Banking & Financial Services:: Emkay

Sector Update

Sector Update Banking & Financial Services Minor reprieve for infra loan restructuring RBI allows repeated restructuring of infrastructure loans subject to conditions The RBI today allowed the infrastructure loans to be restructured repeatedly subject to certain conditions and retain standard assets status even if the asset has already been restructured once in line with its earlier guidelines declared on May 30, 2013. The extant guidelines as per earlier norms In its earlier guidelines dated May 30, 2013, the RBI had stated that revisions of the date of commencement of commercial operations (DCCO) and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will not be treated as restructuring provided that: n        The revised DCCO falls within the period of two years and one year from the original DCCO stipulated at the time of financial closure for infrastructure projects and non-infrastructure projects respectively; and, n        All other terms and conditions of the loan remain unchanged. The key word here is “consequential shift in repayment schedule”. Such loans would attract normal 0.4% provisions. If there is any“restructuring or reschedulement of loans” due to change in DCCO, then the provisions would be 4.25% in FY15 and 5% in FY16. What has changed? Further, banks may restructure such loans, subject to the extant prudential norms on restructuring of advances, by way of revision of DCCO beyond the time limits quoted as above and retain the ‘standard’ asset classification, if the fresh DCCO is fixed within the following limits, and the account continues to be serviced as per the restructured terms: n      Infrastructure Projects involving court cases Up to another two years (beyond the two year period quoted at paragraph 2(a) above, i.e., total extension of four years), in case the reason for extension of DCCO is arbitration proceedings or a court case. n      Infrastructure Projects delayed for other reasons beyond the control of promoters Up to another one year (beyond the two year period quoted at paragraph 2(a) above, i.e., total extension of three years), in case the reason for extension of DCCO is beyond the control of promoters (other than court cases) n      Project Loans for Non-Infrastructure Sector (Other than Commercial Real Estate) Up to another one year (beyond the one year period quoted at paragraph 2(a) above, i.e., total extension of two years) Thus, only for loans where there is a repeated change in DCCO and “shift in the repayment schedule” only for the above mentioned reasons, the provision would remain at 0.4%.

CMC Ltd - Initiating Coverage - Skills in government business coming of use

Rating: Buy; Target Price: Rs2,270; CMP: Rs1,826; Upside: 24.3%



Skills in government business coming of use



We initiate on CMC with a Buy rating and a 1-year TP of Rs2,270. CMC’s
growth rate should pick up as the domestic market (~33% of revenues as
of FY14) gets impetus from digital governance initiatives. CMC’s
revenues grew by only 15.8% in FY14 as its India business grew by just
6.6%. We expect international revenues to continue growing faster than
the company average and margins to remain in the 15-17% range. With
RoE of 26%, broad client base of 1,000+ clients and consistent
execution in the past (unlike many Tier-2 firms), we think multiples
comparable to Tier-1 firms can be assigned.

$ International growth to continue, but expecting domestic growth as
well now: International revenues increased to 67.3% of total in FY14
from just 20% in FY03, as a result of a conscious strategy by CMC to
transform its business-mix and margin profile, as well as the poor
demand environment in India that acted as a drag in recent years. We
expect international revenues to continue to grow given CMC’s
differentiation through its focus on Embedded Systems and
asset-leveraged solutions (~18-19% of overall revenue and ~28% of
System Integration revenue). Even the India growth can pick up,
particularly driven by government contracts.

$ CMC’s invaluable experience as a Prime/Lead Contractor in India
timely: With total spending on IT by the GoI estimated to touch
USD6.4Bn over 2014, CMC has great potential. To execute most
government projects, the prime contractor needs to be able to staff
personnel for support and maintenance afterwards in remote areas
(which is unviable unless there is sharing of personnel across clients
for support), an area that CMC has ample experience in. Moreover, TCS
and CMC have partnered for some domestic contracts such as the INR10Bn
Passport Seva Project.

$ Margins could hold up even with increasing domestic contribution:
Domestic contribution could accelerate given renewed focus on
Infrastructure and e-governance by the govt. CMC has experience in
both and also in the cumbersome process of digitisation of manual
government records. With continued growth in its international System
Integration (SI) business and in the high-margin IT-enabled-Services
(ITeS) business, we expect CMC can maintain an EBITDA margin of 15-17%
even as the low-margin domestic Customer Services could grow at
company average.

$ Valuation and key risks: CMC Ltd is currently trading at an implied
Fwd P/E of 15.5x Sep-15E EPS. With improvement in growth in the India
business likely over FY16E, current multiples can improve slightly. We
initiate with Buy and TP of Rs2,270 based on 16x Sep-16E EPS. We think
a premium to traditional Tier-2 firms is justified as the biggest risk
with Tier-2 firms is that of client concentration and CMC had over
1,000 clients as of 3QFY14. One of the key risks is the competition
from TCS, its parent, especially in areas where both have competing
products like BaNCS (for Insurance) from TCS and Genisys from CMC.
Another key risk is the change in immigration and visa norms in the US
(57.1% of CMC’s FY14 revenues).



Thanks & Regards