Cyient is focusing on profitable growth: Ajay Aggarwal, ED & CFO

Ajay Aggarwal, Executive Director and Chief Financial Officer, Cyient talks about September quarter numbers, revenue, growth opportunities in the digital space, services, segment, region-wise performance in NAM, APAC and EMEA, offshoring, attrition and M&A opportunities among others during an interview with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: The company has posted its second-quarter numbers. Please provide the highlights for the same and also tell about the verticals where growth prospects are visible?

A: The results have been in line with our expectations on all three fronts. If our growth is seen in the perspective of constant currency then we have grown by around 5.50% QoQ. Our margins are quite good and our EBIT in the service business stands at 15.50%, which means about 20% of the operating margins, which is one of the highest. Our net profit is also close to the highest and cash generation has also been good. So, there has been an all-around growth from the perspective of growth, profitability and cash generation. We have also announced an interim dividend of Rs 10 per share, which is the highest ever. As far as the performance of the segments is concerned, there has been a well-rounded growth, although, we are not a typical IT company but an engineering and R&D company where a lot of opportunities are available. Good growth has been seen in all of our verticals - except aerospace, which is but suppressed but should recover by the year-end. And, the digital start-up that we did in the last two years has also grown well and it will also lead our further growth.

Q: Revenue has been quite stable. What will be your outlook on revenue for the future quarters? Also, the margin was a clear surprise as most other IT companies reported a decline in margin. How did you manage to increase and is it sustainable going forward?

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A: For many years, we have focused on profitable growth. Cyient, as a company has the vision to post industry-leading earnings growth. So, you will get to see that we are amongst one of the highest-earning growth slots in the industry and our earnings growth should stand between 30-40% this year. We are working good on both fronts from growth to margin expansion, which would be best in the industry. As far as our margin is concerned, we have always kept our service sector margin around 16-17% in the short and medium term and the same margin is reflected in this. Operational efficiencies improvement has helped us a lot, maybe you look at the utilisation. Our work is coming on offshoring and we are focusing more on value addition and quality of revenue. So, a lot of work is being done on these fronts to ensure that how we should focus on profitable growth and this led to this margin expansion. You will also see growth in the coming quarters and years and this trend will continue. As I have said that we are growing well in the new segments, i.e. the new tech segment like digital. If you will look at our traditional business Vs the new tech business then we are seeing a growth of more than 30% in it. That will be leading the growth this year as well as in the coming years. So, on both, the margin expansion as well as revenue growth, we are very confident and we will give one of the leading industry growth earnings, as far as Cyient is concerned.

Q: You have said that there has been a 30% growth in the digital segment and it is likely to improve further in the coming time. Can you please provide details about it in terms of the new areas and businesses you are entering into and what are opportunities you have in it and the kind of order book that is visible? Also, what impact it will have on your books?

A: If you will have a look at our order book and the customers where they are spending then you will see that there is a growth opportunity of around 45-50% in the market and it is across the sectors. If you will talk about our medical business, aerospace, rail transport and communication businesses, our customers across all the segments - normally we work with product companies or network companies - are working on product upgrade or infrastructure and network upgrade. In the process, they are working on ways to create a digital interface either between a machine and a human being or the human experience or the features that ensure its safety and reliability. In these, the main focus in upgrades is shifting towards digital and it is across the globe like we are working in Europe, America and the Asia Pacific, and as you have asked about the segments than it is across geographies, across sectors and if seen today where we do not have supply constraints - it is not valid just for our company but also for the entire nation - then we can grow massively in the digital. Its order book is growing well and our headcount in the area has almost doubled in the last one year. The order book and backlog are also fitting into it and definitely, it will be seen in our books and so on, we will get a growth of around 30-50% from this area. As far as the margin is concerned, obviously, the area is margin accretive but if we will focus on the growth this year then we will be able to offer more value-added solutions further due to which the margins will grow further.

Q: In terms of business segments, Services - that has a contribution of around 82% in your revenue - has performed really well both in terms of revenue and margin. What's the reason for this?

