India's Cyient: Higher Costs Cloud Profit Growth

Cyient, a global services firm based in India, has reported a third-quarter profit below analysts' expectations, hurt by slower growth in its biggest segment and higher costs. The company's profit declined to 1.22 billion rupees ($14.12 million) for the three months ended Dec. 31, from 1.47 billion rupees a year ago. Analysts had expected 1.71 billion rupees, according to data compiled by LSEG.

Cyient's total expenses rose 9% during the quarter, led by a 26% jump in its cost of materials consumed and a 6% rise in employee expenses. The company's revenue from its digital, engineering, and technology segment, which contributes more than 76% to its total revenue, fell 1% during the quarter. Its smaller design-led manufacturing business, Cyient DLM, posted a 38% rise in revenue.



Cyient's higher costs and their impact on profit margins can be attributed to several primary factors:

1. Increased Cost of Materials Consumed: Cyient's total expenses rose by 9% during the quarter, with a 26% jump in the cost of materials consumed. This increase in material costs directly impacts the company's gross profit margin, as it increases the cost of goods sold (COGS) without a proportional increase in revenue. This factor contributes to the decline in Cyient's gross margin, which was 32.19% in the last 12 months.
2. Higher Employee Expenses: Employee expenses rose by 6% during the quarter. This increase in labor costs affects the company's operating expenses, which in turn impacts its operating margin. Cyient's operating margin was 13.29% in the last 12 months. Higher employee expenses can be attributed to factors such as increased salaries, benefits, or the consolidation of Altek Electronics, Inc., which specializes in PCB assemblies, box builds, and cable harnesses, with ITAR certification.
3. Consolidation of Altek Electronics, Inc.: The consolidation of Altek Electronics, Inc. has led to higher employee costs and other expenses for Cyient. This acquisition may have resulted in additional overhead costs, such as integration expenses, which further impact the company's profit margins. However, it is essential to note that this acquisition also contributed to a 38% rise in revenue for Cyient's design-led manufacturing business (Cyient DLM) during the quarter.
4. Geopolitical Issues, High Inflation, and Interest Rates: Cyient mentioned that despite geopolitical issues, high inflation, and interest rates, its clients continued to show interest in technology investment. However, these factors may have indirectly contributed to higher costs by increasing the cost of inputs, supplies, or services used in Cyient's operations.

These factors combined have led to a decline in Cyient's profit margins. In the last 12 months, Cyient's profit margin was 9.15%, and its EBITDA margin was 15.30%. The company's net income for the last 12 months was INR 6.59 billion, with earnings per share (EPS) of INR 59.50. To mitigate the impact of higher costs on profit margins, Cyient may need to focus on improving operational efficiency, negotiating better terms with suppliers, or finding alternative sources of revenue with higher margins.



In conclusion, Cyient's higher costs and their impact on profit margins have led to a decline in the company's profit growth. To address these challenges, Cyient must focus on improving operational efficiency and finding alternative sources of revenue with higher margins. Despite these challenges, Cyient's strategic initiatives, such as the Idea Tree program and expansion of services and client base, have helped the company maintain its growth momentum. However, the company continues to face challenges in addressing the limitations of the Idea Tree initiative and maintaining its profitability in the face of higher costs.