Although Shakespeare wouldn’t have argued against a billion dollar enterprise rechristening itself after over two decades of existence, when Infotech Enterprises did that last year, quite a few eyebrows were raised. Was it necessary? Would the new name have the same degree of acceptability? Is the re-branding expense worth it? And really, “What’s in a name?” To find the answers, The Dollar Business skipped Shakespeare and spoke to insiders in the board of engineering solutions provider Cyient

Neha Dewan | The Dollar Business

For India’s aircraft and aircraft components manufacturing industry, FY2014 was a watershed year. The year saw India becoming a net exporter of aircraft and aircraft components – something that was unthinkable even a couple of years back, something that even industry insiders find hard to digest even today. And Ministry of Commerce data for the first nine month of FY2015 indicate that last year was not an aberration. For, in these nine months, the country has actually recorded a trade surplus of over $2.2 billion (exports of $4.6 billion vs imports of $2.4 billion)! Given this, it’s no surprise that an engineering solutions provider – Cyient – which earns over a third of its revenue from the aerospace industry, saw its revenue and profits rise to an all-time high in FY2014.

Not run of mill

Contrary to what many believe, Cyient is not an IT company. It is an engineering solutions provider. Its services include conceptual designing, drawing, engineering analysis, prototyping, designing of sub?systems and components and manufacturing. Just how different Cyient is from the traditional Indian IT company can be gauged from the fact its major clients include aerospace manufacturing giants like Boeing, Bombardier, Pratt & Whitney and engineering giants like Caterpillar. But given that it doesn’t have many peers; that traditional Indian IT companies have been tremendously successful; and that its erstwhile name – Infotech Enterprises – sounded just like that of an IT company, Cyient had long felt the need to differentiate itself. Hence, the rechristening. Explaining the reason behind the name change to The Dollar Business, B. V. R. Mohan Reddy, Executive Chairman, Cyient, said, “The rationale behind the rebranding decision was to better articulate our capabilities and accomplishments, and outline our vision to all stakeholders.” And the move seems to be working as in the first three quarters of FY2015 Cyient’s consolidated profits are almost the same as its full year profits of FY2014!

 

Travelling light

An analysis of Cyient’s performance over the last decade validates that it is a quick learner. For FY2011, the only year Cyient reported a y-o-y drop in consolidated profit in the last decade (thanks largely to a 560 bps rise in employee benefit expense – its single biggest expense), has been followed by three successive years of EBITDA margin expansion, despite employee benefit expenses largely remaining steady. And the company has managed to achieve this by cutting cost in travelling and conveyance expenses – its second biggest expense. For, at Rs.94.8 crore, while travelling and conveyance expenses accounted for 8% of Cyient’s revenue in FY2011, at Rs.104.3 crore, they accounted for just 4.7% of that in FY2014. While it might not seem much, the fact that this 330 bps saving is exactly what Cyient’s EBITDA margin has improved by between FY2011 and FY2014 – from 15.3% to 18.6% – validates how important this cost control has been! One is sure, if there is one company, which believes in “every penny saved is a penny earned”, it is Cyient.

 

Far and wide

Cyient earns its revenue from two primary segments – Engineering, Manufacturing, Industrial Products (EMI) and Network & Content Engineering (N&CE). While EMI, which has two business units [Aerospace and HTH (Hi-Tech, Medical, Consumer, Transportation and Heavy Engineering)], contributes two-thirds to Cyient’s total revenue, N&CE, which also has two business units [Utilities & Communications (UC) and Data Transformation & Analytics (D&A)], contributes about a third. That Aerospace and HTH, even individually, contributed more to Cyient’s consolidated revenue in FY2014 than UC or D&A, is just further proof that Cyient is very different from traditional Indian IT companies.

Even when it comes to geographical spread of revenue sources, Cyient is pretty well diversified, with North America accounting for 45.1% of revenue in FY2014, followed by India (22.2%), Europe (21.3%) and Rest of the World (11.4%). Did the 22.2% figure for India surprise you? It certainly did us. Explaining the reason for this high contribution of India, Reddy told The Dollar Business, “The Rs.489 crore figure (for FY2014) in our consolidated topline is not revenue from India, but simply represents purchase orders (POs) generated in the country. The bulk of these POs are from companies headquartered overseas, who have preferred to generate them in India.” So, what exactly is India’s contribution to Cyient’s revenue? According to Reddy, Cyient earns only 1-2% of its revenue from companies with global headquarters in India. “Domestic market has limited demand for our specialised range of services. For instance, hardly any OEMs and tier I and tier II vendors in the aerospace sector are present in India,” he added.

 

Lone ranger

The inherent nature of Cyient’s business – engineering solutions – is such that one has to be continuously on one’s toes. Unlike IT spending, which is seamless because of maintenance requirements, engineering spending is very project specific – if a client outsources an engineering design to Cyient, it need not come back to it for years, since an engineering design doesn’t need maintenance. This means Cyient’s topline growth is bound to be bumpy.

Secondly, the highly specialised workforce that is required for engineering solutions means that Cyient’s employee benefit expense will be very high – in FY2014, while IT major Tata Consultancy Services (TCS) spent 36.5% of its revenue on employee benefit expense, the same for Cyient was 62%.

Lastly, engineering solutions outsourcing is not really a business which Indian companies are known for. It’s a business dominated by Chinese players. Hence, getting large orders from new clients will always be a challenge for Cyient.