A: If we will talk about the quarter or the entire year, then in this quarter you will see that the aerospace, the air travel internationally has not started a lot till date due to which our air space is impacted despite that in aerospace, we have grown 4% QoQ and we are also recovering in it and by the year-end, aerospace will be recovered. Apart from this, whatever segments we have from the utilities to communication and medical health, good growth is visible in each of these and in most of those segments have reported double-digit growth on a year-on-year basis. So, it is a well-rounded growth and is from across geographies.

Q: Region-wise NAM and APAC performed, however, EMEA underperformed by 8.7% QoQ. What was the reason for this and how do you see APAC performing going forward as it was 16.6% up QoQ this time?

A: As far as the APAC region is concerned, we have almost doubled it in the last three to five years. APAC region used to be at around 5% around 7-8 years ago and there has been good growth in the region and it will continue. However, if you have a look at Europe then there is no problem with it. The number of our manufacturing business in Europe is also included in it and there is cyclicity in it due to which this quarter numbers are not looking good on a year-on-year basis but I would like to assure you that our growth has been good in every region, maybe it is North America, Europe or the Asia Pacific. In the Asia Pacific, as you asked, it will continue to do well as there are good opportunities in the Asia Pacific region.

Q: Offshoring at 50% highest in the last 10 quarters. What is your outlook on it? Also, you have managed to maintain the attrition level at 23-24%, whereas there has been an increase in several IT companies. What helped you in maintaining the attrition levels and what is the outlook on this front?

A: As far as offshoring is concerned, as I have said that we are focusing on profitable growth and if you will have a look at our revenue, maybe we are compromising the growth of 1-2% because offshoring provides low revenue growth but more profitability growth. So, if you will have a look then in the last one year our offshoring has improved by around 5-6%. I feel that from best players, there is a gap of around 10% for us and you will see that in the coming time it will lead to an improvement in our offshoring. Apart from this, the kind of attrition that is taking place is just not limited to India but our overseas customers are also seeing how attrition is impacting. We are thinking that apart from offshoring, price increase from customers, about which we haven't talked about in the last five to six years, should come now. So, going forward, offshoring and price increase definitely will be a good lever for us in profitability increase and we are working a lot in it. As far as attrition is concerned, it is one of the biggest focus areas and we are trying to bring it down to 16-18%. Therefore you will see that when we talk about profitable growth, we are maintaining a balance to ensure that how people are retained. In the coming quarters, you will see that a lot of initiatives will be taken and for leadership, we are bringing ESOP incentives and are also launching some innovative productivity linked schemes for our working population from October 1. So, we are working a lot on it and are aiming to run the company for a long term so that whatever is our profit is reflected in it. If you will have a look at our margin then we are investing around 2% in it for the long term, maybe we are offering technology or doing something innovative or ESOPs for the employees or something else. We are investing around 2% for the long term and the same 2% will be further added to our margins in the coming time.

Q: Cyient has strengthened its IntelliCyient Suite of Digital solutions with the acquisition of WorkForce Delta. What is your view in terms of acquisition and do you have the appetite for the purpose, if yes, what could be the ticket size for the same and is there anything in the offing that we can see in the next few quarters?

A: First of all, I would like to inform you that more than Rs 1,400 crore is available with us and the cash generation is also the highest. We are converting more than 70% of EBITDA into cash flow and that too will continue and I would like to inform the investors. We are focusing on profitable growth as well as cash generation and we are trying to provide at least 50% dividend on a regular basis as a percentage of profit and accordingly are providing dividends. Also, with the available cash and aspirations, we will focus a lot on acquisition and investments. You have talked about WorkForce Delta, it is a good acquisition in digital. Several companies are present in the pipeline and we are looking at it. We are mainly focusing on the new-age related businesses maybe it is a new technology related to mobile, medical health, safety-related new works. Our pipeline is quite strong. As far as ticket size is concerned, we always try to acquire big companies but on the ground at times, we have to make tactical acquisitions. But in the coming time, you will get to see that the highest ever investments will happen in this company if we will talk about the next six to eighteen months.