Ladies and gentlemen, good day, and welcome to the Cyient Limited Q1 FY23 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and anyone who wishes to ask a question may enter star one on their touchtone telephone. To remove yourself from the queue, please enter star two. Please note this call will be for 60 minutes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, MD and CEO of Cyient Limited. Thank you, and over to you, sir.
Thank you very much. Good evening, ladies and gentlemen, and welcome to Cyient Limited's earnings call for the first quarter of financial year 2023. I'm Krishna Bodanapu, Managing Director and Chief Executive Officer of Cyient. Present with me on this call are Mr. Ajay Aggarwal, Executive Director and Chief Financial Officer, and Mr. Karthik Natarajan, Executive Director and Chief Operating Officer. 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 risks and uncertainties. A detailed statement in this regard is available in our investor update, which has been emailed to you and is also posted on our corporate website. This call will be accompanied with an earnings call presentation. Details of the same have been shared with you. With this, let me first take you through the highlights for the quarter.
In Q1 FY23, we posted revenue of $161.6 million, which is a year-on-year growth of 15.8% in constant currency or 12.6% in USD, and quarter-on-quarter growth of 4.4% in constant currency or 3.1% in US dollars. In rupee terms, we posted a quarterly revenue of INR 1,250 crore. This signifies a growth of 18.1% year-on-year or 5.8% quarter-on-quarter. Services revenue stood at $137.1 million, which is a year-on-year growth of 18.7% in constant currency, 15% in US dollars, and a quarter-on-quarter growth of 6.5% in constant currency or 5% in US dollars.
A point to note, inorganic service revenue contributed 2.9% quarter-on-quarter, and we also had a strategic buyout with to onboard a few resources to accelerate ramp-up for a strategic customer, which contributed to about 1.1% quarter-on-quarter. DLM revenue stood at $24.5 million, which is a growth of 1% year-on-year or a degrowth of 6.3% quarter-on-quarter. Group EBIT margin stood at 11.5%, down 164 basis points year-on-year and 298 basis points quarter-on-quarter. PAT stood at INR 116.1 million for the quarter. Again, a marginal growth of 1% year-on-year and a degrowth of 24.7% quarter-on-quarter. Coming to this, the other highlights for the quarter. We're very proud to report that, Dr. B.V.R. Mohan Reddy.
Mohan Reddy, our founder chairman, was inducted into the Geospatial Hall of Fame at the Geospatial World Forum 2022 earlier in the quarter. The Hall of Fame acknowledges the geospatial industry's legends whose passion, vision, knowledge, leadership, and business acumen have brought the power of geospatial and mapping technologies closer to the core of human lives and made a difference. We've also partnered with IIT Hyderabad and WiSig Networks to enable volume production of India's first architected and designed chip, the Koala Narrowband IoT System-on-a-Chip. Narrowband IoT is a 5G technology that enables low bit rate IoT applications with long range and extends battery delivery life by up to 10 years.
As many of you know, the semiconductor design and semiconductor manufacturing is a key imperative for the Indian government, who are also spending a lot of money and providing a lot of incentives. This chip is actually the first example of a fully indigenously developed chip, and now will also be manufactured. We are responsible along with WiSig Networks, which is a part of IIT Hyderabad. I'm also proud to report that the founder chairman, Dr. B.V.R. Mohan Reddy has endowed the BVR Mohan Reddy School of Innovation and Entrepreneurship, which is a first-of-its-kind initiative in collaboration with IIT Hyderabad, aimed to nurture and develop world-class innovation and entrepreneurial talent, especially in light of the country's ambition to become Atmanirbhar Bharat.
It aims to create an enabling ecosystem to help talent spur innovation and nurture business instincts. I'm also excited to have Prabhakar Atla, who joined the leadership team as we continue to strengthen our digital footprint. Prabhakar Atla joins us as the Chief Digital Officer and will be responsible for all our digital offerings, which, as many of you know, are growing at an accelerated pace at this point. We're really excited to have him and a number of new leaders who have joined, which will further accelerate our digital offerings and our digital journey. On the M&A and strategic buyouts, Citec, which is the acquisition that we announced in Finland of a plant engineering company. We're expecting to close the Citec acquisition this quarter.
It has been delayed due to a couple of regulatory issues which will be resolved in the next couple of months. Most of the issues have been resolved. I think there are still two issues which we're quite confident that will be resolved during the course of this quarter. We're excited with this acquisition because it positions Cyient as a leader in plant engineering and product engineering. It also helps us take our plant engineering and digital portfolio to a new set of customers who have extensive manufacturing facilities globally, and includes offerings such as digital twins and so on and so forth. Grit Consulting. We are expanding our science consulting practice with the investment in Grit Consulting.
As some of you probably know, our positioning has been consulting-led, industry-specific, technology solution provider, and this whole consulting-led piece gets further strengthened due to the addition of Grit and the capabilities that Grit Consulting brings to the organization. Grit has deep-rooted expertise in consulting for asset-intensive industries, in which include metals, mining, plant engineering, and again, aligns well with some of the other investments that we're making. Grit has been closed, and some part of Grit's revenue is reflected in the growth of the revenue of this quarter. Celfinet, which is a Portugal-based telecom engineering company which helps communication service providers engineer networks intelligently and smartly, and also connect across the smart infrastructure and enterprise networks.
