's capability and expertise is also building -- designing for the building of the plants. We also did some work on the digital aspects and the technology aspects, which is basically around the operations of the plant. And that's where we've built lot of good capabilities. So we believe keeping in line with our design and maintain value chain, it also helps us move across the value chain in terms of providing the operations-related services and solutions. So taking both these take into account, I think we're quite well positioned in terms of how the -- how we can offer these services to the market, notwithstanding the current volatility in some areas of [ demand ].

Right. And can you also talk something about their clients concentration? How many clients do they have? And what does the client obligation look like?

See, the top 5 clients, I think, are about 70% of the revenue, 70%, 75% of the revenue. That's one of the things that we quite like on the business because there are 5 clients who are absolutely strategic clients each from a Cyient perspective. One of them is a common client, but not in a very large matter for us. And therefore, we think that it's a good sort of supplement in terms of how it works. So 5 clients at about 70%, 75%, and we actually make that [ a part of the business ].

And currently, within portfolio, how big is plant engineering for us? And if you could give that...

Well, of these startups, you can talk about our industries.

We do about sub-$10 million in terms of our plant engineering today. And we definitely believe with an additional capabilities that we are getting in and our ability to bring synergy on the digital side of the plant engineering whether it is digital twin or predictive maintenance and our ability to support the plant operations, I think that will help us to address the growth in double digits in the integrated capabilities over the next 3 to 5 years. And also the biggest opportunity that we are looking forward is on the energy transition and which is likely to happen in the next 20 years and to meet the emission standards that have been agreed by most of the countries. And this could mean roughly about 50%, 60% greenhouse gas emission reduction or about $15 trillion spend. So there is a huge CapEx that needs to be spent. And 75% of them has to be on the clean energy. And that's going to be an opportunity that we're really going to bet on for the next 20 years or so.

The next question is from the line of Vikas Ahuja from Antique Stockbroking.

Just one small clarification. If I heard it correctly, did you say that on EBITDA margins, it's -- for FY '23, it's going to be in the range of 14% to 16%? Sorry I missed that part.

So you can refer to the slide. For everybody, it's very clear, if you look at the bottom of the slide, we have said EBIT margin is likely to be 14% to 16%. So we are all -- in all the legislations that we have, we talk about the EBIT margin. Does that clarify?

Okay, okay. And it still be a net profit? In terms of net profit, it's accretive for FY '23?

It is supplied. I don't know if you expect...

I think I might miss the PPT. I joined a bit late.

It is on EPS. I'll read out the numbers, it is accretive by about INR 3 in year 1 and about INR 5 to INR 6 in year 2.

The next question is from the line of [ Saurabh Karani ] from IIFL.

I just had a question on the earn-outs. Are there any earn-outs as part of the transaction, given that's a trend that we've seen in a lot of the recent transactions in the space? If not, then how do you plan to protect future performance as well as senior management retention for this deal?

So there's no earn-out. We're acquiring this company or acquiring the shares from our private equity call it an [ antique ] finished private equity. So obviously, given the nature of the transaction, there is no earn-outs let's say. Of course, from the past perspective, I think one is, therefore, our diligence process was a lot more detailed than what we would normally do, which [ Cyient ] and the Citec management were very helpful with. So that gives us the confidence. And of course, the attractive warranties and insurances and so on and so forth in the offtake that we need to protect ourselves. Of course, the second point, which is I'd say the more important thing, which is the motivation and retention of senior management. We're working with Johan and the team on making sure that we put together an attractive retention package, especially for the key people. And we will do that to work to be -- work our [ science ] retention measures, including ESOPs and RSUs and the first bonuses and so on and so forth. So that's how we plan to protect the leadership that is there. And not just the business leadership but also technical leadership is not something that -- it's very, very unique about our capability that builds the organization to [ is today ].

The next question is from the line of Abhishek Shindadkar from Incred Capital.

Yes. And congratulations on the acquisition. Maybe this question is for Johan, if you can hear us clearly. If you look at the decade performance of this company, media article suggest that this was 1,000 member, EUR 50 million company in 2011, and you had targets to double the revenue in 2015. So if you can just explain what has gone through maybe what was right, something went wrong or anything in terms of what changed during the decade. That is first question. And the second question is on the Citec website, it seems that there is an update that the conditional call to redeem the outstanding bond loan is put up. So this question is, I think to the earlier question again, that are they kind of paying the loan outstanding, which is on the books of Citec?

