CMC: Steep valuations - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

CMC: Steep valuations

Feb 19, 2003

For CMC, the December quarter was a healthy one. The company, which is now part of the Tata group, has been able to post a 21% growth in its revenues YoY during the quarter. However, the highlight of the performance was a steep improvement in operating margins as the company reigned in its expenses tightly. Consequently, it’s net profits jumped by 45% during the same period.A decline of 11% in other expenses helped the company post better margins for 3QFY03. However, the company’s performance has been much better than it appears. An 81% decline in other income has subdued the company’s bottom line growth.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net Sales 1,146 1,391 21.4% 3,386 3,711 9.6%
Other Income 7314-81.3%12932-74.9%
Expenditure 1,094 1,239 13.2% 3,110 3,358 8.0%
Operating Profit (EBDIT) 51 152 196.4% 276 353 27.8%
Operating Profit Margin (%) 4.5%10.9% 8.2%9.5% 
Interest 44-18.2%187-60%
Depreciation 2120-2.9%5958-3%
Profit before Tax 100 142 42.4%328 321 -2%
Extraordinary items - -  00 
Tax 294037%12288-28%
Profit after Tax/(Loss) 70 10144.7%205 23213%
Net profit margin (%) 6.1%7.3% 6.1%6.3% 
No. of Shares 15.2 15.2   15.2 15.2  
Diluted Earnings per share* 18.5 26.8   18.1 20.4  
Annualised  33.2  33.2 

The top line growth largely stemmed from its software services and systems integration businesses. CMC has been working closely with the Tata Group software major, TCS, for the acquisition of clients in the domestic as well as international markets as TCS has better reach and credibility around the globe. The joint effort of these companies seems to be paying rich dividends.

Segmental Break up
(Rs m) 3QFY02 3QFY03 %Change 9mFY02 9mFY03 Change
Customer Services 649 873 34.4% 1,838 2,145 16.7%
Systems Integration 371 428 15.3% 1,122 1,255 11.9%
Indonet 26 39 47.1% 95 133 39.4%
Education & Training 115 55 -52.4% 364 187 -48.5%
Others 57 10 -83.1% 23 95 314.2%
Total 1,219 1,404   3,442 3,816  

Only reason for concern was the IT education business. With the slowing down of the IT education segment, CMC saw a steep fall in revenues as seen for major domestic players like NIIT, Aptech and SSI. The weakness in demand for IT education is expected to continue in the near future and therefore, the company’s performance is likely to be similar in the subsequent quarters. However, company has decided not to exit from the business and wait for better times that are certain post the consolidation phase the industry witnessing. Due to the sharp down turn many branded and small time players have not been able to sustain and have gone out of business. The company in order to restructure its education business will be focusing on the IT-enabled services markets.

CMC has traditionally focused on and continues to get orders from the government of India. However, the company post divestment stands to face more competition, as the Government would now be open to considering other vendors, who are also capable of vying for projects at competitive rates. The company at its recently held analyst meet expressed its concerns on this matter. But again, given its expertise, CMC emerges as one of the strongest contenders.

A significant element of interest in CMC is due to the fact that TCS, after getting listed would be looking to merge the erstwhile PSU, along with 3 other group companies, Tata Infotech, Tata Technologies and Tata Elxsi into itself. The Government still owns 26% stake in the company for which the Tata group can approach the government after the completion of 2 years of divestment. Considering that CMC was divested in October 2001, Tata’s can approach the Government in October 2003.

At the current market price of Rs 503, the stock is trading at a P/E multiple 33x its 9mFY03 earnings. CMC performance has improved significantly post the change in management. And considering the fact that it will be using TCS marketing and domain expertise prospects look much brighter. However, neither the company’s performance in the recent past nor prospects for the future justify these steep valuations. The high price is on expectations of an open offer from the Tata as they merge CMC into is TCS. However, one needs to remember with government holding 26% of the stake negative surprises are a possible. We feel that investments on hopes of an open offer at these valuations are extremely risky.

Equitymaster requests your view! Post a comment on "CMC: Steep valuations". Click here!

  

More Views on News

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

Infosys had an Exceptional Quarter Buoyed by Huge Deal Wins. Revenue Guidance Boosts Stock (Views On News)

Oct 14, 2021

Infosys raised its forecast for annual revenue growth to 16.5-17.5% from the earlier 14-16%, predicted in July 2021.

Info Edge: The Anatomy of an Indian Internet Behemoth (Views On News)

Oct 2, 2021

Info Edge is very popular in the Indian startup ecosystem due to its active participation in funding events.

This Indian Company is Tapping into the Huge Autonomous Driving Opportunity (Views On News)

Sep 14, 2021

Despite many challenges, Indian companies and startups have not shied away from entering this space.

4 Indian Companies in the Exploding Drone Market (Views On News)

Sep 1, 2021

The futuristic drone industry in India holds immense promise now that the government has come out with new rules.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

CMC. SHARE PRICE


Sep 29, 2015 (Close)

TRACK CMC.

COMPARE CMC. WITH

MARKET STATS