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Tech mid-cap CMC has delivered strongly on the revenue front in the June quarter. However, increase in material costs as well as enhanced sub-contracting expenses have meant that profits have fallen steeply over the same period last year.
During the quarter, while revenues grew by over 24 per cent to Rs 305.6 crore, net profits fell by nearly a fourth to Rs 34.9 crore on a year-on-year basis..
The company's renewed thrust on the hardware-intensive customer services business comes as a surprise. This segment which contributes about 25 per cent to its revenues has grown by 36.7 per cent.
Over the last few years, the company had indicated that it was reducing focus on low-margin deals in its customer services division, in order to boost margins. But in FY11, there was a turnabout with a 12 percent increase in revenues from this segment, though overall margins were not sacrificed significantly.
In this light, the recent quarterly numbers of CMC suggest that the company is still focussed on this segment in order to drive volumes. Purchase costs were up nearly 90 per cent during the quarter, indicating more spends on hardware.
Key division shines
The company's system integration segment, which contributes over 55 per cent of revenues, has seen a 29.5 per cent increase to Rs 170.5 crore.
This is a relatively high-margin business (over 26 per cent EBIT margin) and has been one of key thrust areas for the company as it sought to broad-base to software development and maintenance, embedded systems and turnkey project implementation.
Its IT-enabled services division (nearly 14 per cent of revenues) has grown at a slower clip at just 3.5 per cent.
What has dragged down margins for CMC during the quarter is a steep increase in costs pertaining to sub-contracting, as well as its own staff expenses. While the former increased by over 30 per cent over the previous year to Rs 80.5 crore, the latter expanded by over 23 per cent to Rs 95.8 crore.
The company takes recourse to sub-contracting for implementation of one-off projects or assignments as it seeks to optimise costs.
Staff cost increase may be more a one-off event as a part of annual hikes. It, however, remains to be seen whether sub-contracting costs can be kept under check in the forthcoming quarters, as requirements change based on nature of deal flows.
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