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Monday, Feb 02, 2004

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CMC finds risk in banking on Govt projects

C.R. Sukumar

Hyderabad , Feb. 1

CURRENTLY deriving approximately two-thirds of its revenues solely from clients who are either the Government and or its entities, CMC Ltd, the software major acquired by Tatas, now finds a risk in dependence over Government projects and is also concerned over the likely adverse impact on its revenues and profitability.

Interestingly, the software giant also perceives risk in the form of conflict of business interests of its the new promoter - Tata Sons.

The government, which still holds 26.25 per cent in CMC, has decided to divest its entire shareholding by way of offer for sale. Accordingly, CMC has filed the draft red herring prospectus with the market regulator, wherein it pointed out certain risks.

According to the company, since it derives a significant portion of its revenues from Government and its entities, "Any decline in volume of business from such clients may adversely impact our revenues and profitability."

The Government policy of purchase preference, which is applicable to all public sector enterprises, provides the advantage of having the option of matching the lowest bid in any competitive Government tender process provided the bid is within 10 per cent of the lowest bid. This was extended to CMC for a period of two years after the divestment of government's 51 per cent equity stake in the company in favour of Tata Sons during October 2001. This benefit has ceased to be applicable to the company since October 2003.

"Any decrease in the volume of business derived from such government clients, either as a result of the purchase preference policy becoming inapplicable, or otherwise, may adversely impact our revenues and profitability," the company said in the red herring prospectus.

CMC provides a high proportion of its goods and services on a fixed price basis rather than on a time and material basis. Projects awarded on a fixed price basis are not subject to any upward revision. In view of this, CMC now feels that any subsequent development that affects the commercial viability of the project would have to be absorbed by the company itself and cannot be passed on to its clients.

On the dependence on its promoter, CMC said a key part of its strategy was to increase its international business by leveraging on TCS's brand and global market reach. Towards this, CMC has entered into various arrangements with TCS, wherein CMC is jointly working on projects for TCS's clients in terms of deployment of its personnel and/or project implementation.

Admitting that it neither has "any direct relationship with such clients nor the expertise to access these markets independently," CMC said, "Disassociation of our promoter from us could adversely impact our business and financial position."

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