Investor's Eye: Pulse - (Inflation rises to 7.55%); Stock Idea - CMC (Leveraging on its pedigree); Viewpoint - Prozone CSC (Provogue's demerged real estate arm makes its debut on bourses)

 

Investor's Eye [September 14, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   PULSE TRACK Inflation rises to 7.55% The Wholesale Price Index (WPI)-based inflation for August 2012 came in at 7.55% as against 6.87% in July 2012. The inflation numbers were ahead of the market estimates and were mainly contributed by a pick-up in manufacturing and fuel inflation. Also, the inflation rate for June 2012 was revised upwards to 7.58% from 7.25% as per provisional estimates. The inflation rate for August 2012 was higher than the previous month's and was primarily led by an increase in the manufacturing and the fuel, power and light segment. On a year-on-year (Y-o-Y) basis, the prices of the manufacturing segment increased by 6.14% (as against by 5.58% in July 2012) while the fuel inflation increased to 8.32% from 5.98% in the year-ago period. However, the primary articles segment showed some moderation in inflation (10.08% vs 10.39% in July 2012) contributed by the food inflation.  On a month-on-month (M-o-M) basis the fuel index was up by 3.1% contributed by the electricity segment. The manufacturing index was up by 0.8% month on month (MoM) to 146.9 (compared with 145.7 in July 2012). The primary article index was marginally up (up 0.3% MoM) though the food inflation index remained almost unchanged compared with the July 2012 reading. After showing a significant moderation in July, the inflation rate again surged to 7.55% with an uptrend in the manufacturing inflation. Also, the inflation rate for June 2012 was revised upwards by 33 basis points which indicates inflation pressures in the system. Further, the recent hike in the fuel prices and the weak monsoon are likely to keep pressure on inflation especially food and fuel inflation. With the recent policy action the ball is in the Reserve Bank of India (RBI)'s court to take forward the monetary easing cycle. However, given the inflationary pressures the consensus expectation is that the RBI may keep the rates unchanged in the coming mid quarter policy review. STOCK IDEA CMC Cluster: Emerging Star Recommendation: Buy Price target: Rs1,551 Current market price: Rs1,108 Leveraging on its pedigree 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 digitisation services. CMC's management has indicated the pipeline of deals is strong in both domestic and international markets which is likely to get exploited by CMC and TCS together in the coming years.  Strong foothold in domestic IT arena, expanding competencies in international markets: CMC has gained a strong foothold in the domestic IT arena by winning large turnkey deals, some on its own and the others in partnership with TCS. Another favourable factor driving its strong growth and helping it tap large government projects is its previous status as a public sector undertaking (PSU) which has given it an edge over the other players. The company counts some of the marquee names in the domestic market, like Reserve Bank of India (RBI), Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), Oil and Natural Gas Corporation (ONGC), coupled with the Indian Railways, other PSUs, defence sector, as its clients which is testimony to its strong presence in the domestic IT market. Currently, the domestic market contributes around 40% of its total revenues. Going forward, with an upswing in the domestic IT spending, CMC is well poised to tap this advantage.  Thrust on value-added services augurs well for margin trajectory: CMC started as a low-margin equipment provider and integrator with an asset heavy model. However, over the years its management has credibly brought down the low-margin equipment revenues to around 10% from 40% earlier. Over the same period, owing to the synergies with TCS, the revenue contribution of the relatively high-margin international business has increased significantly to over 60% of the total revenues. Strong growth traction in the system integration (SI) and IT enabled services (ITES) businesses, increasing acceptability of its industry specific solutions (asset-based solutions) and further scope for improving the offshore mix would drive the company's margins 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 Rs1,551.   VIEWPOINT Prozone CSC       Provogue's demerged real estate arm makes its debut on bourses Prozone Capital Shopping Centre (Prozone CSC), the demerged arm of Provogue India, got listed on the bourses recently. The demerger was effected on February 10, 2012 after which Provogue India had got listed on the bourses with an independent status, owning only the core retail business. On September 12, 2012, the retail real estate developer, Prozone CSC, got listed with a market capitalisation of Rs400 crore (at Rs26).    Valuation and outlook Prozone has the advantage of a healthy balance sheet, a substantially large land bank and a reputed strategic and financial partner. However, it has land bank situated in tier-II cities and little track record in terms of successful execution and management of the real estate business. Moreover, the long awaited re-listing can be seen as an exit route for many investors and result in pressure on the stock in the near term.  We have worked out the rough fair price by employing the sum-of-the-parts valuation method. At a cap rate of 14% taken to value the annuity based Aurangabad retail business and its other land banks (based on the indicated development plans) the valuation works out to Rs23-24 per share. We see upside to the fair price from the increasing visibility on the execution front of the residential projects (in Indore, Jaipur and Coimbatore) scheduled to be launched shortly.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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