CMC Ltd - Initiating Coverage - Skills in government business coming of use

Rating: Buy; Target Price: Rs2,270; CMP: Rs1,826; Upside: 24.3%



Skills in government business coming of use



We initiate on CMC with a Buy rating and a 1-year TP of Rs2,270. CMC’s
growth rate should pick up as the domestic market (~33% of revenues as
of FY14) gets impetus from digital governance initiatives. CMC’s
revenues grew by only 15.8% in FY14 as its India business grew by just
6.6%. We expect international revenues to continue growing faster than
the company average and margins to remain in the 15-17% range. With
RoE of 26%, broad client base of 1,000+ clients and consistent
execution in the past (unlike many Tier-2 firms), we think multiples
comparable to Tier-1 firms can be assigned.

$ International growth to continue, but expecting domestic growth as
well now: International revenues increased to 67.3% of total in FY14
from just 20% in FY03, as a result of a conscious strategy by CMC to
transform its business-mix and margin profile, as well as the poor
demand environment in India that acted as a drag in recent years. We
expect international revenues to continue to grow given CMC’s
differentiation through its focus on Embedded Systems and
asset-leveraged solutions (~18-19% of overall revenue and ~28% of
System Integration revenue). Even the India growth can pick up,
particularly driven by government contracts.

$ CMC’s invaluable experience as a Prime/Lead Contractor in India
timely: With total spending on IT by the GoI estimated to touch
USD6.4Bn over 2014, CMC has great potential. To execute most
government projects, the prime contractor needs to be able to staff
personnel for support and maintenance afterwards in remote areas
(which is unviable unless there is sharing of personnel across clients
for support), an area that CMC has ample experience in. Moreover, TCS
and CMC have partnered for some domestic contracts such as the INR10Bn
Passport Seva Project.

$ Margins could hold up even with increasing domestic contribution:
Domestic contribution could accelerate given renewed focus on
Infrastructure and e-governance by the govt. CMC has experience in
both and also in the cumbersome process of digitisation of manual
government records. With continued growth in its international System
Integration (SI) business and in the high-margin IT-enabled-Services
(ITeS) business, we expect CMC can maintain an EBITDA margin of 15-17%
even as the low-margin domestic Customer Services could grow at
company average.

$ Valuation and key risks: CMC Ltd is currently trading at an implied
Fwd P/E of 15.5x Sep-15E EPS. With improvement in growth in the India
business likely over FY16E, current multiples can improve slightly. We
initiate with Buy and TP of Rs2,270 based on 16x Sep-16E EPS. We think
a premium to traditional Tier-2 firms is justified as the biggest risk
with Tier-2 firms is that of client concentration and CMC had over
1,000 clients as of 3QFY14. One of the key risks is the competition
from TCS, its parent, especially in areas where both have competing
products like BaNCS (for Insurance) from TCS and Genisys from CMC.
Another key risk is the change in immigration and visa norms in the US
(57.1% of CMC’s FY14 revenues).



Thanks & Regards

CMC (Rs 1283.1): BUY:: Business Line,

Technicals-Wockhardt, cadila, Financial Technologies, Royal Orchid Hotels, Tinplate, Bombay Dyeing, CMC :: Business Line :: Business Line

Wockhardt, cadila, Financial Technologies, Royal Orchid Hotels, Tinplate, Bombay Dyeing, CMC :: Business Line

CMC All round performance – beat expectations:: Prabhudas Lilladher,

CMC reported Q3FY13 results exceeding our/consensus expectation. The revenue
growth has been consistently supported by SI (CQGR of ~9% over the last three
quarters), while ITES remained relatively muted in Q3FY13. The margin profile
continues to be stable as reiterated by the management. We reiterate our
‘Accumulate’ rating, with a revised target price of Rs1,350 (from Rs1,270) as we
revise our estimates up for better growth and margin expectation

CMC :: ShareKhan Diwali Muharat Picks 2012

Solid parentage, strong visibility: 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 and created a niche for itself in the field of large system
engineering and integration projects. 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.
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 RBI, IOC, BPCL, ONGC, coupled with the Indian Railways, other PSUs and
defence sectors.
CMC has 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 (CMP) 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 have Buy on CMC with a buy rating and a one-year price
target of Rs1,551.

CMC: Buy ::Business Line

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.

CMC Diversification is the key :PL Research

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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.

CMC: Buy ::Business Line

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Buy CMC:: Business Line,

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CMC: Buy

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Pick up in the high-margin services component has resulted in top-line expansion too.

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K.Venkatasubramanian

Spending on IT hardware and software by Indian companies and the government is picking up at a rapid pace. Globally too, technology spending is reviving, especially in the US, after a lull of two years. The few companies that operate in this space could benefit from the momentum.

CMC: Buy :: Business Line

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Visit http://indiaer.blogspot.com/ for complete details �� ��

CMC: Buy

---

Pick up in the high-margin services component has resulted in top-line expansion too.

---

K.Venkatasubramanian

Spending on IT hardware and software by Indian companies and the government is picking up at a rapid pace. Globally too, technology spending is reviving, especially in the US, after a lull of two years. The few companies that operate in this space could benefit from the momentum.