Generative AI is hyped, yet to come in a big fashion in engineering services: Cyient MD Krishna Bodanapu

Cyient executive vice chairman and managing director Krishna Bodanapu

Generative AI is very hyped at the moment and is only a back-office enabler that cannot replace engineering services, said Cyient’s executive vice chairman and managing director Krishna Bodanapu, even as the company’s IT services counterparts are betting big on the disruption expected by the technology.

While there are some definitive use cases like scanning technical and engineering data at the back end, automating and improving productivity in these tasks by 40-50 percent, generative AI is yet to make a major mark in the industry, he said.

Speaking to Moneycontrol, Bodanapu said, “When Microsoft released its GenAI, everybody thought that they were done for and now the world is going to be run by Microsoft. But honestly, in the last year, nothing's really changed. I mean, GenAI is great if you want to ask for restaurant recommendations, but beyond that, I would be a lot more cautious.”

“In ERD (engineering, research and development), I don't think Gen AI is going to come in any major fashion yet. When I talk about a technician looking at data, it is engineering data. So it becomes an enabler, not the core business… There are some great use cases, but I think people sometimes get ahead of themselves, taking those use cases as a proof point and extrapolating it irrationally,” he added.

On the business front, Cyient reported $214.9 million in quarterly revenue, growing 22.3 percent year-on-year in constant currency terms, as of the second quarter ended September 30. Nearly 80 percent of its revenue comes from its digital engineering and technology business.

The company has continued to see a slowdown in quarterly deal wins or order intake, which Bodanapu attributed to the seasonality and cyclical nature of the business, expecting a better deal pipeline in Q3 and Q4.

Bodanapu shared that the company is on track to touch $1 billion in revenue by FY25. Earlier, Cyient was aiming to achieve this target by FY24.

Currently, Cyient is one of the mid-tier companies outperforming its large-cap IT services peers in the stock market. Bodanapu credits this to the opportunities the company got during the Covid years to “rebalance its portfolio” and rethink heavy dependency on certain segments like aerospace which accounted for nearly 45 percent of its business. The company has worked on improving its margins and efficiency too.

Cyient even demerged its design-led manufacturing (DLM) business and got it listed in 2023.

Technology spends increasing

Unlike the tepid and cautious outlook on technology spending in the IT services sector amidst macroeconomic uncertainties, its engineering services or ERD business is seeing a contrasting trend of spending continuing to increase.

Moneycontrol had earlier reported that this trend is also because clients are looking to cut down on expenses and workforce sizes, and are now more open to outsourcing some part of engineering services externally. Till date, customers would outsource only about 5 percent of their ERD needs, giving the sector a headroom of growth to, say, 10 percent.

Moreover, the engineering services sector is poised to grow by 10-12 percent in India over the next five years.

Bodanapu said, “Tech budgets are only increasing. So the budget for design, development, and R&D engineering is increasing, and it's actually getting quite interesting. IT budgets are pretty much flat, because there is a fairly significant shift that's going on with things becoming more SaaS-led, pay as you use in model.”

“Software is becoming more and more important in the budget for doing testing, integration, validation, etc. In that sense, the deal size and deal longevity is also increasing as engineering outsourcing has become important to how customers manage their product,” he added.

Right now, Cyient’s deal demand is driven by the aerospace, sustainability (including oil and gas, energy and nuclear, diesel segments), automotive and, in parts, healthcare segments. Communications, which was strong in the recent past, is expected to recover by Q4 onwards, as the capex cycle of these customers are still slow amidst high-interest rates.

“Our balanced portfolio I think has been our biggest achievement in the last three to four years because we wanted to strengthen the sustainability portion of our business, which is worked out very well for us,” Bodanapu said.

Cyient DLM’s long-term strategy

Cyient DLM too has turned out to be quite a success. Bodanapu said this was on account of the current market opportunity culminating in India becoming more open as a market, pushing for electronics design and manufacturing domestically coupled with the ongoing geopolitical shift with companies looking at a China plus one strategy. Added to this is the transformation in the semiconductor industry globally as companies want to de-risk their chip strategy, all of which represent some of the opportunities Cyient DLM is banking on.

Citing an example of how even a car’s software today involves 100 million lines of code driving demand for companies like Cyient, Bodanapu said, “With a combination of all these things, the opportunity is very significant. So we just need to see how long it will continue, At least this irrational behaviour, I think, just from an opportunity perspective for us will let us deliver 30-50 percent year-on-year (growth) for the next five years. We see a line of sight because a lot of the data, a lot of the business is also very long-term.”

He added that while DLM business might take three to five years to crack a customer, once you onboard them, it’s a very long-term project of around 25-30 years. Cyient’s DLM recently got one such 25-year-tenure deal with Honeywell.