How mid-tier IT player Cyient is changing into a product company

Engineering is something that has always been close to BVR Mohan Reddy’s heart. A mechanical engineer by education, he pioneered computer-aided design and manufacturing (CAD/CAM) in India by introducing computer systems for design and manufacturing as early as 1982 as the MD of Tata Group company, OMC Computers. Indeed, having started off as a shop floor manager at DCM Industries, engineering had been part of most of his 18-year career, barring two stints of three years each, at Mico Bosch as a systems analyst and as sales manager at HCL tech. “In my heart, I always wanted be an entrepreneur, but coming from a middle class background, I was always stumped at the question, ‘What experience do you have in running a business?’ So, I decided to get some experience before I started,” says the executive chairman of Cyient (formerly, Infotech Enterprises).

Having tried his hand at production, sales and building a company, Reddy knew he was ready — and it had to be in engineering. In 1991, he started Infotech Enterprises with ₹20 lakh of his own and two cheques of $10,000 ($1= ₹25) from two friends. To avoid any conflict of interest with his last employer, who was focused on hardware and the domestic market, Reddy focused on software and the export markets. He quickly discovered that India was not trusted for its intellectual property in engineering (CAD/CAM), and decided to look at the Geographic Information Systems (GIS) as the same software was used for drafting drawings and creating maps.

Creating a new mix

DNO contribution is up post an acquisition

In the 23 years since then, Cyient has come a long way, winning not just the trust of customers but also carving a niche for itself in engineering services across industries such as aerospace, transportation, utilities and semiconductors. Its list of customers includes names such as Pratt & Whitney, Boeing, Airbus, Bombardier, Alstom Tom Tom, Qualcomm and Philips. “Customers used to call me a supplier and then we migrated to being a strategic partner. One client called us an integrated partner. I asked him what he meant by that and he said, ‘We can’t function without you.’ That was indeed a proud moment for us,” says Reddy. 

Cyient co-innovates with clients to build products and as a result, holds several patents with its customers. For instance, it has built a bus power control unit with Pratt & Whitney to control the input and output voltages in an aircraft. An aircraft requires different voltages for different functions — a lower voltage for the music system, while the oven needs a higher level — and Cyient’s unit manages these requirements, ensuring there are no surges even during sudden altitude drops. This product straddles electrical and mechanical engineering capabilities and embedded software as well, making it a complex solution offering that the company believes not many can offer.

Changing order

Now, Cyient is getting ready to make the next big leap, wherein it reduces its dependence on services and increases its contribution from system and solutions. Currently, services contribute 75% of revenue, systems bring in 20% and solutions bring in the remaining 5%. The plan is to increase the contribution of solutions in the next five years. Sundaraman Viswanathan, associate director, Zinnov, believes this is a step in the right direction. “While Cyient has significant expertise in designing engineering products, there is also an opportunity in engineering analytics, where it can help clients analyse the data generated by the products to get insights that can either increase revenue or reduce costs. It can offer engineering design and analytics as an end-to-end solution. All it has to do is build smart products that talk to each other,” he says, adding that solutions can make up one-fourth of the company’s revenues over the next five years. Already, Cyient partners with most power companies on the US West Coast, managing the data from their smart girds. It wants to move to analysing the data to generate more revenue and improve customer satisfaction.

Leading the transformation will be Reddy’s son Krishna Bodanapu, who took over the reins as the company’s CEO in April 2014 after spending 13 years climbing its ranks, starting as sales manager in Europe in 2001. “There was a definite need for new blood in the company as the industry transforms, and the change happened at the right time,” says Reddy. According to him, even their leadership styles are different; his son, says Reddy, is a big-picture guy who is very hands-off. “He is very focused on achieving the key metrics and not how it is done, whereas I am a micromanager who likes to get his hands dirty,” says the proud father. 

To complete its makeover, Cyient undertook a branding exercise in May 2014, where it changed its name from Infotech Enterprises to Cyient, which is a play on the words client and science, the key factors in the company’s success. “The idea was to have a name that is global and unique but, in a way, captures our past,” says Reddy pointing out that the ‘ient’ stands for Infotech Enterprises. But, surely, a name change is only a cosmetic exercise? Bodanapu agrees. “But we are using the change as an impetus to drive several things, such as our new strategy and how we engage with customers,” he says.

