CMC CMC Q4FY14 results have beaten PLe & consensus expectation on all counts. The strong performance was led by Customer Service and System Integration. We reiterate our ‘Accumulate’ rating, with a revised TP of Rs1,690 (from Rs1,620), as we revise model for stronger growth and margin. The company added 15 new clients. April 15, 2014 Shashi Bhusan [email protected] +91‐22‐66322300 
Revenue and margin ahead of expectation: CMC reported a revenue growth of 11.1%QoQ to Rs6,232m (PLe: Rs5,604m, Cons: Rs5,774m). EBITDA margin expanded by 517bp to 21.4% (PLe: 16.1%, Cons: 16.5%) led by margin improvement in Customer Services and System Integration along with lower Other operating expense (decline 31% QoQ i.e. 365bp). PAT grew by 26.7% QoQ to Rs894m (PLe: Rs698m, Cons: Rs711m) due to higher other income. Other Income includes Rs 609.8m (Q4FY13: Rs. 276m) pertaining to dividend received from its wholly owned subsidiary CMC Americas for Q4FY14. 
Kuwait Case – Resulted in positive one‐off impact in the quarter: CMC won a legal case against Kuwait Stock Exchange (KSE) during the quarter. KSE had terminated the contract with CMC in September 2006, against which CMC filed a legal case in the courts of Kuwait. The Cassation Court of Kuwait, which is the highest judicial authority in Kuwait, delivered the judgment in favor of CMC and has ordered KSE to pay CMC a sum of KD 2.17 million (Rs 463.7mn) along with interest @ 7% per annum from the original date of order from the lower Court. 
Performance strong excluding one‐off: The case resulted in Sales increase by Rs189.78m, other income increase of Rs59.42m, PBT increase by Rs. 376.62m and operating expense reduction of Rs 128.8m. Hence, excluding above mentioned impact, revenue grew by 7.7% QoQ to Rs6042m, EBITDA margin expanded by 390bp to 20.1%, and EPS declined by 8.7% QoQ to Rs21.26. 
Worth exploring? 1) What resulted in strong growth in Customer Service and System Integration? 2) How sustainable is margin expansion for the quarter? 
Valuation & Recommendation: We see revenue momentum to pick‐up in FY15. Reiterate ‘Accumulate’, with a TP of Rs1,690, 14x FY16E earnings estimates. Hussain Kagzi [email protected] +91‐22‐66322242 Rating Price Target Price Implied Upside Sensex Nifty Accumulate Rs1,528 Rs1,690 10.6% 22,629 6,776 (Prices as on April 11, 2014) Trading data Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders Promoters Foreign Domestic Inst. Public & Other Stock Performance (%) 1M 6M Absolute 4.7 10.1 Relative 1.0 (0.1) How we differ from Consensus EPS (Rs) PL Cons. 2015 109.4 107.1 2016 119.9 131.0 46.3 30.3 204.2 0.00% 0.00% 0.00% 0.00% 12M 9.6 (12.4) % Diff. 2.2 ‐8.5 Price Performance (RIC: CMC.BO, BB: CMC IN) Key financials (Y/e March) Revenues (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs) 2013
19,279
31.2
3,168
2,302
76.0
51.7
14.5
2014E 22,315 15.8 3,893 2,805 92.6 21.8 22.5 2015E
25,525
14.4
4,589
3,315
109.4
18.2
26.0
2016E
28,792
12.8
5,002
3,632
119.9
9.5
28.0
2013
16.4
26.8
24.5
2.4
14.3
20.1
4.9
0.9
2014E 17.4 26.6 24.0 2.1 11.8 16.5 4.0 1.5 2015E
18.0
25.8
24.1
1.8
10.0
14.0
3.3
1.7
2016E
17.4
23.4
21.9
1.6
9.0
12.8
2.7
1.8
(Rs)
2,000
1,500
1,000
500
Apr‐14
Feb‐14
Dec‐13
Oct‐13
Aug‐13
Jun‐13
Apr‐13
0
Source: Bloomberg Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Q4FY14 Result Update Strong performance – One‐off gain made it stronger
CMC Exhibit 1: Revenue and margin strong, beating consensus expectation (Rs m) Var (Act. Vs Est.)