Johan, are you in a position to answer the first part of the question?

Yes. So can you hear me?

Yes, clear.

Very good. So first of all, yes, Citec acquired the company in 2011. And the size of the company was what it was then and it was a plan to grow the company. But the plan did not really -- maybe they didn't hit the target they set then, and I joined the company in December '17. And I would say that the company, there was a lot of positive things, good customer relationships, good competence in the organization setup. Everything was there. But there were some things that we have to put focus on. It was focusing on increasing control, project delivery control, business control, sales control of this place. And we look on the cost structure to set on a healthy cost structure and then went for a growth. And when we put this systematically in place how the company is healthy, and we are on track as we discussed earlier. Maybe coming to the bond things, I'll give the word over to Krishna.

I think Ajay will answer that.

So again, I would, first of all, say that none of us should be worried about the bond. It's just the issue that we have been discussing as part of the closing the transaction. And everything is agreed both technically as well as in spirit. The issue clearly is that we have to retire this debt has been agreed. We are ready with the funding to retire the debt. Only question is I don't want to pay the debt unless I become the owner. So we have to do it simultaneously or put it in a provision, so some formalities are there. Just to conclude this. I want to give you comfort that as far as we are concerned, we will not have this debt on our books. As far as how do we do it between now and closing the transaction, we are working out those formalities. And I don't see Citec as a risk on those formalities. The cost of debt finally that we will have on our assets is going to be one of the best. Fully tied in for interest and foreign exchange will be less than 3%. These are the 3 comments.

The next question is from the line of Sudhir Guntupalli from Kotak Mahindra.

I think this question was asked in a few different ways earlier. And at least, I am very much confused on this aspect. So just if you can provide further clarity, it will be great. So your press release mentioned that enterprise value of $94 million on a debt-free and cash-free basis. I know that whatever is the closing cash on the balance sheet that belongs to us, subject to the closure. But what I'm trying to understand is what exactly is the consideration that we are paying in whatsoever form and fashion, be it the cash that we are giving to the exiting private equity company or the debt we are retiring? So what is the cost to Cyient to kind of make this acquisition go through? The wording of enterprise value on a debt-free basis is a little confusing. So Ajay, if you can provide clarity on that? That's my first question. In whatsoever common...

Can I take the first one? Can I take the first one? You are concerned. I want to make sure that you're comfortable before we go to the next. As we have said in our stock exchange release, the enterprise value is at [ 6.38 ] right, and that's EUR 94 million, okay? What we are going to pay them in cash is going to be EUR 68 million numbers. We are doing the stock exchange in euros want to be very, very transparent. All this bond will be paid to the bondholders. I already explained about the mechanism. And cash, whatever is there will be retained in the book. Our estimates give us this calculation of EUR 68 million. And so this is the important mechanism. So if you're asking me EUR 68 million is the cash outflow from us to the seller plus taking off the bonds on the balance sheet, which is there. And in terms of the cash, that's the normal adjustment, which is debt, there is no equity. As far as financing of this EUR 94 million is concerned, I already explained. We will do 50-50 or maybe a little higher, looking at some of the consideration to the extent of it. I hope this clarifies.

So you mean to say that the total consideration is EUR 94 million, right? We are not going to pay...

Enterprise value is EUR 94 million cash-free debt-free.

Okay, sir. Let me ask this way. So including everything, in all forms and fashion, our cost to Cyient to make this acquisition go through will not be greater than EUR 94 million?

Yes. that is correct..

Sure. And my second question, if I look at EBIT account sales, EBIT account revenue, this is roughly 1.2x of calendar '21 revenue. Looks like a fairly attractive number, and the seller is a private equity company. So I'm a little surprised as to who exactly is leaving value on the table here? Is it because -- is it the multiple is so attractive because this entity has not seen much of a growth over the previous several years? Or is there something else that we are missing here?