A new design

Cyient is now focusing on building significant capabilities in product design. “There’s a lot of opportunity between product design and manufacturing, such as prototyping, testing, system integration and certification, and we want to tap that,” says Bodanapu. Outsourcing in engineering services is not as mainstream as financial services. Here, not only are the contract sizes smaller but it takes time to buy into the customer’s wallet as most activities are seen as critical. However, thanks to increasing pressures to reduce costs and Indian firms’ growing design capabilities, outsourcing of engineering services is expected to reach $38-50 billion by 2020 from around $2 billion now, according to a Nasscom-Booz Hamilton study. With product realisation and a comprehensive data analytics offering, Cyient hopes to become a full-lifecycle partner for customers from just providing design services.

The company is looking to considerably increase sales from existing customers. “We do have marquee names as our customers. While we are strategic partners to them, we are still not a substantial player, so there is a definite opportunity there,” says Reddy. Revenue growth is a priority as the company had two tepid revenue growth years in FY13 (6.7%) and FY14 (5.3%) in dollar terms, as one of its key clients in the semiconductors space ramped down business. “There is no denying that we have disappointed our investors on revenue growth; it has been a tough four or five quarters as one of our top 20 customers had some challenges. That is one of the perils of being a small company: you face the heat when one of your customers goes through challenging times. In 2009, when industry growth was almost flat, we grew by 15%, and last year, when the industry grew by 15%, we saw a modest growth of 5-6%. So you have to see these things in context,” points out Bodanapu. Like its client list, the company has some marquee names as investors — PE firms such as Carlyle and ChrysCapital, which own more than 10% and 4-4.5% respectively. With demand picking in the US, analysts expect revenue, which is currently at ₹2,200 crore, to grow at an average of 15-18% in the next two years, with operating margins remaining at around 20%.

Inorganic push

Meanwhile, Cyient is looking at the inorganic route to acquire new customers and augment its revenue growth and service offerings. Recently, the company picked up a 51% stake in the US-based data analytics firm Invati Insights. While financial details are yet to be disclosed, the deal will strengthen Cyient’s position in the analytics space, which is a focus area for the company. Earlier, in March 2014, Cyient acquired American IT services management company Softential Inc, for $20 million. The firm helps marquee clients such as Time Warner, Coca-Cola, Sprint and Verizon, among others, operate their network operations and data centres. While the integration process will be completed by April 2015, the company expects the acquisition to add $20 million-22 million in revenue and $4 million-5 million in profits in its first year.

The acquisitions are to be funded  with Cyient’s Rs 726 crore cash chest. “We are looking at companies in our existing markets of the US, the UK and Germany, since we hope to scale our presence in medical devices and electronics and will look at options that will help us do that quickly,” says Bodanapu.

Apart from the business model transformation, Reddy is keenly working on strengthening the leadership team. “I am very happy with the current team, but once in a while I’d like to fast forward and see how the organisation would be in 10 years and the kind of leaders we would need. So I work very strongly with the leadership team to develop new leaders,” he says. Cyient currently has around 12,000 employees and, says Reddy, finding the right talent hasn’t been easy.

Ravi Menon, IT analyst, Centrum Broking, believes larger IT services have attracted the best talent by offering fatter hikes and faster career growth. “With growth rates tapering for the big players, they can’t afford fancy hikes and promotions every two years. This works to Cyient’s advantage as it can match the hikes and offer candidates a better job profile. If you are an engineer, the prospect of creating a product will definitely be more appealing than being a drop in a larger ocean,” he says.

So, will be it faster for a company of Cyient’s size to migrate to systems and solutions, something even the big guys are focusing on these days? “It is a difficult change. It is a running organisation so we have to ensure things go on as planned. If you want everyone to be a rocket scientist, then who is going to do the regular jobs? We have to get the trade-off right. You cannot ask the existing guys to do everything, so we will build a team to focus exclusively on solutions,” says Bodanapu. But he is sure the move to non-linear revenues is inevitable. “No services play the rate per hour game forever. More than the customer, competition is forcing companies to move the linear revenue model,” he says.

In a world where the big guys compete with mid-caps on most deals, niche players such as Cyient have an advantage. “They are able to form deeper relationships with clients. They are the go-to guys for product development and that is a good place to be,” says Viswanathan. Transition in any business is difficult, more so in a services-led business where migrating to a solutions-led model needs a significant mindset change. What works to Cyient’s advantage is that its chosen area of engineering services lends itself to building solutions and products, making the transition much easier for itself.