CMC Continues Outperformance

CMC, a subsidiary of Tata Consultancy Services (TCS) announced its results earlier today. The strong set of numbers had the stock prices of CMC appreciating by 3.44% to Rs 1334.85 per share. Having looked at the functioning and prospects of the company, we had recommended investors to accumulate the stock post its Q1FY13 results, on July 13, 2012. Since this recommendation, when it was trading at a price of Rs 938.40 per share, prices have risen by 42.25%.

On a sequential basis, CMC announced a growth of 7.49% in its revenues, 8.60% in operating profit and 23.60% in net profit. These numbers have been robust indeed. With this, the revenue, operating profit and net profit of the company have reached Rs 492.97 crore, Rs 83.18 crore and Rs 61.06 crore respectively.

In terms of segment performance, Systems Integration, which contributes to over 60 % of the total consolidated revenues, grew by 12.37%. Moderate growth was seen in Customer Services and IT Enabled Services which grew by 0.48% and 3.53% respectively. Revenues from Education and Training and SEZ (which together contribute to less than 5% of the total consolidated revenues) declined by 11.38% and 12.53% respectively.

One of the factors behind our recommendation of CMC was the fact that the company was reducing its dependency on equipment and IT hardware for revenues. The IT hardware industry has been facing a lot of headwinds since the last few quarters because the massive depreciation in the rupee. Considering the fact that 85% of components required in the industry have to be imported, currency movements account for a great deal of importance.

Overall, the company saw good traction on various segments and geographies. It added 26 clients in Q3FY13 compared to 15 clients in Q2FY13. A net addition of 473 employees was made taking the total headcount to 11224.

Consistent outperformance in a subdued environment, strength across segments and geographies and healthy deal wins and employee metrics lead us to maintain our recommendation on the stock.