The Hindu Business Line : CMC: Buy

Investments with a one-year horizon may be considered in the CMC stock, considering its availability at reasonable valuations and bright business prospects. At Rs 808, the share trades at 13 times its current earnings and 10 times its estimated FY09 earnings. An increasing focus on high margin services, rising international revenues, presence in key IT spending segments in India – visibility for which has increased after the Railway and Union Budgets and improvements in operational parameters – make for robust business prospects for CMC.

CMC’s customer services and system integration businesses handle IT solutions and manage turnkey projects by providing services across the entire gamut of IT infrastructure components. These activities are the largest contributor to revenue. CMC also has an ITES division, which handles back-office processes, call-centre services and an education and training division, which provides IT education services to college graduates and corporate professionals. System integration and educational training, which are growing at a higher rate, are the company’s relatively high margin offerings.

The company has been expanding client relationships in areas such as defense, e-governance, ports and transportation, all key drivers of domestic IT spend. The proposals in the railway budget ranging from increased mobile ticketing, augmenting IT infrastructure, fleet tracking and having a complete call-centre infrastructure by 2008-09, may all mean additional order flow for CMC, given its execution capabilities and existing relationship with the Railways. The Union Budget proposals to increase the number of IT-enabled citizen service centres to deliver Government services and increase in defense spend also hold promise for the company. But the caveat here is that where the deals are hardware intensive, the margins may be lower.

CMC’s international revenues have increased 35 per cent in the nine months ended December 2007. The growth here is driven by system integration deals, infrastructure management deals, synergies with TCS and focus on ITES services. International deals are usually more margin accretive than domestic ones and the company hopes to achieve a 50-50 balance between the two over the next 12-15 months. Though the extending receivables cycle was a concern earlier, this has been reduced sharply in the latest quarter. Margin pressures could arise as a result of competition from players such as HCL Infosystems, Wipro Infotech, Bartronics and Datacraft, for the above deals.

K. Venkatasubramanian

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