CMC In the right place at the right time ::Edelweiss

CMC is a leading systems engineering and integration company in India
with strong parentage in TCS. The company has significantly trimmed
exposure to low-margin business and enhanced proportion of system
integration and services business, leading to margin surge. We expect
revenue and earnings CAGR of 25% and 44%, respectively, over FY12-14E,
and prefer the company for its robust return ratios. We initiate coverage
with ‘BUY’ and target price of INR1,255, implying 30% upside.

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Solutions approach and hi-tech focus with TCS parentage an edge
CMC’s unique solutions approach in the System integration space along with focus in
the hi-tech space has enabled it post robust growth in an uncertain environment and
also ensures revenue stickiness for future. The above coupled with TCS parentage
provides it with all advantages of a large player right from capabilities in all geographies
to a strong balance sheet to execute domestic projects like the passport project.
In sweet spot due to high presence in the domestic market
Rising government focus, particularly in e-governance, on faster economic
development rightly places the India market in the fastest growing category in the
APAC region. CMC’s execution track in the domestic space which currently contributes
~35-40% of total revenues (Indian Railways’ online reservation, ICR for Office of
Registrar) clearly exhibits its prowess in executing complicated projects.
Focus on high margin business and offshore shift to expand margins
CMC been successful in its endeavour to exit from low margin customer service
business and focus on the high margin non-equipment services business. The company
also expects offshore execution to increase by at least 10% in the System Integration
(SI) business which will enable margins to improve by at least 300bps.
Outlook and valuations: Long-term bet; initiate coverage with ‘BUY’
We expect a 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. We
believe the stock is a long-term bet due to strong uptick expected from government
spends, timing of which is difficult. We initiate coverage with ‘BUY’/SO
recommendation/rating with TP of INR1,255, implying 12x our FY14E EPS of INR104.