Stock Fundamentals

CMC: Tapping the right keys

K Venkatasubramanian | Updated on January 24, 2018



A growing client base and presence in high potential markets are positives

Despite a rather weak growth scenario that the IT sector is faced with, select players still seem to be well placed to deliver on the revenue front.

Mid-tier company CMC has been able to consistently better the industry over the past three to four years. Its key market, the US, is on the recovery path; most large- and mid-sized players are increasing focus there. A revival in the domestic IT spends too works favourably for CMC, which has an entrenched presence here.

Although CMC is set to be amalgamated with its parent TCS, the timeline for completion is as yet unclear. In its concall with investors in April, the CMC management indicated that it would take time.

Also, the company has recently announced the dates for its quarter results in June. This suggests that the amalgamation may possibly not happen soon.

Investors can thus buy the shares of the company. At ₹1,994, the stock trades at 18 times its likely per share earnings for 2015-16. While this valuation multiple is not cheap, it is still at a discount to mid-tier IT players such as Mindtree and Hexaware (21-24 times).

A good mix of service offerings with system integration solutions leading the way in deal wins, a tilt towards international (largely the US) revenues, and an expanding domestic market are key positives for the company.

The association with its parent company, TCS, has also helped CMC tap into newer segments and expand its client base. It has also been rapidly moving away from pure hardware-intensive deals over the last few years, which would help margins and enable it to move up the services value chain.

In 2014-15, CMC's revenue grew 12.7 per cent over the previous fiscal to ₹2,513 crore, while net profit remained almost unchanged at ₹277 crore. The profit growth would have been higher, but for a 24 per cent increase in sub-contracting and outsourcing expenses. These expenses may be tempered in the future.

Increasing overseas footprint

Over the past four years, with its service offerings expanding, CMC has made a significant transition from being a hardware-intensive, low-margin player to a more services-centric company. It now derives nearly 91 per cent of its revenue from offerings that have a significant services component.

The company’s systems integration division (over 65 per cent of revenue) offers application development and maintenance, and ‘embedded’ systems services, which are typically high-margin businesses.

This segment has grown at nearly 17 per cent in 2014-15, much faster than the overall revenue rate of the company. CMC’s more hardware-intensive customer services unit (a little over 17 per cent of revenues) too continues to grow, though at a slower pace, given that the company takes up such contracts only if there is a significant software component to be offered subsequently.

Its third major division, IT-enabled (BPO/KPO) services, (12 per cent of revenues) though has had very mild traction. Education and IT training is the other segment in which the company operates. This blend of offerings gives CMC a better chance of winning deals that are non-discretionary in nature.

The combination of a large client base and a dispersed geographical presence offer good visibility on future revenue flows and growth prospects.

International revenues (largely from the US) now account for over 66 per cent of the company’s overall revenue, up from 55 per cent levels a couple of years ago.

Traction in Indian deals

In India, the Government, which is increasing spends in areas such as rural connectivity and e-governance, is a key market for CMC.

It has been engaged by state agencies such as Indian Railways, Passport Seva and the Election Commission, where heavy volume of data is likely to provide sustainable revenues for the company. India provides about a third of the company’s revenues. In recent quarters, the company has also been able to win deals from the defence and the port segments as well.

Competition in the system integration space from players such as Wipro Infotech and HCL Infosystems could mean pricing pressure for CMC.

Hiring more local staff in the US in case of project requirements could increase the company’s wage costs and affect margins.

Published on June 27, 2015

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