Will operate between 15-17% margins this fiscal: CMC

In an interview to CNBC-TV18, R Ramanan, managing director and chief executive officer, CMC highlighted that the company experienced broad-based growth in the second quarter.

CMC posted 38 percent growth in revenues on a year on year (YoY) basis and its net profit increased by 51 percent (YoY). It added 13 clients during this quarter and is seeing a good traction for CMC solutions in e-governance.

Ramanan added that the company will operate between 15 percent and 17 percent margins in this fiscal. "In the last two quarters we have been consistent in terms of margins. We have been delivering at 16.6 percent as opposed to Q4 of last year where we were operating at 15.2 percent."

Below is the edited transcript of Ramanan’s interview with CNBC-TV18.

Q: Can you take us through the numbers, its little over what the street estimated especially the rupee revenue growth. Can you take us through the highlights of the quarter?

A: We have had good quarter. We have grown by 1 percent quarter on quarter (QoQ) on the total revenue. But if you analyze a bit, we have grown 6 percent QoQ on services revenue, which is high value adding and high margin revenue. We have gone down a bit on products sale or equipment sale, which is low margin revenue traditionally.

If we take that factor into account we have had a fairly good quarter because we have experienced growth in all the segments of our business and in all the geographies that we are having. In terms of our year on year performance, our numbers are fairly high in terms of 38 percent growth year on year (YoY) in our revenue and our net profit has also increased YoY by 51 percent.

Q: You said all sectors grew but your IT enabled services grown by only 1 percent and your net profit is down in QoQ terms almost 15 percent?

A: The net profit is factoring a 4.48 crore tax, which is because of dividend that we have paid during this year from CMC America. If you take an absolute like to like comparison our net profit is operating at 11.76 percent if you remove dividend contribution.

Q: Is that why your tax rates are so lumpy because quarter ago it was 22.8, now it is 31. Is that because of the dividend payment in the US?

A: Absolutely. In the same period last quarter also, we had given a similar dividend and that had same impact during the quarter of last year. We normally do that every year for CMC America.

Q: Focusing on the deal pipeline from the government’s space at this point in time. How is that doing as a particular sector for you and for this quarter gone by as well as the remaining part of the fiscal?

A: We added about 13 clients during this quarter. Quite a few of these clients are from the Indian space. We also added a number of clients in the international geographies. We are seeing good traction for CMC solutions in e-governance. We have had new wins in treasury management for CMC in different states.

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We have also won major order on intelligent transport systems, which is using Nirdeshak, a vehicle tracking system. We have also been able to penetrate the mining sector in India and implemented solutions there.

We are seeing growth in the ports and cargo solution space for CMC in the government sector. These are some of the major wins that we have had. We see continuing good traction in each of these areas.

Q: The volatility in the margins was quite prominent in the previous fiscal of FY12. Around 16.7 percent, can we assume that you will possibly average at this level for the remaining part as well?

A: We will be operating between 15 percent and 17 percent margins during this year. We will continuously be improving on that. In the last two quarters we have been consistent in terms of margins. We have been delivering at 16.6 percent as opposed to Q4 of last year where we were operating at 15.2.

We have had good growth in our margins and we will continue to focus on ensuring that we will be between 15 percent and 17 percent preferably, improving on where we are right now.

Q: Will you see more competition in your India business space? Infosys was announcing that it is going to have additional emphasis on the India business unit, would you see margins coming under pressure?

A: The focus for CMC in India has been on asset base solution and services business. We are focusing on areas where we have a solution or a product, which is replicable and the services around that.

In this, we do not see a pressure on the margins because it depends upon the product itself. There is an in-built margin when we approach the market in this manner. If you go for vanilla service contracts, yes, you will see competitive pressures, but that is an area which we are avoiding.

Q: Any guidance on what kind of earnings growth and margins you can deliver in FY13?

A: For the half year we have grown by 38 percent. We will continue maintaining a focus on ensuring that we do better if not the same during the rest of the year. We are also improved our margins considerably during this year.

In the half year we have been able to grow by 51 percent. Our focus is to continue on value adding solutions and services business, both in India and in international market.

Our international business is now at 66 percent of our total revenue. There has been a good growth in CMC America of 5 percent quarter on quarter subsequently for two quarters. We see possibilities and traction in both the American markets as well as in the Indian markets and we will continue to focus on the same.