Cyient

Cyient provides engineering and IT services to clients mainly in developed markets, in areas such as automation, innovation and manufacturing among others. Its core business is engineering research and development, which has plenty in common with the software outsourcing industry. More companies are outsourcing high-end, complex engineering work to places like India, where there is an abundant availability of skilled engineers at comparatively lower costs, benefitting service providers like Cyient. Founded in 1991, Cyient won its first major foreign contract in 1999, worth about US$5.5 million. Its key verticals include transportation, communications and utilities.

Why do we like the investment?

We think Cyient is a good value play in the Indian engineering research and development services sector. Specifically, we like Cyient because of its strong financials – the business is able to generate free cash flow with very healthy yields. Margins have also steadily recovered post Covid, driven by operating leverage, increased offshoring and higher utilisation of capacity.

The company is taking the right steps towards delivering more consistent and profitable growth by focusing on a few key industry segments as well as new leadership and organisational changes. Its venture into the automotive industry is promising, given it is one of the fastest growing verticals for the sector. Consistent performance and delivery leave the door open for significant re-rating potential for the company.

On the leadership front, Cyient hired a new Chief Operating Officer in 2020 who introduced a slew of changes, including some internal restructuring and quarterly reviews for performance accountability. So far, the progress has been encouraging, with order intakes improving towards pre-pandemic levels and reducing the company's reliance on top clients to drive growth. The number of larger accounts won – those in the range of US$1 million-US$20 million – has also gone up steadily, while order inflows continue to look robust, with a generally upbeat outlook across most verticals.

Broadly, firms in this industry are expected to see strong demand due to an accelerated shift towards digital engineering, as the world progressively moves towards smart and connected products. India's share of engineering, research & development offshore penetration is expected to rise over the next decade, playing catch up to IT services where the country is a global leader. Due to talent scarcity globally for niche digital skills, Indian companies are expected to benefit from increased offshoring of projects given its strong engineering talent base.

On the ESG front, there have been concerns over Cyient’s defence-related businesses, but the company has de-emphasised its past work in the defence industry. It has indicated further that it currently does minimal work for the Indian government. While Cyient does not have a formal ESG rating from MSCI, a controversy report from MSCI did not identify any major issues.

Cyient has a dedicated annual sustainability report to showcase the company’s ESG initiatives – the board of directors provides leadership for Cyient’s sustainability agenda and is supported by a committee and a working group that acts as a bridge with the implementation team. For example, in its latest sustainability report, the company disclosed an initiative to install rooftop solar panels at three of its facilities in India. The project resulted in an additional power supply of 400 kilowatts to replace the use of grid electricity.