Engineering Service firms script a turnaround after COVID-19 setback

These companies reported significant drop in revenue in the June quarter as their clients’ business in the areas of manufacturing and automotive space came to a standstill when the lockdown was declared.

LTTS was poised to grow in double digits in Q4 FY20, projecting 10 percent growth for the quarter. However, as the pandemic stuck, its revenues came down, and it is now poised for 9-10 percent decline in FY21.

Both KPIT technologies and Hyderabad-based Cyient saw their revenues decrease by over 15 percent year-on-year in the first two quarters for FY21.

But the worst is behind them, say company executives, who are seeing demand come back. The results for the quarter ending December 2020 back their optimism.

LTTS reported 6.8 percent increase in revenue sequentially for Q3 FY21 at $190.1 million as opposed to the 1.5 percent sequential growth it saw in Q2 FY21. KPIT Technologies too grew 6.7 percent sequentially in Q3 compared to the marginal growth it saw in the previous quarter. Cyient grew 4.7 percent quarter-on-quarter in the December 2020 quarter compared to 3.4 percent in Q2.

So, what is driving the growth now?

The growth has come at the back of a couple of factors. Investments are returning, and engineering firms are seeing deal momentum gathering pace.

For instance, LTTS signed its largest ever engineering services deal of $100 million spanning five years with a global oil and gas major in the last quarter for digital transformation.

“In pure engineering, you can't sign a deal like that,” said Deputy CEO, Amit Chadha, during a recent interaction with Moneycontrol. The company is also currently in talks with other companies for deals in the range between $25-50 million.

Kishor Patil, CEO, KPIT Technologies, which registered a nearly 50 percent increase in profits sequentially, said that this rise could be attributed to pent-up demand from previous quarters, and significant deal wins. This includes a strategic pact with the BMW group for the next generation charging programme.

Karthikeyan Natarajan, President & COO, Cyient, said during the earnings call, that the company won large deals in medical technologies and has seen a seven percent year-on-year growth on deal intake. “We are seeing traction across communication, medical devices and some specific pockets in rail transport, semiconductor and DLM. I think those are the areas that we see the potential opportunities for us to scale up,” he added.

These opportunities are driven by investments that the companies are making in digital, medical technologies and in electric vehicles. According to executives, as the momentum in these sectors continue, it will drive growth in the coming months for the firms.

Growth sectors

Patil of KPIT Technologies explained that there is huge focus in the electric vehicles space, especially in the US and Europe. The case in point is the recent push for electric vehicles by the Biden administration. President Joe Biden plans to replace the government vehicle fleet with electric vehicles. This would be the big opportunity for automotive players and in turn, for companies that work with these firms at the software end.

Medical technologies are another huge focus area for all the companies, especially at the back of COVID-19. For most, it was the only sector that grew even as other segments declined. Natarajan of Cyient in an earlier interaction with Moneycontrol, stated that the company is looking to tap into opportunities in the medical devices space. The company clinched a big deal in this area.

According to Chadha of LTTS, “In the medical area, healthcare, and life sciences, we do about $100 million business from that annualised. We expect that to continue to grow for us in the digital area. Then there is emergency usage of various devices and elective surgery coming back, we expect that part to grow as well,” he added.