This significantly actually strengthens our wireless capability, especially for 5G rollouts, and they have some really long-term relationships and some very good customers. This acquisition has closed. There wasn't any element of consolidation because it was closed on the last day of the quarter, so any impact will only be seen in the coming quarter. Lastly, we also completed a strategic buyout to accelerate ramp up for a strategic customer. Just to set this in context, we signed a very large deal with an automotive customer, and this customer will become one of our top five customers in the next 12-24 months. We're obviously quite excited because as we've talked about in the past, automotive is a very important market.
Along with a few smaller customers who are also growing, this is an anchor for us which really changes the dimension and the positioning, more importantly, of our automotive business. There was a lot of work that needed to be done, but the client also had the opportunity to quickly ramp up. We had the opportunity to onboard about 500 resources with very, very similar skill sets. We bought out the company to onboard these 500 resources, which are immediately available for our client. That's not where it stops. It actually is going to be one of our growth drivers even through the rest of the year. It was a good tactical opportunity for us to accelerate ramp up for a very important customer in a very important sector.
I personally am very excited that automotive now becomes a very important sector for us and a very unique growth sector. With this, I'll now hand over the call to Ajay, who will take you through the detailed financial performance for the quarter. Thank you, and over to you, Ajay.
Thank you so much, Krishna. I would say that, you know, as Krishna explained, this has been a quarter where, you know, our strategy of diversifying our portfolio as well as looking at revised capital allocation is really playing out. It is very evident in our growth, and you will see only the part of it has come in the current quarter. With that, let me begin with the numbers. With this, our growth is 18.7% in constant currency year-on-year. In terms of the quarter-on-quarter growth, it is six and a half percent. This includes the contribution that we have got from the investments.
DLM growth is 1%, and group growth and constant currency year-on-year is 15.8%. Since, as Krishna explained, the acquisitions have been taken only for the part of the quarter, two of them, and the other one, that is Celfinet, has only been consolidated into the balance sheet as on 30th June. It will have its impact only in next quarter, that is quarter two. We expect the incremental growth to the base growth of 6%-7% to come for the full year, purely based on the investments and acquisitions that have already been closed during the quarter.
This really helps us. I'll talk a little bit more about it, but this really helps us to build a much wider portfolio and to give higher earnings growth than what we were able to do with this money sitting in our cash. In terms of the hedge book, I'm happy to report that if you look at the right-hand side of the table, while there have been significant volatility, especially in the European currencies, Euro and GBP, which form a significant part of our operations, our forward covers, as you know, we cover at least for one year forward for 70% of our net inflows. There we have a benefit of INR 7- INR 9 even for the next 12 months.
For the current quarter, we have got some good gains from the forward contracts, and we expect the same to continue at the current spot rates. If you look at the current spot rates to our forward cover positions, our benefit for the year will be about $4.6 million. We have looked at the various sensitivity of the exchange rate and how it can change our EPS. In any scenario, the way our forward covers are between the operating profit and the other income, our EPS is absolutely protected. That's the comfort I want to give to all of you. We have made a little bit additional forward cover.
We have taken from 70%-80% for 12 months, and we have also taken 20% for months 13 to 24. We feel that, you know, this has been a very consistent policy that we have been having and has really played out in these volatile times. In terms of the income statement, I think you will see that, you know, our margin is down quarter-on-quarter and our services margin is at 12.8%. We have given the increases during the quarter, and we have provided an extra. There you will see that most of the decline is coming because of the wage impact that we have given in quarter one.
Also, I think we have been building the pipeline of people looking at the anticipated growth which is looking very nice. Due to that, our utilizations, I would say, for the time being are a bit lower compared to what we were internally expecting as well as compared to the last quarter. We feel there is something like 5% which is higher compared to what we had internally set out for ourselves, and that's another 2.5% which we can reverse over the next one and two quarters. Other levers we had talked about of margin improvement. I would say they're really playing out well. We are in pockets able to get the price increases from the customers.
We are focusing a lot in driving the automation in our operations. We are very focused on quality of revenue and revenue mix, and all of them are playing very nicely. Most of the levers are playing to the plan. We are focusing and making sure that, you know, we pay best-in-class salaries and the salary increases, and that has led to a little bit gap. As I said, we are very sure that all the levers that we have set ourselves for will play out in the full year. You will see later that we are confident that, you know, we will get back to the margins in the next three quarters and for the full year what we have committed to ourselves and to all of you.
DLM, EBIT margin, I would caveat, actually if you exclude a one-off it will be more like 7%. We had some error in our accounting, in terms of the inventory valuation in the system that we have corrected. That's why this margin is looking 4.2%. Excluding that one-off, you should read it as 7%. To that extent, there is an impact on this. As I said, you know, I feel very, very good about the capital allocation that has happened with new investments, and we all have been getting 5%-6% return on the cash. Against that, the returns on this new capital allocation is looking very, very good.
