CMC Faces Declined Margins But Gears Up For Growth

CMC, a subsidiary of Tata Consultancy Services (TCS), announced its Q2FY13 results on October 15, 2012. Overall, the sequential growth in the financials of CMC has been rather subdued due to a drop in the company’s equipment sales business, languid business conditions and mounting foreign exchange losses. 

As compared to Q1FY13, the operating revenues of CMC have raised all of 1.32 per cent, from Rs 452.28 crore in Q1FY13 to Rs 458.26 crore in Q2FY13. The sequential growth in EBIT too has been in line with this, showing a growth of 1.68 per cent and thus improving the operating profit margin by 4 basis points. The impact though can be seen in the net profit of CMC which has dropped from Rs 58.43 crore in Q1FY13 to Rs 49.40 crore in Q2FY13, marking a hefty downfall of 15.45 per cent. This has been a result of a drastic drop in ‘other income’ and a rise in the effective tax rate. 

In terms of segments there has been a drop in income from customer services as a part of which CMC provides services for IT infrastructure requirements, including the supply of software and equipment. The company has, over time, reduced its dependence on the equipment supply business which saw a reduction in margins that affected the overall performance of the company. In line with this, the company said that in Q2FY13 94.8 per cent of its revenues came from the provision of services. This figure stood at 89.49 per cent in FY12, thus showing clearly the reducing focus and dependence on equipment supply. CMC also said that its equipment sales business was down by 42 per cent sequentially and that services grew by 6 per cent, thus clearly following their strategy.

In addition to this, CMC added 15 clients in the quarter under review and said that the traction of business from the U.S. and Europe remains strong, especially for the company’s embedded and real-time solutions and for systems integration. The company’s operations in the U.S. grew by a healthy 5 per cent. The management’s outlook on the economy and demand looks healthy through their comments and is indicative of no pressure on pricing or decision-making. CMC’s position also looks healthy on the staff front. The company announced a raise in wages in the range of 3-8 per cent. Also, CMC managed to bring down the attrition rate from 18.1 per cent to 17.9 per cent.

Overall, the company’s status looks healthy in terms of positioning. It also has a healthy balance between its international and domestic sources in terms of revenue generation. Moreover, the company has been successfully concentrating on reducing focus on the margin-binging equipment sales business. These factors thus maintain our positive outlook on the company and its prospects.