Engineering services firms set for better growth

These IT cos likely to post double-digit upswing in FY22 on sound deals

Bengaluru: Engineering services companies are likely to post double-digit revenue growth in the next financial year (FY22) on the back of sound deal momentum and rising offshoring among global enterprises.

In the third quarter ended December 2020, most Indian engineering services providers posted a sequential (quarter on quarter) rise in their revenue growth but was not able to witness growth in year-on-year terms.

L&T Technology Services (LTTS) reported a 6.8 per cent rise in sequential term to post revenue of $190.1 million in the December quarter. It was down 4.6 per cent in YoY terms. However, the company won seven deals with TCV (total contract value) of more than $10 million, and a contract worth $100 million along with two $15 million deals.

Similarly, Persistent Systems dollar revenues increased 7.4 per cent QoQ to $146.1 million during the third quarter. In dollar terms, Cyient's revenue was at $141.4 million, up 4.7 per cent over the September quarter. Another engineering services firm Tata Elxsi also posted healthy revenue in the December quarter. Among IT biggies, HCL Technologies reported a 2.5 per cent QoQ rise in its revenue from the engineering and R&D services segment.

"Like IT services firms, Indian engineering services firms are likely to see 2-3 per cent contraction in their revenues in the current financial year. However, things are looking for next fiscal and most domestic engineering services companies are likely to post double-digit growth in revenues in FY22," said Pareekh Jain, an outsourcing advisor and founder of Pareekh Consulting.

He also said that momentum in large deals and preference towards offshoring among engineering services clients would support this trend.

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.

However, experts see a rise in the pace of outsourcing by engineering services clients operating in oil & gas, automotive, aerospace, and many more in the coming days.

"Offshoring in engineering services is traditionally low as compared to IT services firms as the work executed by the former forms the core of their operations. However, the pandemic has changed the scenario and most companies realise that projects can be executed in offshore locations like India without any disruption. This is likely to support the growth of Indian service providers working in this space," Jain said.

Apart from this factor, even cost pressure faced by engineering services clients in aviation, automotive and oil & gas space is also another reason for the rising pace of outsourcing to offshore locations like India. Recent L&T Technology Services deal worth more than $100 million from an oil & gas client is testimony to this fact, experts opined.