In terms of the PAT, I think it's just a flow out of what revenue and growth we have got. Other income has played out well. We have a good increase and a good amount of INR 14 crore that we got from the forward contract gains, which as I said, is sustainable at current spot rates. Our ETR is in expected lines. When you consolidate some of the acquisitions, they are all accretive on our tax rates since we are in Europe and Singapore. It's just that, you know, when you look at the goodwill and some of the transactions, it becomes a little higher. We had talked about a tax rate of 27% for the full year, and we feel confident that we will be at 27%.
We have provided a detailed bridge. I would only like to call out that, you know, in terms of utilization, I've already talked. We continue to make significant investments, and that's what is reflecting in our SG&A spend. Be it driving our five pillars, driving our new organization, driving getting the technology organization investments on technology. That's why you'll find quarter-on-quarter our SG&A is higher, but it is in line with our internal plan. We are very focused that we will not compromise on these investments to build the long-term earnings growth for the company. In terms of cash generation, we have the cash balance position of INR 1,375 crores, which is $174 million, which is a decline of $207 million.
As you know, we have generated a free cash flow. At the same time, we have given the money for the acquisitions. We have continued our same practice of doing one part of the acquisition from our internal accruals, that is the cash available. One part we have taken from the debt, where we have very nice leveraging, at least 2%-3% leveraging between what we get on our treasury income versus what is the cost of that capital since they are all in overseas acquisitions in the same currency, no risk arbitrage of at least 2%. In terms of cash flow conversion, the cash flow conversion is 27% for the growth, 35% of services.
DLM, we did have a little negative free cash flow, but I think we got some of that collection spill over in the first week. We are confident of delivering that 50% free cash flow in DLM. In services, we did have a benefit of the tax refund. Overall, you will find that our DSO have temporarily gone up. But we are very confident as we proceed during the year, we'll bring it back to the normal, and we will deliver the free cash flows that we have, you know, maintained and the norm that we have followed. Some of it fluctuates between the growth years and less growth years.
We'll have a good growth year, but despite that we are confident our conversion will be more than 50%. With this, I hand over to Karthik, who will give us the business update.
Thank you, Ajay. Good day, everyone. To start giving a quick update on the performance. Before that, I want to really give an update on our organization design. We just modified slightly, and we are focusing on the same ten segments like we have been doing earlier. We try to consolidate them under some buckets based on both organic as well as the inorganic growth that we have planned for this year. I think we hope this structure will help us to sharpen the focus and also better integration and synergy that we have planned out for this year. To strengthen this, we have also added customer success, partners and which will bring focus on our top hundred customers and which will really create, long-term customer relationships, increasing the win rate and driving large deals.
As Ajay said, we continue to focus on the five pillars. We call them as tech stack of Cyient, and we are making our investments in this area. We expect our five pillars to grow at more than 25% through this year, and we have seen a growth of about 17% in Q1, and we expect this to accelerate during the course of this year. Also driving the order intake on growth offerings, collaborating with CTO office. We have formalized the CTO office along with focus investment in building solutions for the future. I'll cover that in the next few slides. If you go down to the next level in terms of as per the new structure, we'll also give you a reference for you with the old structure.
What we have seen now in Q1 of fiscal 2023 and ARC, which is Aero, Rail and Comms, they have grown by 2.5% quarter-on-quarter. These are all in USD terms and 5.6% year-on-year. I think the growth is predominantly led by communications. The interesting thing is aerospace did join the party for growth, but it is not growing at a pace that we really expect it to be. Probably the recovery would happen over the next 12-18 months, as shared by various analysts. Rail transportation has seen a dip. This is essentially led by the mergers and acquisitions and the consolidation of their products and services, and also increased offshoring and forex. That has impacted in terms of growth.
We have anticipated this, and we hope this to reverse by H2 of this year. Mining energy and utilities, and this is led by the degrowth that has happened on the utilities business and, where some of the contracts which ended in Q4 and we have not been able to replace them fast enough, and we hope this should start getting to the recovery path in H2. The new growth areas which we talked about as semiconductors, medical devices, automotive and mobility and high tech, and they've grown by 3.6% with 23.6% year-on-year growth. DLM, which we again anticipated this earlier and which has shown a -6.3% growth in QOQ and 1% year-on-year.
At the group level and 3.1% QoQ and 12.6% year-on-year in the USD terms. We also, if you look at the order intake and if you take the view year-on-year, I think the services order intake is up by 17.8%. This gives the confidence that I think we have the growth trajectory for the year, and we have taken it well to make sure that we capture this. Also this is the largest TCV that we have done in the last many years. We have closed six large deals of $424 million. We are very excited about the opportunities to expand with many of our existing clients.
Deeper penetration of our existing clients is going to be critical and focus on top 10, 20, 30, 50 and 100 clients is where we are really trying to maximize what we can do in terms of adding value to them. Go to the next slide. This gives a comparison with the structure that we had earlier. I think everything remains the same except you will see some breakdown on utilities which shows minus 16% degrowth as compared to last quarter. This was due to the project closure I talked about. If you really take a broader view on the industries and look at the aerospace, the global travel is estimated to pick up maybe during later part of this year, while pandemic is not the issue anymore.
