Cyient Target Price Cut to Rs 850 by Emkay Global Financial

Cyient to Acquire Tao Digital Solutions in USD218 Million Deal

Cyient has entered into a definitive agreement to acquire 100% stake in Tao Digital Solutions for an enterprise valuation of USD218 million. This valuation is equivalent to approximately 9.5 times the company's estimated earnings before interest, taxes, depreciation, and amortization (EBITDA) for CY27, excluding management incentives and retention schemes.

According to the terms of the deal, Cyient will pay approximately 60% of the valuation, or USD130 million, upfront in cash. The remaining amount will be paid in the form of performance-linked earnouts. The company plans to fund the deal primarily through debt, with a significant portion of the debt expected to be serviced by the acquired entity's free cash flow (FCF).

The acquisition is expected to address capability gaps in data engineering and AI applications, enabling Cyient to participate in large, annuity-led tech/data programs and sign large multi-year deals. Additionally, the deal is expected to reduce the company's reliance on project-based revenue streams.

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Cyient's management expects the deal to be accretive to earnings per share (EPS) after accounting for integration and one-time transaction-related costs. The company has not yet factored the deal into its earnings estimates, pending the closure of the transaction. The deal is expected to contribute approximately 12% to the company's revenue run rate, with limited EPS impact.

Recommendations and Outlook

We retain a reduce rating for Cyient, with a target price of Rs850. This valuation is based on a price-to-earnings ratio (PER) of 12 times the company's estimated earnings for March 2028. The company's Digital and Lifecycle Management (DLM) business is valued at a 20% discount to its current market price.

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Note: DET stands for Digital Engineering and Technology, and DLM stands for Digital and Lifecycle Management.