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We initiate coverage on CMC (Computer Maintenance Corporation) with an
‘Accumulate’ rating and a target price of Rs1,200. CMC stands out from the rest of
its IT peers on geographical exposure, growth, visibility; however, there is lumpiness
in its growth due to strong Indian presence. CMC is well placed to benefit from the
continuing public sector IT demand, given the governments drive to use IT to
improve public sector efficiency and the Government’s long-term investment
programmes in Education and e-Governance.
Under‐penetrated Indian market and local government market gives organic
growth prospects: CMC’s strong presence with the Indian government and PSUs
gives room for expanding footprints by cross-selling opportunities. According to
Gartner, government IT spends is expected to grow at CAGR of 13% (FY11-14E).
Differentiated business model: CMC is well established to exploit the global
market synergy due to its parentage with TCS (holds 51% stake). The company’s
joint go-to-market strategy with TCS gives them well-experienced partner for
the access of global markets. Moreover, it also gives access of marquee clients
along with higher revenue visibility (~54% revenue). The well established model
of sub-contracting (contract employees: ~54%) makes the model flexible.
Organic revenue growth and quality of earnings strong: CMC’s organic revenue
growth hit ~6.5% CQGR over the last 11 quarters and is forecast by the company
to exceed ~4% in FY13. With 85% of PBIT now derived from outside the
traditional CS and E&T, from high margin portfolio SI and ITES, which is growing
faster than traditional portfolio of CMC. FCF conversion and DSO of CMC is in
line with the larger peers despite high exposure to government sector.
Valuation & Recommendation – Accumulate with a target price of Rs1,200: (i)
We believe CMC’s 2-year growth prospects (16% pa revenues, 17.5% pa EBITDA
on our estimates) are much stronger than peers (ii) Nevertheless, at these levels
CMC’s rating looks undemanding. Traditionally, CMC trades at a premium to the
mid-cap IT Services companies. We value the company at 17x FY13 earnings
estimate with a target price of Rs1,200.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage on CMC (Computer Maintenance Corporation) with an
‘Accumulate’ rating and a target price of Rs1,200. CMC stands out from the rest of
its IT peers on geographical exposure, growth, visibility; however, there is lumpiness
in its growth due to strong Indian presence. CMC is well placed to benefit from the
continuing public sector IT demand, given the governments drive to use IT to
improve public sector efficiency and the Government’s long-term investment
programmes in Education and e-Governance.
Under‐penetrated Indian market and local government market gives organic
growth prospects: CMC’s strong presence with the Indian government and PSUs
gives room for expanding footprints by cross-selling opportunities. According to
Gartner, government IT spends is expected to grow at CAGR of 13% (FY11-14E).
Differentiated business model: CMC is well established to exploit the global
market synergy due to its parentage with TCS (holds 51% stake). The company’s
joint go-to-market strategy with TCS gives them well-experienced partner for
the access of global markets. Moreover, it also gives access of marquee clients
along with higher revenue visibility (~54% revenue). The well established model
of sub-contracting (contract employees: ~54%) makes the model flexible.
Organic revenue growth and quality of earnings strong: CMC’s organic revenue
growth hit ~6.5% CQGR over the last 11 quarters and is forecast by the company
to exceed ~4% in FY13. With 85% of PBIT now derived from outside the
traditional CS and E&T, from high margin portfolio SI and ITES, which is growing
faster than traditional portfolio of CMC. FCF conversion and DSO of CMC is in
line with the larger peers despite high exposure to government sector.
Valuation & Recommendation – Accumulate with a target price of Rs1,200: (i)
We believe CMC’s 2-year growth prospects (16% pa revenues, 17.5% pa EBITDA
on our estimates) are much stronger than peers (ii) Nevertheless, at these levels
CMC’s rating looks undemanding. Traditionally, CMC trades at a premium to the
mid-cap IT Services companies. We value the company at 17x FY13 earnings
estimate with a target price of Rs1,200.
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