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Brokerage Recommendations

Tuesday, September 18, 2012

Sharekhan calls a ‘Buy’ on CMC
CMP: Rs. 1075    Target Rs. 1551

Key points: Solid parentage, strong visibility: Over the years, under the Tata Consultancy Services (TCS) parentage CMC has transformed itself from a low-margin information technology (IT) equipment provider to a well-diversified IT services and solutions provider. CMC initiated its “Joint-Go-To-Market” approach with TCS in 2005, which is paying up handsomely now. In the last five years the contribution of the international revenues has tripled from 20% to around 60% of the total revenues in FY2012 whereas the share of the services revenues has gone up to almost 90% of the total revenues as compared with 53% in FY2005. The share of revenues achieved through synergies with TCS has crossed 51% in FY2012 from 43% in FY2007.

Going forward, the CMC management aims to be among the top 20 global system engineering and integration companies by 2020 by capitalising on the strong synergies with TCS. Synergies with TCS have been leveraged to win large mission mode projects (MMP) in the domestic market, eg e-Passport Seva and CBEC Project, and improve traction in the international market in the areas of embedded system and digitization services. CMC’s management has indicated the pipeline of deals is strong in both domestic and international markets which are likely to get exploited by CMC and TCS together in the coming years.

Valuation: Over the years, CMC has gradually transformed itself from a low-margin equipment provider into a well- diversified IT services and solutions provider, and created a niche for itself in the field of large system engineering and integration projects. On the other hand, its Joint- Go-To-Market strategy with TCS is also playing a big role in the business transformation, with CMC gaining strong traction in the international markets. As a matter of fact, the international business constitutes more than 60% of CMC’s total revenues. We believe CMC has already set the stage for the next level of growth and is likely to witness a much stronger growth in the coming years. We expect its earnings to grow at a CAGR of 43% over FY2012- 14. At the current market price of Rs1,108, the stock is trading at 13.4x FY2013E and 10.7x FY2014E earnings respectively. We value the stock at 15x target multiple based on the FY2014 earnings estimate, in line with its two-year average trading multiple. We initiate coverage on CMC with a Buy rating and a one-year price target of Rs 1,551.

B P Equities calls a ‘Buy’ on MBL Infrastructures
CMP: Rs. 166    Target Rs. 271

Results Highlights: The company’s revenue declined by 13.4% yoy to Rs. 2,682 mn. This was due unbilled work at ten ongoing projects which has not reached significant level of billing as per the percentage completion method of accounting followed by the company. The work at these project is going at a full swing and the revenue is expected to flow from these project during Q3 & Q4FY13. We also saw slow execution at the Orissa BOT projects resulting in low revenue. During the quarter we saw a decline in EBIDTA margins which stood at

12.5% down by 77 bps yoy, primarily due to higher construction expenses and employee cost. During the quarter PAT margins were down by 125 bps yoy at 5.2%.
Other Highlights: The present order book is at Rs 23,210mn which stands at 1.9x FY12 sales giving us the revenue visibility of 18-24 months. During the quarter the company added orders worth Rs. 2,060mn. The closing order book has been divided into 22% railways, 17% buildings and balance 61% roads & highways.

The outstanding bids stands at Rs. 102.6 bn and the management is expecting fresh orders of Rs. 30 bn during FY13 with a targeted closing order book of Rs. 38 bn by end of FY13. Management has also guided a topline of Rs 17,000 mn with EBIDTA at Rs. 1,900 mn and PAT at Rs. 900mn for FY13.

The construction work is going at a full swing at the company’s road BOT projects viz., Seoni Katangi and Waraseoni Lalbarra while the work at Rimuli Roxy Rajamunda is going at a very slow pace.

Valuation & Outlook: The company is well poised to capitalise on the opportunities of govertment spending on infrastructure. At current market price of Rs 165 the stock is trading at a P/E multiple of 3.7x and 3.4x to its FY13E and FY14E EPS of Rs. 44.9 and Rs. 48.4 per share. We maintain ‘BUY’ with a target price of Rs. 271 per share with an upside of 64% based on SOTP method. For the construction business we arrive at a price of Rs 224 per share which discounts FY13E EPS of Rs 44.9 by 5x. For BOT projects we have valued Seoni Balaghat on DCF basis, Seoni Katangi on BV basis and Waraseoni Lalbarra on BV basis, which gives a value of Rs 47 per share.

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