FOR HIGH RISK APPETITE INDIVIDUALS ONLY
CMP: Rs. 1165.80; Buy at Rs. 1155 - Rs. 1165 levels.
Medium to Long term Target – Rs. 1200; STRICT STOP LOSS – Rs. 1073.00; Market Cap: Rs. 3,532.37 Cr; 52 Week
High/Low: Rs. 1,187.30 / Rs. 721.30
Total Shares: 3,03,00,000 shares;
Promoters : 1,54,89,922 shares –51.12 %; Total Public holding : 1,48,10,078
shares – 48.87 %; Book Value: Rs. 229.84;
Face Value: Rs. 10.00; EPS: Rs. 53.06.82; Div: 125 % ; P/E: 21.71 times; Ind P/E:
7.20; EV/EBITDA: 19.18.
Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 7,065.05 Cr.
CMC LTD: The Company was founded
in 1975 and is based in New Delhi, India. CMC Limited is a subsidiary of Tata
Consultancy Services Limited which holds 51% as a promoter. CMC Limited was
formerly known as Computer Maintenance Corporation Private Limited and changed
its name to CMC Limited in August 1984. CMC Limited engages in the design,
development, and implementation of software technologies and applications, as
well as the provision of professional IT services in India and internationally.
The company’s Customer Services segment is involved in the provision of IT
infrastructure architecture, design, and consulting services; turnkey system
integration of large network and data centre infrastructures; procurement,
installation, commissioning, warranty, and maintenance of imported/indigenous
computer and networking systems, and software; and provision of on-site and
remote support services. Its Systems Integration segment undertakes the
activities of solution deployment that includes embedded systems, software development,
software maintenance and support, turnkey project implementation, and systems
consultancy. The company’s IT enabled Services segment provides business
process outsourcing and knowledge process outsourcing services for front end
and back office, which include on-demand software services, office records
digitization and document management, recruitment and examination results
management, and legacy data migration management. Its Education and Training
segment offers education and training programs in the areas of information
technology, soft skills training, integrated career development, skills
development, and vocational programs to corporate organizations, government
institutions, and individuals. The company’s Special Economic Zone (SEZ)
segment rents its SEZ campus facilities located in Hyderabad to TCS. It serves
customers in banking and financial services, ecommerce, e-governance, defense
and space, power and utilities, government, and hi-tech and telecommunication
industries. The Company is compared with NIIT Technologies, Sonata Software
ltd, Kpit Cummins Infosystems Ltd
Investment Rationale:
CMC is a leading systems engineering and
integration company in India under the strong parentage of TCS. CMC’s unique solutions approach in the System integration
space along with the focus in the Hi-tech space has enabled CMC to post a robust
growth in an uncertain environment and also ensured revenue stickiness for
future. The company has been working for last several years with TRW a large
automotive electronic player primarily due to its unique domain capabilities and
hi-tech approach. It is believed that like other successful mid cap focused players
CMC’s expertise has been the Hi-tech space where competition has been limited
which enables significant revenue and client stickiness. The above solutions
and technology approach along with TCS parentage will provide CMC with all
advantages of a large player (inspite of being a small player) right from
capabilities to offer services across geographies to a large balance sheet
required to participate in huge projects like the Indian passport project. Looking
at the result side CMC has posted an average 36 % growth (YoY) over the past
nine quarters in the System Integration segment driven by robust traction in
the US market, which contributes more than 70 % to the vertical’s revenue. The segment’s
PBIT margin has also been above 20 % and management expects it to rise further
with increase in offshore execution. Also, with the rising government focus,
particularly on e-governance & on faster economic developments, the Indian markets
are rightly placed in the fastest growing category in the APAC region. CMC’s
execution track in the domestic space currently contributes 35 % - 40 % of
total revenues. CMC gives services to Indian Railways’ online reservation, ICR
for Office of Registrar and this clearly exhibits its powers in executing
complicated projects. The company also expects offshore execution to increase
by at least 10 % in the System Integration (SI) business which will enable its
margins to improve by at least 300bps or 3 %. It is believed that there is a
scope for at least 400bps or 4 % margin improvement in this vertical, which
will boost overall margin by at least 200bps or 2 % over the next couple of
years. CMC has been able to emerge strongly in the SI business in both revenue
and margin primarily due to its arrangement with TCS. CMC and TCS have an
arrangement whereby contracts are won by the latter in the international market
and executed by the former, for which CMC pays a marketing fee. There are also
instances where the companies have executed projects jointly with a revenue
sharing model, more so in case of extremely large size and complex projects like
the Indian government’s passport project, requiring varied skill sets and a
strong capability at the project winning stage.
Outlook and Valuation:
According to Nasscom Indian IT has
predominantly been known for strong exports (23% CAGR over FY04-12) in the past
vis-a-vis domestic spend (18% CAGR over FY04-12). India is significantly
underpenetrated (going by even per capita IT spend) versus most developed
nations and both governments at the Centre and state levels have time and again
emphasized on the importance of IT adoption and its role in streamlining key
work processes like land records, e-rolls etc. The government’s National e- Governance
Programmes (NeGP) and Unique Identification Development (UID) programme are
just a first few key steps towards digitisation. It is believed that UID will
lay a significant stepping stone for the future IT infrastructure. Nasscom
predicts India to be the fastest growing IT services market worldwide. Management
has clarified that the company has exited from loss making equipment deals in
Q1FY13 and will maintain 10 % margin going forward. CMC has consistently paid dividends over
the years with payout ratio being in the 17-25% range. Going ahead too, the
company plans to continue the policy of paying dividends. An estimated dividend
payout ratio of 30% for FY13 and FY14 is expected. CMC is
expected to post robust revenue and earnings CAGR over FY12-14E, respectively,
driven by strong growth in SI business and exit from loss making deals in the
CS segment. CMC could be bought with a
long-term due to strong uptick expected from government spends, timing of which is
difficult. In my view CMC could
report FY13E EPS of Rs. 79.70/sh and for FY 14E of Rs. 104.40/sh. The stock could be bought for the target
price of Rs.
1255 and recommend Accumulate on the
stock.
| KEY FINANCIALS | FY11 | FY12 | FY13E | FY14E |
|---|---|---|---|---|
| SALES (Rs. Crs) | 1,096.20 | 1,469.30 | 1,873.60 | 2,313.40 |
| NET PROFIT (Rs. Crs) | 179.40 | 151.80 | 241.30 | 316.40 |
| EPS (Rs.) | 59.20 | 50.10 | 79.70 | 104.40 |
| PE (x) | 16.30 | 19.30 | 12.20 | 9.30 |
| P/BV (x) | 4.50 | 3.80 | 3.20 | 2.60 |
| EV/EBITDA (x) | 11.90 | 12.10 | 8.80 | 6.80 |
| ROE (%) | 27.40 | 21.30 | 28.40 | 30.70 |
| ROCE (%) | 31.20 | 27.40 | 34.10 | 36.50 |
I would buy CMC LTD with a price target of Rs. 1200 for the short term and Rs. 1255 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1073.00 on every purchase.
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