Fw: Stock Idea: CMC (Leveraging on its pedigree)

 

 

Stock Idea [September 14, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA CMC Cluster: Emerging Star Recommendation: Buy Price target: Rs1,551 Current market price: Rs1,108 Leveraging on its pedigree Key points Solid parentage, strong visibility: Over the years, under the Tata Consultancy Services (TCS) parentage CMC has transformed itself from a low-margin information technology (IT) equipment provider to a well-diversified IT services and solutions provider. CMC initiated its "Joint-Go-To-Market" approach with TCS in 2005, which is paying up handsomely now. In the last five years the contribution of the international revenues has tripled from 20% to around 60% of the total revenues in FY2012 whereas the share of the services revenues has gone up to almost 90% of the total revenues as compared with 53% in FY2005. The share of revenues achieved through synergies with TCS has crossed 51% in FY2012 from 43% in FY2007.  Going forward, the CMC management aims to be among the top 20 global system engineering and integration companies by 2020 by capitalising on the strong synergies with TCS. Synergies with TCS have been leveraged to win large mission mode projects (MMP) in the domestic market, eg e-Passport Seva and CBEC Project, and improve traction in the international market in the areas of embedded system and digitisation services. CMC's management has indicated the pipeline of deals is strong in both domestic and international markets which is likely to get exploited by CMC and TCS together in the coming years.  Strong foothold in domestic IT arena, expanding competencies in international markets: CMC has gained a strong foothold in the domestic IT arena by winning large turnkey deals, some on its own and the others in partnership with TCS. Another favourable factor driving its strong growth and helping it tap large government projects is its previous status as a public sector undertaking (PSU) which has given it an edge over the other players. The company counts some of the marquee names in the domestic market, like Reserve Bank of India (RBI), Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), Oil and Natural Gas Corporation (ONGC), coupled with the Indian Railways, other PSUs, defence sector, as its clients which is testimony to its strong presence in the domestic IT market. Currently, the domestic market contributes around 40% of its total revenues. Going forward, with an upswing in the domestic IT spending, CMC is well poised to tap this advantage.  Thrust on value-added services augurs well for margin trajectory: CMC started as a low-margin equipment provider and integrator with an asset heavy model. However, over the years its management has credibly brought down the low-margin equipment revenues to around 10% from 40% earlier. Over the same period, owing to the synergies with TCS, the revenue contribution of the relatively high-margin international business has increased significantly to over 60% of the total revenues. Strong growth traction in the system integration (SI) and IT enabled services (ITES) businesses, increasing acceptability of its industry specific solutions (asset-based solutions) and further scope for improving the offshore mix would drive the company's margins in the coming years.  Valuation: Over the years, CMC has gradually transformed itself from a low-margin equipment provider into a well-diversified IT services and solutions provider, and created a niche for itself in the field of large system engineering and integration projects. On the other hand, its Joint-Go-To-Market strategy with TCS is also playing a big role in the business transformation, with CMC gaining strong traction in the international markets. As a matter of fact, the international business constitutes more than 60% of CMC's total revenues. We believe CMC has already set the stage for the next level of growth and is likely to witness a much stronger growth in the coming years. We expect its earnings to grow at a CAGR of 43% over FY2012-14. At the current market price of Rs1,108, the stock is trading at 13.4x FY2013E and 10.7x FY2014E earnings respectively. We value the stock at 15x target multiple based on the FY2014 earnings estimate, in line with its two-year average trading multiple. We initiate coverage on CMC with a Buy rating and a one-year price target of Rs1,551. Click here to read report: Stock Idea   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.