11.2%
Y/e March Q4FY14 Q3FY14 QoQ
Q4FY13
YoY
Cons PLe
Sales 6,232.1 5,609 11.1%
5,240 18.9%
5,774 5,604 EBITDA 1,330.6 908 46.6%
818 62.6%
950 900.0
47.8%
21.4% 16.2% 517 bps
15.6%
574 bps
16.5% 16.1%
529 bps
894 706 26.7%
613 45.8%
718 698 28.1%
29.51 23.30 26.7%
20.24
45.8%
24 23.0
28.3%
EBITDA Margin PAT EPS (diluted) Source: Company Data, Bloomberg, PL Research Exhibit 2: Adjusted for legal battle won by CMC Rs m Q4FY14 (Adj)
Q3FY14
Sales 6,042.4 5609.3
7.7%
1,213.2
907.8
33.6%
20.1%
16.2%
390 bps
644
706
‐8.7%
21.26
23.30 ‐8.7%
EBITDA EBITDA Margin PAT EPS (diluted) QoQ
Source: Company Data, PL Research Exhibit 3:
Revising FY15E and FY16E estimates upward New FY15E Revenue Old FY16E FY15E Change FY16E FY15E FY16E 25,525 28,792 25,137 28,379 1.5%
1.5%
EBITDA Margin 18.0% 17.4%
16.2%
16.1% 181 bps
126 bps
EPS 109.4 119.9 101.2 114.0 8.1%
5.2%
Target Price Target Multiple 1690 1620 4.3% 14 14 0.0% Source: Company Data, PL Research Exhibit 4: Customer Services and System Integration delivered strong growth By Service Offering (Rs m) Q4FY14
Q3FY14 QoQ Q4FY13
YoY
Customer Services 1,198.3 1,031.9 16.1% 1,560.8 ‐23.2%
Systems Integration 3,983.9 3,584.0 11.2% 2,717.4 46.6%
ITES 774.5 724.9 6.8% 693.4 11.7%
Education & Training 137.7 162.8 ‐15.4% 143.6 ‐4.1%
SEZ 137.8 106.1 29.9% 124.4 10.7%
96.9 31.4 209.2% 40.6 139.0%
Customer Services 18.9%
18.3% 64 bps 29.6%
‐1063 bps
Systems Integration 62.9%
63.5% ‐59 bps 51.5%
1148 bps
ITES 12.2%
12.9% ‐61 bps 13.1%
‐90 bps
Education & Training 2.2%
2.9% ‐71 bps 2.7%
‐54 bps
SEZ 2.2%
1.9% 30 bps 2.4%
‐18 bps
Unallocable Revenue 1.5%
0.6% 98 bps 0.8%
76 bps
Unallocable Revenue % of Total Source: Company Data, PL Research April 15, 2014 2
CMC Exhibit 5: Segment Results (PBIT) By Service Offering (Rs m) Q4FY14
Q3FY14 QoQ Q4FY13
YoY
81.3 96.5 ‐15.8% 81.7 ‐0.5%
1,090.2 720.4 51.3% 626.3 74.1%
262.1 208.1 25.9% 168.4 55.7%
8.5 20.4 ‐58.4% 25.7 ‐66.9%
99.7 79.2 25.9% 100.8 ‐1.1%
Customer Services 7%
9% ‐257 bps 5%
155 bps
Systems Integration 27%
20% 727 bps 23%
432 bps
ITES 34%
29% 513 bps 24%
956 bps
6%
13% ‐636 bps 18%
‐1170 bps
72%
75% ‐229 bps 81%
‐861 bps
Customer Services Systems Integration ITES Education & Training SEZ PBIT Margin (%) Education & Training SEZ Source: Company Data, PL Research Exhibit 6: Capital Employed By Service Offering (Rs m) Q4FY14
Q3FY14 QoQ Q4FY13
YoY
Customer Services 1,332.9 1,274.7 4.6% 1,193.1 11.7%
Systems Integration 2,193.7 2,177.0 0.8% 1,748.7 25.4%
664.4 790.1 ‐15.9% 754.5 ‐12.0%
76.0 83.7 ‐9.2% 51.5 47.5%
3,547.3 3,435.7 3.2% 2,853.6 24.3%
ITES Education & Training SEZ Source: Company Data, PL Research April 15, 2014 3