The oil prices and, logistics and the labor availability for crew as well as, on the ground, staff support, I think all of them are still not bringing the demand to the level of pre-pandemic. Also some of the specific issues with, North American, Aero OEM, I think that continues to struggle. Any ecosystem players connected to them will have a challenge on the recovery for, few more quarters. At the same time, we are seeing some new, green shoots in the form of, electrification, hybrid or urban air mobility and space and defense. I think this area continues to see a growth. We have added about two new logos in the urban air mobility space, and we are very excited about the opportunities that we are likely to see in this, domain.
Rail, as I talked about the challenges on offshoring and the consolidation of vendors that continues, and we are likely to see the benefit over a period of time. At the same time, we are also expanding into some of the newer areas on rail signaling, embedded and digital transformation across products and factories. Communication, which has seen the strongest growth, and we are very bullish on what is likely to be seen for the remainder of the year. This is led by the network transformation and modernization in the areas of fiber rollout or wireless and 5G. The unique capabilities that we added through Celfinet, which is on the wireless network transformation, is going to help us to really capitalize on the growth from our existing customers too. We also strengthened our private wireless capabilities.
This is also helping us from taking the communication practice to the enterprises like mining and manufacturing and other segments. DLM, we won the largest ever multi-year deal in aerospace, and we are very excited about what we announced a few days ago for the Farnborough Airshow. This is to build a digital cockpit for avionics, and this is for a general aviation and business aviation aircraft system. This gives us confidence to expand, to build this kind of relationship with many of our existing customers, which can really give us the scale over a period of time. While the supply side challenges persist in terms of semiconductor to electronic component availability, the outlook looks strong. Going on the mining energy and utilities, I think mining, this is, the growth is led by couple of things.
One is the regulatory, which is driving sustainable mining or responsible mining, and along with the energy transition. If you look at any of the renewable or clean energy sources, they would require minerals like copper, nickel and other new materials. This is where the mining is likely to see a significant growth, and we are continuing to build momentum on that. Grit Consulting that we added last quarter is going to be another addition to strengthen our growth in this area. Energy and utilities, the focus again is on clean energy and the integration of multiple energy sources. How do you think they can drive the grid modernization, enterprise asset management, and finally leading to the decarbonization of the world?
Many of our customers have committed to bring this by 2040 to 2050, and that is driving significant amount of digital transformation opportunities that we are going to participate in. We expect a recovery on the utilities business by H2 of this financial year. Automotive and mobility, and following on what Krishna talked about, I think the sector is definitely poised for growth this year and enabled by connectivity, improved safety, electrification and customer experience. With our expertise, we are very confident that we can really listen to the demand that is coming on the entertainment and connected and data areas. Healthcare and life sciences. This is another interesting customer that we added.
On the life sciences side, this is a new line of business for us, and we believe we have a unique proposition to offer in the convergence of medical device, healthcare and life sciences. We are also providing the quality and regulatory services at scale. Our differentiation comes through the digitalization, telemedicine, remote patient monitoring and software-defined medical products. We are working with some of the customers in defining the future of how the medical products are not going to be led by hardware, but are going to be led by software. High tech. This is the business we were calling earlier as the geospatial, and we really want to bring the focus on bringing the offering of digital and technology solutions to tech companies and to drive both location-based services as well as the digital services.
We are trying to take this offering across many of our enterprise customers like mining and communications, automotive and utilities. Semiconductor, which though it continues to see supply chain issues on the manufacturing side, but the R&D demand looks robust and enabled by the edge analytics, 5G and IoT. Krishna talked about one of the recognition that we received last quarter for designing the first narrowband IoT design from India. I think we are really proud of what we have achieved in this segment, and we are really seeing that significant opportunities are up for us in terms of silicon design for automotive and industrial applications.
As we go to the next slide, this is where we are really trying to create the future for ourselves, and we are calling them as intelligent connected products, autonomous systems and processes and how do we drive the next gen of hyperconnectivity and sustainability, digital platforms and customer experience. Various solutions that you are seeing on the right side, and I just picked some of them, like the single board computing platform. This is for a medical device customers, where we are trying to create a scalable, low-cost hardware platform and can be really define the software which can be configurable to really meet various variants that are required to be built up. We are trying to create these platforms to really reduce time to market and really help the customer to innovate faster.
Similarly, we are working on some of the improved ADAS and safety, and this is for a construction and mining customer. We are trying to really integrate some of the camera and LiDAR sensors and to really help improving the safety of operations. This is something which is a very unique capability that we built over the last many months, and we are trying to scale some of these areas. Also getting on to sustainability. This is an interesting project which is on battery energy storage system modular package system. This is going to help in terms of decarbonization as well as the carbon sequestration. Some of these technologies really help us to build a greener planet.
We are seeing the growth in some of these areas are really happening as we speak. We are confident that the sustainability as an initiative is at least a two-decade opportunity in terms of how this is going to pan out, both on electrification as well as a clean energy sources that are going to get integrated into the utility segment. With that, I will hand over this back to the operator. Sorry. Krishna?
