Yes, "while lighting a cigarette" is probably the best translation here.
This form of the verb, the present participle, is used often like the English "-ing,"* though it is not used as often as we do in English. Generally it will be translated as either "Upon doing something" or "While doing something" such as
Elle lisait en mangeant
She read while eating
Or it will be translated using "by", as in "he did something by doing something.
Elle a maigri en faisant beaucoup de sport.
She got thin by exercising a lot
(I took the examples from the french.about site related to the topic, where you can find more examples as well as a third use-case for this form, it's often a good site if you want to get a clear and easy to understand overview of a topic.)
* It's worth noting here that saying it is like "-ing" is true but dangerous. It cannot be used like the english present continuous tense "I am playing," nor can it be used after other verbs, e.g. "I hate cooking". In these cases French just uses the present tense or a noun in the place of the verb. Information as to when not to use this form of the verb can also be found on the site I linked to above.