Engg services cos set for big ticket deals

Stocks hovering at all-time high levels on demand optimism

- Rising pace of outsourcing and offshoring in engineering services

- More such opportunities in oil & gas, automotive and aviation sectors

- L&T Technology Services, Cyient, KPIT and Persistent Systems may post encouraging results in Q4

- Indian engg services firms bagged 10 large deals in 2020

Bengaluru: Indian engineering services providers are on an inflection point and are likely to witness a larger number of outsourcing deals coming on their way in this calendar year.

Experts are also of the opinion that companies operating in the engineering services segment are expected to see year-on-year (YoY) growth in revenues in the fourth quarter of the ongoing financial year ending March 2021.

"Domestic engineering services firms like L&T Technology Services, Cyient, KPIT, and Persistent Systems are likely to post year-on-year growth in revenues in Q4 of this fiscal year. Also, a large deals pipeline is expected to be robust for coming quarters," said Pareekh Jain, a technology outsourcing advisor and founder of Pareekh Consulting said.

According to experts, the major factors behind the growth uptick are due to the rising pace of outsourcing and offshoring seen in this segment. Unlike the IT services space where outsourcing is more prevalent, engineering companies shy away from outsourcing projects due to the critical nature of their operations. However, the current pandemic has changed that perception, and engineering companies operating in the oil & gas, automotive, and aviation sectors are more amenable to outsource projects to engineering services firms. Similarly, offshoring of the outsourced work to geographies like India is also on a rise.

"Increased outsourcing and offshoring are definitely going to benefit Indian engineering services providers, which have around one per cent share of the global engineering outsourcing market. Also, cost pressure faced by large engineering companies like automotive, aviation, oil & gas, and many more will supplement this trend," said Jain.

Globally, around 5 per cent of the engineering services work is outsourced annually, which is pegged at around $75 billion.

Out of this, Indian engineering services firms receive around one per cent of this outsourcing pie.

Though more than 10 large deals were bagged by domestic firms in 2020, short-term challenges, however, remain. Company-specific issues faced by L&T Technology Services, Cyient, and KPIT are likely to continue for some more time.

"R&D budget is the first to be cut at the time of slowdown. So, companies with exposure to clients who are cutting down such budget will see a negative impact on their top line," said a Mumbai-based analyst.

Meanwhile, the share prices of domestic engineering services firms are hovering near their all-time high levels. While the share price of L&T Technology Services (LTTS) is hovering around Rs 2,550 level, Cyient is at Rs 665 per share. Similarly, the share price of KPIT Technologies is at Rs 172 per share. "Stock prices of domestic engineering services firms are already reflecting the prospects despite the fact that nine months sales (April-December) of most firms are down on a year-on-year basis. As investors see Indian companies gaining market share in coming quarters, this is being seen in valuation," the analyst said.