I'll quickly take you to the outlook for the next year. Last year we gave the outlook.
Sir, sorry, sir, to interrupt you. The audio is not clear.
Oh, sorry. I'm sorry the mic was not on. I'll repeat that. I'll take you through the outlook for FY 2023. Largely the outlook has not changed. From a revenue perspective, we believe we will grow in the range of 13%-15% in constant currency for the group. Of course, this is the organic number, so it doesn't include any of the inorganic that has happened. We have visibility for a high single-digit growth in DLM due to supply chain supply-side challenges. So that continues. We'll at least get to the high single digits.
We'll add another 6%-7% due to the acquisitions that we've already announced, that is Grit and Celfinet. This does not take into account Citec because it's not closed, we're still not commenting on it. If or when Citec happens and depending on the timing, obviously, it'll add a bit more to that growth. 13%-15% in constant currency organically, another 6%-7% based on current acquisitions, plus whatever we get due to the other acquisitions. On margins, we expect EBIT to be in the 13%-14% range. As Ajay had explained in some detail, margins did fall in Q1, but there is a clear line of sight of how we will recover.
It was a quarter of salary increases, and the recovery has also started to happen as we see some of the costs and how they're playing out. ETR or the effective tax rate will be around 27%, and free cash flow will be in line with what we typically have done in the previous years. With that, I will hand it over to the moderator to curate questions, please.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets for asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Anyone who wish to ask a question may please press star and one. The first question is from the line of Sulabh from Morgan Stanley. Please go ahead.
Yeah, hi. Thanks for the opportunity. Am I audible?
Yes, you are.
Just a clarification to begin with on the revenue guidance bit. This strategic buyout of Celfinet, is that included in the 13%-15% organic guidance or the 6%-7% inorganic one?
No, it would be on the inorganic one. It's not in the organic guidance.
Sure, sure. Thank you. On the utilization front, what led to that drop this quarter, given that, you know, it has come in as a negative surprise for us? Because employee addition is something or the capacity building is something that you would have largely known at that point in time at the beginning of the quarter.
Mr. Karthik Natarajan, do you wanna?
Yeah, thanks, Sulabh, for the question. I think this is build out that we have been planning out for the last two, three quarters. It is important for us to continue to invest on some of the technology solutions area, one. Two, we also need to build the talent pool that is required for the next six to nine months. We started putting a lot of combination of freshers as well as laterals on the skills that we want to really build up. There is a skill building exercise that is happening as we speak, and that has created pool of engineers that are ready to be deployed partly in Q2 and partly in Q3.
This is a situation we really want to get to maybe a quarter ago, and we are able to really have this pool of engineers ready to be deployed this and next quarter.
Okay. And then, on the margins bit for Ajay. Ajay, given the margins that you reported this quarter versus the guidance that you have on the margins, the aspiration to deliver those margins looks quite steep from here on. Just trying to understand how you plan to get there, given there's a component of wage hike which is coming in 2Q again. What are the near-term levers that you see, you know, that are there in the vicinity which can remove some of these headwinds that are there?
Yes, please. I would say that, you know, if you look at what has happened during the quarter, and what levers we had talked about both internally and to you, in terms of, you know, what will drive the margin improvement, absolutely, I think there is a headwind from the wage hike. It will continue in quarter two as well as in quarter three. We are giving the wage hike, spread over the three quarters. The largest part of it has come in quarter one, and rest of it will come in quarter two and quarter three. In terms of the levers, if you see that, you know, one is that the biggest one that we are looking at is some of this inflation.
We have also been talking about passing on some of this to the customers in terms of pricing. We have been also talking about the change request and some of those recoveries from the customers. That's one area which you will see will play out. We have a plan for the full year. It has played to the plan for quarter one, and it'll also play to the plan for the next three quarters. Second is bucket is again, you know, when you look at our growth, what we are talking about is looking at, you know, not taking business at very low margin or which doesn't make sense. So SG&A, if you see, in this quarter has also given us about 50 basis points, and we have a plan for the full year.
We do see a good amount of tail of business with focus on more profitable growth that we can let go of. Automation I talked about. It is spread over the full year. You will see that, you know, we will do that as per the plan for the full year. Utilization is one. We have got temporary sort of headwind.
It will also play out in the rest of the year. I think these are some of the things that we are doing to make sure that, you know, we come back for the year as a whole to 13%-14% of the margin that we had said. Yes, it will have a steep ask in the next, especially in quarter three, quarter four. Some of those margins, especially for services, we have done in the past. We can come back to those levels.
Sure, Ajay. On the last bit from my side is on the M&A strategy. Given that we've done three acquisitions and then one buyout in recent times, how are we thinking about this going forward? Do we have more targets that are there in the pipeline that we are evaluating or more gaps that we are looking to fill in the next six to 12 months?