Income Statement (Rs m) Y/e March 2013 2014E 2015E
2016E
Net Revenue Software Dev. Exp. Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Ex‐Od items / Min. Int. Adj. PAT Avg. Shares O/S (m) EPS (Rs.) 22,315 10,899 11,416 5,547 1,977 3,893 270 — 251 3,873 1,069 2,805 — 2,805 30.3 92.6 25,525
12,207
13,318
6,505
2,224
4,589
295
—
156
4,450
1,135
3,315
—
3,315
30.3
109.4
28,792
13,657
15,135
7,643
2,491
5,002
374
2
184
4,810
1,179
3,632
—
3,632
30.3
119.9
19,279 8,665 10,613 5,216 2,229 3,168 232 2 132 3,066 764 2,302 — 2,302 30.3 76.0 CMC Balance Sheet Abstract (Rs m) Y/e March 2013 2014E 2015E
2016E
Shareholder's Funds Total Debt Other Liabilities Total Liabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash & Equivalents Other Current Assets Current Liabilities Other Assets Total Assets 9,463 417 — 9,879 3,697 3 2,381 3,728 1,374 6,901 4,547 71 9,879 11,585 417 — 12,002 5,668 3 2,381 3,879 745 9,065 5,930 71 12,002 14,113
417
—
14,530
7,313
3
2,381
4,762
963
10,232
6,434
71
14,530
16,896
417
—
17,313
9,127
3
2,381
5,731
1,626
11,362
7,257
71
17,313
Quarterly Financials (Rs m) Y/e March Q1FY14 Q2FY14 Q3FY14
Q4FY14
5,608 884 15.8 64 — 21 841 168 673 673 5,609
908
16.2
67
—
32
873
167
706
706
6,232
1,331
21.4
78
—
97
1,350
455
894
894
Cash Flow Abstract (Rs m) Y/e March 2013 2014E 2015E
2016E
C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE 1,233 44 (435) 842 532 1,374 1,296 1,317 2,284 (2,232) (682) (630) 1,374 745 62 62 2,946
(1,940)
(788)
219
745
963
1,007
1,007
3,700
(2,188)
(848)
663
963
1,626
1,512
1,512
Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality 4,866 770 15.8 62 — 101 809 278 531 531 Key Financial Metrics Y/e March Growth Net Revenue EBITDA % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Adj. PAT 2013 2014E 2015E
31.2 41.2 51.7 51.7 15.8 22.9 21.8 21.8 14.4
17.9
18.2
18.2
12.8
9.0
9.5
9.5
18.0
13.0
24.1
25.8
17.4
12.6
21.9
23.4
—
—
(0.1)
—
14.0
3.3
10.0
1.8
12.8
2.7
9.0
1.6
25.5
3.5
3.6
30.4
24.5
3.8
3.6
41.6
16.4 11.9 24.5 26.8 17.4 12.6 24.0 26.6 (0.1) — — — 20.1 4.9 14.3 2.4 16.5 4.0 11.8 2.1 Eff. Tax Rate 24.9 Other Inc / PBT 4.3 Eff. Depr. Rate (%) 5.8 FCFE / PAT 57.2 Source: Company Data, PL Research. 27.6 6.5 4.3 2.2 2016E
Key Operating Metrics Y/e March Revenue (US$ mn) Rs/US$ Gross Margin Subcontracting Cost (as % of Revenue) Source: Company Data, PL Research. 2013 2014E
2015E
2016E
353 55 38 35 367
61
35
40
427
60
36
39
488
59
35
38
April 15, 2014 4
CMC Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage
60%
52.7%
50%
40%
30%
25.9%
20.5%
20%
10%
0.9%
0%
BUY
Accumulate
Reduce
Sell
PL’s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. April 15, 2014 5