The fastest-growing economy in the world, India is projected to see a GDP increase of 7.8% in 2018. The nation is rapidly industrializing, yet still only a third of its population currently resides in an urban environment. There is plenty of opportunity in this region, and Cisco is in an interesting position to capitalize.
The Big Picture
IP-based networking giant Cisco (CSCO ) is based in the US and operates under five main segments: infrastructure platform, applications, security, services, and other. It is the largest player in the networking space and has inked partnerships with a large list of global enterprises including Apple (AAPL ) , IBM (IBM ) and Alibaba (BABA ) .
Cisco India began operations in 1984, and has since filed over a thousand patents and issued 600 for what it calls “innovations across all technologies.” It works with over 2,500 partners in the country and operates 176 networking academies with an overall enrollment of 24,138 active students.
Cisco India works with key domestic firms including Tata Group, Bharti Artel, and multiple provincial government offices. The company’s second largest Global Development Center is based in Bangalore, and houses its research and development, IT, services, and customer support teams, where it develops new business models and technologies for emerging markets, including India.
One key reason why Cisco’s infrastructure platforms are so important to India is because it is still in its infancy. The country boasts a population of 1.32 billion, yet according to data from Statista, only 369 million are connected to the internet. The Indian government is trying to change this through an initiative known as Digital India, a program started in 2015 that seeks to transition the country into a knowledge economy comprised of a digitally literate workforce.
Cisco is one of multiple firms working towards making that a reality. It is leveraging a partnership with telecom giant to power the world’s largest all-IP network. It includes over 250,000 Cisco routers and will allow Jio to cover 99% of India’s population, laying the basic groundwork to bring the nation online. Cisco began its manufacturing operations in Pune in 2016, and unveiled its first Made-in-India product the following year, predecessor to current routers.
By the Numbers
While this is a worthy cause, what does it mean for the company’s bottom line? In its most recent earnings report, Cisco posted revenues of $12.5 billion on $0.66 in earnings per share, both of which narrowly beat our Zacks Consensus Estimates. While this represents a year-over-year revenue decrease of 4%, EPS still surged 10%.
Cisco noted that its product revenue in India grew by 11% overall in 2017. While Cisco saw declines in other segments, initiatives in India are bearing fruit. The company is aggressively expanding its small business client portfolio, aiming to triple its customer base to 75,000 by 2020. A growing Indian economy includes an increasing number of small businesses, and Cisco has laid the groundwork to capture this opportunity.
Cisco expects the number of internet users in India to reach 829 million by as early as 2021, with the company set to play a major role in the process. The nation still has a long road ahead of it in terms of economic development, but according to a PricewaterhouseCoopers report titled “The World in 2050,” it could surpass the US in GDP by 2050.
Outlook
In recent news, the firm announced plans to acquire July Systems, a private cloud-based mobile application platform. The month before the announcement, it completed the buyout of an AI-based relationship intelligence platform provider, Accompany.
These moves are part of its shift from hardware to software-based products. It is a solid futureproofing method that could increase margins and give the firm a flexible market position. Cisco’s solid net-cash balance of $37.63 billion gives it the ability to pursue various growth initiatives alongside its stock repurchases and dividend hike. The company has raised its buyback program from $25 billion to $31 billion and returned $9.22 billion to shareholders through dividends in fiscal year 2017.
Cisco is a company with a compelling short and long-term investment outlook India. On top of India, it is also collaborating with Open Transit Internet (OTI) firm Orange to expand its network to Africa, Europe, and the Middle East. Although the acquisition of multiple new firms carries integration risks, and deep macro exposure could make Cisco vulnerable, it is still operating in an overall position of strength, which is reflected in recent earnings estimate revisions.
In the last 60 days, Cisco has seen six upward and no downward earnings estimate revisions for the current quarter, and nine upward estimates for the current fiscal year compared to one downward estimate. Four analysts have revised estimates downward for the following fiscal year, but twice analysts as many have moved them upward.
Overall, this mixed estimate activity currently leaves Cisco at a Zacks Rank #3 (Hold). However, investors should keep in mind that the Zacks Rank performs strongest over a 3-6 month timeframe. Initiatives in India may take years to continue developing, but hold a lot of potential. As such, investors should put the sleeping giant on their radar if they haven’t already.
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