I think, practically, if you look at it, we also have to look at the bandwidth considerations, et cetera. We'll definitely pause a little bit because these three have to be integrated. I think the strategic buyout is fairly straightforward. There isn't too much of a challenge or an integration imperative there. With the others, they have to be integrated, and we really have to start seeing the benefits of synergy. The intent is still there. The areas of focus are still there. The pipeline is now in an early stage, given that how much we've spent both from a time and effort on these three. We're still in an early stage. Some of the tactical deals will continue.
There are some tactical gaps that we'll wish to fill, and we're also having some conversations that are fairly advanced stage, especially on these tactical gaps. In terms of the larger strategic M&A, I think just looking at where things stand, it'll probably be only towards the very end of the year or early next year, just looking at the pipeline, et cetera. We're still focused. We're still gonna build out the pipeline, but just practicality and executability means that it'll be end of the later this year, but most likely early next year on.
Sure. Thanks for taking my questions.
Thank you. The next question is from the line of Shradha from Asian Markets Securities. Please go ahead.
Yeah. Hello, can you hear me?
Yes. Please go ahead. We can hear you.
Yeah. Hi. Just one clarification, the margin guidance of 13%-14%, this is organic margin guidance, or does it also include the impact of consolidations of acquisitions?
This is organic margin guidance, but I'll also say that the acquired entities also have a very similar margin profile in a consolidated manner. The outlook that we talked about is organic.
Sir, because Grit Consulting, if I recall, is a very high margin business and so is Celfinet at 20% EBIT margin. From that perspective, the consolidated margin profile should ideally look better.
See, I would say that, you know, there are two parts. If you look at from the perspective of the businesses as we acquired them, they have been accretive. Then we have to also look at, we have done the purchase price allocation, and some of that will have to be, you know, depending on how much has gone to the intangibles. This exercise happens subsequent to when we talk about the announcement or closure of transactions where we have to also take D&A. Our rough estimate is that, you know, we will be at similar margins for the company. Good news is we don't expect any dilution on the margins. Also in the first year, we are also seeing there are integration expenses. We find people have not taken proper software licenses.
There is not enough work done in terms of, you know, some of these simple things like certifications for the customers and all. We have seen that, you know, there is a good investment. I would say that, you know, we would see that, you know, it will not drag the margin. That's what I would say, Shraddha.
Yeah, sure. Sir, as of quarter-end balance sheet, we've already made the payments against Grit and Celfinet. Is that right?
As far as Celfinet and Grit, yes.
Was there any payments involved around this strategic buyout also?
Yes, there was a payment involved. We had acquired the people, and we had made a payment towards that acquisition of hiring. Yes.
What is the potential size of this particular buyout deal? I mean, how big can this particular deal ramp up be over the next six, 12, 24 months?
I think the buyout is a part of a much bigger deal that we have going on. Like I said, overall the customer has the potential to be a top five customer. Not just potential, we have a high degree of confidence that it will be a top five customer within the next 24 months. Actually, probably even quicker, next 12 months. The buyout is only one part because it helped us ramp up in the initial phase quickly, but there's still a significant amount of demand and momentum for ramp up, which continues over there.
Sir, it took over the offshore employees of this particular client?
Sorry, say that again.
I mean.
Yes. Yes, that is right.
Sir, can you quantify the amount paid on account of these two acquisitions in this quarter? Because I think there's some contingent-based payment also on these acquisitions. What was the amount paid out this quarter?
Do we have that number? We'll get back to you on that number.
Sure. Sir, on DLM, you said that there was some accounting mistake, which was, which is the reason why we had to book one-time expense. How do we see the visibility of margins in DLM business going ahead? Also if you can talk about the single, high single digit growth expected in DLM, how confident are we on that number, given that we've started DLM on a very soft note in this quarter?
As far as margin is concerned, maybe I'll take that and maybe Karthik or Krishna can talk about the growth. As I said, you know, excluding that one-off, the margin is 7%. That's what we expect for H1. For H2, we are still working out, but what it shows us is it could be marginally better than that for H2. Maybe, Karthik, you wanna talk about the growth?
I'll just add to what Ajay said. I think the supply side issues are not going away. I think we are still trying to deal with them. Hope by end of Q2 or early Q3 it gets better. We are still keeping our guidance and hoping that H2 will be better off than H1. On the margin side, we are still trying to look at anywhere between 7%-9% on EBITDA for the DLM business for the full year.
Sure. That's it. Thank you. Before we take the next question, I'd like to remind the participant to limit their question to two per participant. If time permits, you may join the queue for any follow-up. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Sir, two questions. First one on DLM. Like, is there a change in outlook from last quarter versus this time? Because I think this time you are saying more towards 10%, and earlier it was little towards mid-single digit kind of a growth. That was one. Second, when you've given the outlook and you've already mentioned that on the M&A side you have taken a pause for a few months, this auto deal that you have done, now, this involves moving people, and you said there's a bigger plan or bigger deal because this customer can potentially come in. If you could give some color on what is included in this particular quarter that you've just reported, and is it done for the full quarter, for half quarter?
How should we estimate from the next quarter onwards, what kind of revenue contribution can it have on your numbers?