 

 

Bigger and better

Despite these challenges, Cyient is on a roll. Its top and bottom lines are at all-time highs. Last year, it added 43 new clients and saw its total workforce cross the 12,000 mark. It has cash reserves of Rs.691.3 crore (FY2014), which will, if needed, help inorganic growth. Its main strength (as it aims to cross the $1 billion/annum revenue mark over the next 3-5 years), however, is its customers. For, in FY2014, it earned 98% of its revenue from repeat customers! Similarly, as compared to just $0.8 million in FY2010, its revenue per client was $1.2 million in FY2014. All this means a customer, which uses the services of Cyient, invariably comes back to it, the the best example of this being the $100 billion market capitalisation behemoth United Technologies’ subsidiary, Pratt & Whitney, to which Cyient has been delivering solutions for almost one and a half decade.

So, new name or not, here’s one Indian multinational to watch out for. 

 

“Manufacturing is a natural extension of our engineering capabilities”

B. V. R. Mohan Reddy, Executive Chairman, Cyient |

After being the Chairman and Managing Director of Cyient for over two decades, B. V. R. Mohan Reddy has passed on the baton of managing the day-to-day affairs of the company to Krishna Bodanapu, and is only involved in strategic decision making. In an interaction with The Dollar Business, Reddy spoke about the re-branding exercise and his vision for the company he built from scratch

Interview by Neha Dewan | The Dollar Business

 

TDB: What was the primary motivation behind rebranding Infotech Enterprises as Cyient? How successful has this exercise been?

B. V. R. Mohan Reddy (BVRMR): A brand is what people say about you, when you are not in the room. It represents who you are and what you do. With the old brand, Infotech Enterprises, diminishing in its ability to represent our core work powerfully, we constructed Cyient (inspired by ‘science’, ‘client’, and ‘IENT’ of Infotech Enterprises) as a refreshing, forward-looking brand philosophy representing the company. The rationale behind the rebranding decision was to better articulate our capabilities and accomplishments, and outline our vision to all stakeholders.

Rebranding Infotech Enterprise as Cyient was a comprehensive, organisation-wide initiative that went beyond plain renaming to integrating our approach of ‘designing tomorrow together’ with all levels of our engagement with employees, clients and other business partners. The new brand, Cyient, has been received exceptionally well by all stakeholders – internal and external. Shaping one’s identity, however, is a continuous process, and we are committed to nurturing and reinforcing our brand values and philosophy for the long term.

TDB: Although your operating margins have always hovered in the high teens, they are still at least 10-12 percentage points below that of your much larger peers. Do you have any strategy to change this?

BVRMR: Cyient operates in a niche market segment and our business is significantly different from that of traditional IT service firms – one cannot compare apples and oranges. The company’s operating margins are in line with industry standards, however, there is always room for improvement. We are strengthening value realisation consistently through our expanding capabilities, while also optimising costs and boosting productivity and efficiency through improved resource management.

TDB: In the last few years, you seem to have started focusing a bit more on India. Tell us what your expectations are from India.

BVRMR: We have always had a focus on India, despite the fact that doing business with the Indian government is difficult. However, with the new union government in place, the industry is hopeful of reforms. The bulk of Cyient’s business is focused on North America and Europe. Domestic market has limited demand for our specialised range of services. For instance, hardly any original equipment manufacturers (OEMs) and tier I and tier II vendors in the aerospace sector are present in India. Some domestic opportunities exist in telecommunications, utilities and commercial geospatial services, where we have collaborations with global in-house centers (GICs).

 

 

TDB: There’s a feeling in certain quarters that Cyient has failed to attain the greatness that it once promised about two decades back. How would you react to this?

BVRMR: We believe that in several ways, Cyient has made outstanding progress. The company is a pioneer in bringing engineering services to India, has created approximately 13,000 jobs in the sector, and continues to innovate and grow strongly. Cyient’s strength is demonstrated in its financial performance over the years, with revenue growing from $59 million in FY2005 to $363 million in FY2014. The biggest testimony to Cyient’s success, however, is the list of our long standing customers, who continue to invest in strategic collaborations with us.

TDB: The analyst community feels that medical devices and consumer durables are areas of opportunity but are not being tapped substantially by Cyient. How would you react to this?

BVRMR: Cyient already provides engineering solutions in both medical devices and consumer durables. Our recent acquisition of Rangsons Electronics further expands our capabilities in the medical device space. Value engineering, both in medical and consumer segments, is a key area of collaboration with our clients.

TDB: Now that you are earning over 20% of your revenue from India, what are your local ambitions?

BVRMR: The Rs.489 crore figure in our consolidated topline is not revenue from India, but simply represents purchase orders (POs) generated in the country. The bulk of these POs are from companies headquartered overseas, who have preferred to generate the POs in India. Cyient’s exposure to the domestic market – to companies with their global headquarters in India – is in the range of 1-2% of the overall revenue.

TDB: You acquired a manufacturing unit in Mysore earlier this year. What are your plans in manufacturing in the near future?

BVRMR: Cyient’s acquisition of Mysore-based Rangsons Electronics is in sync with our S3 (services, systems and solutions) strategy, and will help us to expand in high-technology and high-value, design-led systems and solutions space. Our aim, essentially, is to provide end-to-end integrated engineering, design and manufacturing solutions to our customers. Our manufacturing focus will be on high-value, low-volume product realisations, as a natural extension of our engineering design capabilities.