CMC - Seasonal weakness, Sound fundamentals - ICICISecurities

CMC's revenue growth slowed down in Q3FY14 to 14% YoY growth in revenues in INR terms as against a much higher 24.5% YoY growth posted in Q3FY13. This was despite a greater help from currency as INR depreciated 13-14% YoY vs. USD in Q3FY14 as against a lower 6% YoY depreciation witnessed in Q3FY13. In Q3FY14, the business was hurt, more than usual, by furloughs and lesser working days internationally and consequently international revenues were flattish YoY in USD terms vs. ~30% YoY growth in Q3FY13. Given that the growth at parent TCS itself is expected to be hurt by furloughs in Q3FY14 and that TCS' contribution to CMC's revenues has increased over time, the magnitude of seasonal weakness was higher YoY.

Lower use of subcontractors (subcon costs down 7.3% QoQ) helped EBITDA margin increase by 40bps QoQ despite lower margin equipment revenues being a higher proportion of the mix at 9.8% v/s 6.8% in Q2FY14. Higher than expected other income and lower tax rates helped PAT to grow 4.8% QoQ to Rs705mn. We expect a bounce-back in growth Q4FY14 onwards and maintain our ADD rating with a target price of Rs1,609 based on 13x FY16E EPS.

Source : Equity Bulls

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