On the first one, I don't think there's a change. I mean, there might be a percentage or two here or there in the outlook on growth from DLM, but overall, I think from the commentary perspective, I don't believe that there's a change in what we're saying with DLM. Anyway, I mean, it's either high or mid at, which means it's a couple of percentage here or there, but that's the range anyway that we will take.
Okay.
Now, in terms of this wider deal, the deal that we signed is actually an MSA that we signed with a large automotive player. After we signed the deal, you know, the demand was quite immediate, and therefore we went and found, you know, the opportunity to onboard a number of resources, about 500 resources, which we were extremely fortunate about to come across and quite smart about to act very quickly and get these resources because there was an alignment in the skills that the customer wants. Now, any growth that is coming on further, leaving the 500 resources, is one, you know, that should remain where it is, et cetera.
The MSA is for a much larger set of services and capabilities, and therefore, when we talk about the growth aspirations for Cyient, that is covered in the or one of the assumptions. Obviously, there's a number of assumptions of which customers, which industries, et cetera. One of the assumptions is that this automotive player will also grow quite significantly.
This 500-
Yeah.
The ramp-up is complete. Like, you have taken full three-month revenue for the acquisition or for the buying that you've done?
No, no, we haven't taken three months revenue. We've probably taken. Can you say that?
That's okay.
We've taken part of the quarter. We can, Mayur can give you more details when required. We've only taken part of the quarter. See, there's two elements. One is, yes, this will ramp up, but this is just the core staff. The growth will come on top of that.
Understood. Now that you have only taken people, how do we take into account attrition? Because I'm not very sure what kind of attrition these guys would run. The payment of around INR 85 crore or whatever you have done, it is essentially for the people transfer, or is there a commitment that these guys will stay or is there an element of committed salaries, et cetera, just to ensure that these guys stay with Cyient? What is the plan on that side?
No, I think that, you know, there are commitments in terms of the people continuity, etc. It's not just to transfer one time. There are commitments on people continuity. The business commitment comes because of the larger MSA. It's not that because of the contract we got any business commitment. The business commitment is part of the MSA really that we have.
Okay. All right, sir. Thank you, and all the best.
Thank you. The next question is from the line of Akshat Mehta from Sameeksha Capital. Please go ahead.
Hello. Thank you for the opportunity. Am I audible?
Yes, please.
Yes, please sir.
My first question would be on the recent Honeywell partnership that you have done. You know, what would be the, you know, deal?
We're not disclosing the contract value. It is a very long-term contract. It goes into obviously multiple tens, if not even hundreds, of millions of dollars. It's a very large contract. Unfortunately, we can't disclose the value because of some of the non-disclosures that we have with the customer.
Okay. My second question is on the line of the recent acquisitions that you've done, Grit and Celfinet. Can you give some quantification on the integration cost that will arise on account of the two? You know, maybe as a percentage of sales or, you know, an absolute amount, something.
See, what we do is if you look at in terms of our total investment that is there during the quarter, we have about INR 406.3 million total investment, INR 406 crore. This involves the payouts for Celfinet, this particular people that we acquired, and also for Grit of about INR 390 crores. We also have the another earn-out that has been accounted in the investments for one of the earlier acquisitions. That's how this is INR 406 crores. When we account for these investments, we don't take the integration costs. What we are taking as the integration cost is
Gold and other segments.
Yeah. Sorry, I'm not able to hear you properly.
That number adds up to 70.
Hello? Hello?
Moderator, there is a problem on echo.
Mr. Mehta requests you to use the handset mode, please. If you're using earpiece, requests you to use the handset mode.
Yeah, sure.
We can hear you clearly. Yes.
Yeah. Is it clear now?
Yes, Akshat. I was saying that, you know, I disclosed the amount that are taken as investments during the quarter. I was saying the integration cost is taken as part of the profit and loss account. Typically 3%-5% of revenue is what we have seen comes out as one-time expenses, right? For a typical every $10 million, you will spend about $350,000. That's what is the rough estimate that we have seen on these integration costs.
Okay. Last question from my side. You know, can you give some color on, you know, why the Citec acquisition, you know, kind of has been pushed ahead by, you know, another, you know, three, four, five months?
There's an RBI approval that is required because of their India presence. They also are fairly sizable India operation, which is where a good part of the value resides. There's just a procedural issue. We've been quite assured that there's nothing of a challenge, but there's a procedural issue, and it'll take, you know, as you know, with some of these, it's also not a huge priority for us to overtly, or it's not a huge issue where we want to escalate and push. I mean, it's a priority to get it closed, but not so serious that we wanna escalate, and that's why we're just letting it take its course of time. I mean, we have some really good advisors, bankers, everybody is very confident.
It's the issue with their India subsidiary having some filings which are maybe not very up to date.
Can you provide some numbers on what has been the performance in Q1 for Cyient, or you can't disclose that?
We can't disclose that. I'll just say that.
We had referred, if you look at when we had announced the transaction, the signing of the SPA, we had given the run rates of revenue. It was about-
That will continue because that was for 11 months of consolidation, so that will continue linearly, right? Is what you're saying.