So that's -- honestly, I wouldn't answer that question because we are not the seller. And at the end of the day, we've agreed on a value that makes sense for both of us. And I think it's a value that we feel comfortable in growing the business. And obviously, it's a value that the seller is comfortable in selling. So I think it's -- honestly, I think it's unfair to try to look at who's leaving value on the table because I don't think any deal gets started somebody feels like they are leaving value on the table. So it's a fair value. It's a fair value for if you look at how you guys value us, for example, you set the growth and you set margin and you set predictability and you've given us a value. And we use the same logic and we come up with the value and the seller felt that it was a fair value. So saying that we're leaving or somebody is leaving value on the table is not right.

We take the last question from the line of Sandeep S. from Equirus Securities.

Yes. Just eager to understand the sequence of transactions. So I think in Feb 2021, the parent of Citec has taken 100% control of the company. And now in this April of 2022, we are selling the stake. So just wanted to understand how the valuations have happened in Feb and now as a whole? And why in such a short period of time, we are exiting the 100% value growth.

I don't -- see Sentica has owned Citec since 2011. So that it hasn't been for a year, it's been a 10-year investment for the private equity, so I'm not sure what happened in February. I think we had some...

First of all, I think I would not go into those details. I want to say that this is a very clean transaction. They did have some changes in their parent level structure between financing and equity and bond. But I think in this call for us to discuss how then it will be unfair. And I just want to assure everybody that everything is very, very clean, you should not be worried on any particular [ town ]. We are not burning off that [ town ]. It's just the way they have done the structure of their balance sheet which has been changing between those periods. And it will not be absolutely fair for us to comment on that particular. But we are very comfortable in our due diligence to make sure the way we are acquiring the asset is absolutely clean. We are directly acquiring Citec and Citec is absolutely clean and will be debt-free.

Okay. Okay. And just a second question more on macro. So if I look at the geopolitical issue, which can lead to chain supply issues, especially on gas within Europe as a whole, so in that scenario, is it fair to say there could be more macro issue for this company, Citec, at least, in the next 6 to 12 months? Or do you believe that could be an opportunity for vendor like Citec to convert from gas to other source of power generation as a whole?

I think that's one of the things that was quite attractive. And it's a fair point that the current geopolitics would -- are a big risk, and therefore, we spent a lot of time. I think the couple of things that I think it's an opportunity for Citec because as both the sources of gas are changing and also the energy for the future is changing in Europe, the opportunity for Citec is quite unique in a niche obviously. Also the shortage of a couple of things are going to happen, right? One is that the Russian gas will have to be replaced by other sources of gas. This include -- this will include the need for what's called LNG terminals to be built, for example. LNG terminals are nothing but large caustic plants that have built on the shore to bring gas or new pipelines will have to built versus the ones that they're talking in Southern Europe. So all of these things are actually good opportunities for Citec in the short term. Business -- there is very, very business dependency on Russia or Belarus. There was a little bit of business, but that business obviously has been stopped. Also in the diligence process, we're not a comfort of what the future business could have been, and all this has also been taken off the table. Therefore, if anything, the current business, we're quite confident is going to be well positioned on -- the current business is well positioned. And also in the future looks like with the changes in the sources and also how gas is going to be parceled, et cetera, is a good situation. And the last thing, of course, is there's going to be more hydrogen, biomass, et cetera, given that EU has also declared bolstering to green sources. So all of those bode quite well. So of course, I mean, the risks that exist to be really a force majeure kind of for all of us. I mean it is a real risk if Russia does something more aggressive in Europe, especially in Eastern Europe or Finland, it is a risk. But that's a force majeure risk. And therefore, the Board deliberated on it quite a bit and I think we all agreed that that's [ not existing ] I mean let's face it, if Russia attacks NATO, then it's a much, much, much more significant issue than how the engineering services businesses are going to perform. So we just have to -- I mean, we are aware of it but that wouldn't -- that wouldn't be something that bothered the Board very much.

Fair enough. Congratulations and all the best.

So thank you very much. I think that brings us to the conclusion of the call and just before handing it over to the moderator I'd say, all of you have been very supportive. And I think all of you obviously understand the business quite well. So needless to say, the questions were also very insightful as we reflect back. So thank you for that. I just want to assure everybody that this is a very well thought through acquisition from a strategic perspective, but also equally important, on the diligence that we mentioned and actionable legal, et cetera. And we're really excited to welcome Johan and his team to Cyient. And I can assure you that there's a very, very good growth and exciting times ahead for us. So thank you, and back to you, moderator.

Thank you very much, sir. Ladies and gentlemen, on behalf of Cyient Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.