Shareholders can continue to hold the CMC stock (Rs 1,020) considering the possible gains it may offer over a one-to-two-year period on the back of reasonable growth prospects. With significant fall in technology stocks recently, any weakness in CMC's price can be used to consider fresh exposures.
The stock trades at 20 times its trailing 12 -month earnings on the current equity base. This is at a premium to its peer, HCL Infosystems, but CMC's operating profit margin of 11 per cent is significantly higher than the former. This may indicate better cost-management and operating efficiency. It also shows that the company's dependence on low-margin equipment sales is decreasing and the services contribution to revenues is on an uptrend.
CMC is an IT solutions company and manages turnkey projects by providing solutions and services across the entire gamut of infrastructure components — computers, servers, routers and systems and application software. Its customer services and system integration SBUs (strategic business units) handle most of these activities and are also the highest revenue contributors (85 per cent of revenues).
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 corporates.
Business Analysis
Solid Partnership: CMC has been able to partner with some of the finest names in the IT space — Microsoft, IBM, Cisco, HP, Sun Microsystems and Oracle. This has helped it gain expertise over a wide range of IT products and servic es enabling it to serve as a value-adding entity for clientele with diverse requirements. This association has also helped CMC secure more business, in addition to client mining from its US subsidiary.
Strong client base: The company has, over the years, been increasingly engaging itself in turnkey projects rather than in small projects. It has won large-sized deals, some on its own, others in partnership with Tata Consultancy Servi ces.
Providing the entire spectrum of IT services not only ensures revenues upon completion of a project, but also locks in future revenue streams by way of services such as maintenance and support. Another favourable factor for the company is that it has been able to tap big public sector undertakings (PSU) as clients, helped by its previous status as a PSU . Indian Railways, ONGC, GAIL, IOC are some of CMC's clients. Increasing IT spends by the government is likely to translate into business opportunities for CMC. It has significant private sector clientele as well; thus ensuring a healthy mix of PSU and private sector clients.
broad-basing offerings
The company is increasing its focus on education and training business. CMC has been able to tailor its programs to corporate needs and has gained significant presence in the IT education space, partly due to its own expertise developed over the years and partly due to synergies created by the TCS association.
The company is working out an interesting business model with Reliance Money as a client, wherein the latter would be allowed to open outlets at CMC's franchisee units. Here, CMC would handle the IT infrastructure and management and provide education and training services to Reliance Money's personnel at these outlets.
This would provide it with twin revenue streams from IT infrastructure support and training services. CMC's ITES revenues have also grown significantly with an increasing overseas client base. It appears well-placed to provide technical support services through its call-centre units. Both are relatively high-margin services and higher growth and contribution to revenues from these services could augur well for earnings.
Risks
With prominent PSUs in its client base, CMC's debt recovery cycle tends to be long and may expand its working-capital requirements. The company's increasing overseas client base also exposes it to currency appreciation risks.
These are key realisation risks. Wage increases, estimated to be about 10 per cent annually, may also affect margins. Finally, competition from other players such as Wipro Infotech, HCL Infosystems and Datacraft are also potential challenges.
The stock trades at 20 times its trailing 12 -month earnings on the current equity base. This is at a premium to its peer, HCL Infosystems, but CMC's operating profit margin of 11 per cent is significantly higher than the former. This may indicate better cost-management and operating efficiency. It also shows that the company's dependence on low-margin equipment sales is decreasing and the services contribution to revenues is on an uptrend.
CMC is an IT solutions company and manages turnkey projects by providing solutions and services across the entire gamut of infrastructure components — computers, servers, routers and systems and application software. Its customer services and system integration SBUs (strategic business units) handle most of these activities and are also the highest revenue contributors (85 per cent of revenues).
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 corporates.
Business Analysis
Solid Partnership: CMC has been able to partner with some of the finest names in the IT space — Microsoft, IBM, Cisco, HP, Sun Microsystems and Oracle. This has helped it gain expertise over a wide range of IT products and servic es enabling it to serve as a value-adding entity for clientele with diverse requirements. This association has also helped CMC secure more business, in addition to client mining from its US subsidiary.
Strong client base: The company has, over the years, been increasingly engaging itself in turnkey projects rather than in small projects. It has won large-sized deals, some on its own, others in partnership with Tata Consultancy Servi ces.
Providing the entire spectrum of IT services not only ensures revenues upon completion of a project, but also locks in future revenue streams by way of services such as maintenance and support. Another favourable factor for the company is that it has been able to tap big public sector undertakings (PSU) as clients, helped by its previous status as a PSU . Indian Railways, ONGC, GAIL, IOC are some of CMC's clients. Increasing IT spends by the government is likely to translate into business opportunities for CMC. It has significant private sector clientele as well; thus ensuring a healthy mix of PSU and private sector clients.
broad-basing offerings
The company is increasing its focus on education and training business. CMC has been able to tailor its programs to corporate needs and has gained significant presence in the IT education space, partly due to its own expertise developed over the years and partly due to synergies created by the TCS association.
The company is working out an interesting business model with Reliance Money as a client, wherein the latter would be allowed to open outlets at CMC's franchisee units. Here, CMC would handle the IT infrastructure and management and provide education and training services to Reliance Money's personnel at these outlets.
This would provide it with twin revenue streams from IT infrastructure support and training services. CMC's ITES revenues have also grown significantly with an increasing overseas client base. It appears well-placed to provide technical support services through its call-centre units. Both are relatively high-margin services and higher growth and contribution to revenues from these services could augur well for earnings.
Risks
With prominent PSUs in its client base, CMC's debt recovery cycle tends to be long and may expand its working-capital requirements. The company's increasing overseas client base also exposes it to currency appreciation risks.
These are key realisation risks. Wage increases, estimated to be about 10 per cent annually, may also affect margins. Finally, competition from other players such as Wipro Infotech, HCL Infosystems and Datacraft are also potential challenges.
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