Yes. That's right. $20 million top line is the kind of, you know, take, you know, I'm just giving you the order of magnitude. Top line is about $20 million per quarter, and this is more of after taking into account the integration cost and everything. For the first year, it's more like 10%-11% kind of EBIT business. In steady state, it's again at the company average.
If you wish, you can also. Citec has a bond that's traded in the public market, so they disclose their numbers on their website, so you can look at that if you wish.
Thank you. Mr. Mehta requests you to join the queue for any follow-ups. We'll take the next question from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.
Hi. Thanks for the opportunity and congrats on a good quarter. Just wanted to understand, you know, given that there are three moving parts in terms of acquisition, contribution coming in, I know you have given a percentage number, but can you just give any color in terms of, you know, the growth rates, for those three, larger pieces? Because it seems like Grit is growing 21%, 20-odd%, versus, you know, almost a 100%+ growth in the previous year, as per the filings. Similarly, if you can just give a color on-
Sorry to interrupt. May I request you to, you know, speak from a little farther away from the mic?
Okay. Is this better?
Yes.
If you know, not repeating the entire question, if you can just give us the color of the three acquisitions in terms of growth and to the earlier question on the margins, I guess we thought that, you know, all these three acquisitions are running in plus of, you know, 25% EBIT margin. When we probably would integrate them, are we being a little conservative while guiding, you know, the company average margins given the benefit these three acquisitions could bring in at the control level?
From a margin perspective, I'd say the three of them are running at a higher than company average. We also have a Citec, which is where a lot of the volume will come from, which will be slightly lower than the company average, at least in year one. The second thing is there are also integration costs which we have to take into account because of IT systems and various other things. That's why I say we're being a bit prudent on the commentary. We'll have to see how it all plays out because in our experience, you know, when we typically.
Even when we paid the consideration for these companies, we have taken a bit of adjustment in margins because, you know, when they run as independent companies versus when they're a part of Cyient because of, you know, all the overheads that go into a business like Cyient, there will be a dip in margin. We're just being prudent. Of course, as things evolve, you will see a better highlight of that.
Thanks. That's
There was another part of the question which I missed.
You were talking about the growth rates in the earlier acquisitions. Maybe give us some time. I think we have given you a color about what happens this year. Give us some time as we proceed on the earnings call, we integrate them. I think we'll be better placed to talk about those growth rates. As Krishna said, right now the mind is on integration and taking stock, understanding them. I think it'll be a little early to talk about those growth rates, but we promise you we'll come back in the coming earnings present earning calls and talk about their growth rates.
Okay, that's helpful. Krishna, just one clarification. In the, you know, Citec acquisition, call that we did, probably I recollect we had highlighted that the margins of Citec business have grown from mid-single digits to almost, you know, 25 or 30% EBITDA. Is that understanding right? Or maybe there is a, you know, change in that number or the understanding is absolutely wrong. The second is,
They have been doing about 13%-15% kind of EBITDA at their levels. We said after taking into account the integration costs and other things, we will be 10%-11% in the first year. Then going forward, we will be improving that. That's what, yeah.
That's what it is.
Okay. Just a last clarification.
If you look at their numbers and they are in line with these numbers, yeah.
Okay. Just a last clarification in terms of the impact of amortization. Ajay Aggarwal sir, would you like to just give a number in terms of what could be the total impact at the D&A line?
Maybe we can come back to you, but broadly what we have seen is that if you look at, you know, our current EPS, if I include what numbers we had given you for Citec as well, when we had that call. Roughly I would say if you look at our base EPS of the last year and you look at the earnings growth, it you know at the full year operation for the next year, roughly we are looking at, you know, something like 25% kind of an increase in EPS, if all these get consolidated into the results and run at full year level run rate. That's what we have in terms of the impact of these.
In terms of D&A, maybe we can come back because each has a different purchase price allocation and different computation. I don't have a thumb rule because depending on, you know, the asset type, there's a different allocation that happens between goodwill and intangibles.
Great. Thank you for taking my question and best wishes for the rest of the year.
Thank you.
Thank you. Ladies and gentlemen, due to time constraints, that would be our last question for today. I now hand the conference back to Mr. Krishna Bodanapu for closing comments. Thank you and over to you, sir.
Thank you very much and thank you everybody for joining. As you can see, it's been a very interesting quarter. I think, organic performance has been in line with what we expected. Now the real opportunity for acceleration for us is both organic performance will continue to remain quite strong, including on revenue growth and margins. Also inorganic has started to kick in, and we believe that will also provide a fairly significant acceleration. We're quite excited. I think, the road ahead of us now looks quite a little bit clearer than what it was maybe 12, 24 months ago.
We're very excited that we have a very robust strategy that we can execute on and that we are gonna be able to execute on this over the course of the next coming quarters. Thank you very much for the support. Thanks for the questions. Of course, as always, if there's any follow-on questions then Mayur Maniyar is always available to answer these questions. Please do reach out to him and if required, one of us will also chip in as and when appropriate. With that, thank you very much. Have a good evening and we'll speak again next quarter.
Thank you very much. Ladies and gentlemen, on behalf of Cyient Limited, that concludes this conference. Thank you all for joining us and you may now disconnect your lines.