CMC Ltd : BUY

Interim Hiccups; An Opportunity to Buy

Transformation accomplished: FY11 marked first full year post CMC’s biz transformation, in which it delivered healthy topline growth (+24% YoY) with stable margins (FY11 OPM at ~19%; +40 bps YoY). A balanced rev mix (Svcs: ~89%, International revs: ~54%, contribution from TCS: ~47-48% in Q4F11) with ~30% segmental PBIT margins for high growth Systems Integration & ITES biz (FY11 aggregate share: ~68%) bestow a positive demand outlook for CMC in the coming years.

Long-term revenue visibility robust: Higher employee additions (+33% YoY to 7,396) & increased investments in facilities are direct indicators of a stronger revenue outlook in the coming years. Healthy demand outlook is also reflected in new client additions (20 in Q4 – 8 in US and 12 in India/ 80 in FY11). In domestic biz (Q4 rev share: ~46%), CMC is witnessing strong traction in its niche verticals/offerings — Infra, e-Governance, Insurance, Retail (Rollout svcs), Rural & Co-operative Banks, Mobile and Cloud Computing. In exports (+26% YoY in Q4), strong demand is witnessed in its key offerings – Embedded & Real-Time Systems, Digitization & Work-Flow mgmt – in developed (US/Europe) as well as in emerging economies (Bangladesh, Sri Lanka, Nepal and MEA).

Leverage on short-term corrections (due to higher FY12E tax rate and capex) to BUY: FY12E tax rate and 35% increase in SEZ capacity to impact short-term performance. CMC’s earnings growth would have been higher but for increase in the FY12E effective tax rate to 25% (vs. earlier indications of 20%) and higher capex of ~Rs 250 cr in FY12E. Commencement of Phase III facility with 3,500 capacity addition (+35%) to Phase I & II (10,000 capacity) to impact cash flows in FY12E. On the positive side, this increase in capacity is again an indicator of buoyant demand. While we reduce our FY12E EPS est. downwards by ~10% to ~Rs 132 to incorporate these changes, we remain more confident on FY13E EPS growth and build in ~28% YoY growth to Rs 169. Revenue/PBT CAGR btw FY11- FY13E at 24%/23% resp.

BUY the stock from a long-term perspective.

Persistent Systems Ltd : BUY

Guidance In-Line; Watch for Playout of OPM Levers

Revenue traction remains robust led by strong growth in focus areas. Buoyancy in demand is reflected in: 1) pace/ quality of client addns (22 new clients in Q4/ 36 in Q3; active client base now includes +40 clients with annual rev run rate > USD 1 bn), 2) inv in S&M team, & 3) gross hiring target of ~2,300 (~36% of current employee base) which would include ~1,000 freshers. Persistent reported Rev of ~Rs 213 cr (~9% QoQ & ~24% YoY), EBITDA of Rs 38.1 cr (~11% QoQ & ~1% YoY) & PAT of Rs 33.1 cr (~9% QoQ & ~17% YoY) in Q4FY11.

Key highlights

ü  Sales: Led by growth in volumes (~8% QoQ) and IP sales. Pricing rose ~1.1% QoQ for offshore; declined 2.6% QoQ for onsite.

ü  EBITDA: (a) 10% salary hikes effective 1 Jan’11 and (b) Rs 2.4 cr provision for bad debts as a conservative provision, impacted EBITDA. Decline in attrition rate (190 bps QoQ) was a positive.

ü  PAT: Forex gain of ~Rs 2.9 cr helped PAT performance.

Valuation

Revenue guidance good; margin mgmt critical for a better EPS: Upsides exist in the FY12E topline guidance of USD 220 mn (+29% YoY of which organic biz is 25%) given: 1) strong traction in R&D by ISVs* given higher discretionary spend, 2) robust demand in the focus areas (to contribute ~43-45% to FY12E topline vs. ~42% in Q4), 3) ambitious plans to raise IP-led revs to ~20% of the topline over the next 3-5 years vs. ~10% in Q4 & 4) growth in new biz – Sell-with biz (partnership with existing clients to offer integrated solns) & TCG (which leverages its domain expertise in focus areas to offer consulting svcs). However, margin mgmt is critical to offset margin headwinds from salary hikes & high attrition rates in the industry. For a +ve YoY EPS growth in FY12E, it would have to leverage on existing op. levers in: 1) employee pyramid, 2) utilization rates 3) pricing & 4) growth of IP-led revs, to offset the impact of 30% effective tax rate which would consume most of the growth in operating profit.

Est./Valuations: F12E EPS marginally revised downwards by ~1.7% to incorporate higher S&M investment. Our TP of 511 implies an upside of 30%. Maintain BUY rating.

21st April, 2011

Tracking positive cues from global peers our markets opened on a positive note and traded sideways till the afternoon session. The markets momentarily moved lower in the afternoon session but soon regained momentum tracking cues from positive opening of European peers. The markets gained further in late session and closed the day on firm note. All the Sectoral indices ended in the green with AUTO, IT & Metals gaining more than2% each. Among the Sensex stocks M&M (5.05%), TCS (4.63%) & Hindalco (4.16%) were amongst the gainers while Rcom (1.99%), HH (1.87%) were among the losers. The Sensex gained 349 points or 1.83% to close at 19,471 while Nifty gained 111 points or 1.93% to close at 5,852.

Total traded turnover stood at Rs 1,72,309 cr. In equities both FIIs & were net buyers of (Rs 193 cr) While DIIs were net sellers (Rs 23 cr). On the derivatives side, FIIs were net buyers in Index Futures (Rs 858 cr), Index Options (Rs 853 cr) and Stock Options (Rs 9 cr) while they were net sellers in Stock Futures (Rs 121cr).

The US markets ended positive as investor sentiment was positive after better than expected earnings reported by companies like Intel & United Technologies. The Dow Jones gained 187 points or 1.52% to close at 12,454 while NASDAQ gained 58 points or 2.10% to close at 2,803.

The Asian markets are trading positive. Nikkei is trading higher by 0.58% while Hang Seng is currently trading higher by 1.10%.

The market breadth was positive with buying seen in all the sectors. The markets may open on a positive note tracking from cues from global peers. The weekly food and fuel inflation data to be announced and expectations from earnings of big companies like Reliance and TCS may affect the market sentiment.

The trend deciding level for the day is 5820,If NIFTY trades above this level then we may witness a further rally up to 5885‐5920‐5955 levels. However, if NIFTY spot trades below 5820 levels then we may see some profit booking to initiate in market, it may correct up to 5785‐5745‐5715.

Stocks to focus for intraday long: Uniphos, Bajaj Auto, BPCL