The Hindu Business Line : CMC: Avoid

INVESTORS may avoid subscribing to the sale of shares made by the Government in CMC at the floor price of Rs 475 per share. At 20 times its annualised 2003-04 earnings, the stock's valuation is stiff.

To sustain the existing market capitalisation, post-tax earnings will have to grow annually at 20 per cent over the next five years sustaining which appears a difficult proposition.

The Tata group acquired CMC in late 2001. Tata Sons holds a 51 per cent of CMC. CMC traditional strengths stem from their end-to-end solutions capability in managing projects on a turnkey basis for the Government and the public sector in the domestic market.

It is among the few companies in India that can offer the entire gamut of services ranging from software development, implementation and hardware solutions to its customers.

Over the years, CMC has gained extensive project management capabilities, domain skills that span practically every vertical, good customer relationships and a strong delivery chain across India.

Going forward, CMC plans to leverage its synergies with Tata Consultancy Services (TCS), the unlisted company of the Tata group to widen its presence in the international markets, and also add greater value to TCS's existing customers.

Though CMC has been operating under the Tata umbrella over the past two years, the revenue growth has been fairly sluggish during this period.

In addition, the margins - both operating and net - has not staged a substantial improvement over this period.

Operating margins have remained locked in the 9 to11 per cent bracket; net margins have also been range bound at 5 to 6 per cent.

Unless there is a sharp improvement in margins, the trigger for an improvement in post-tax earnings may not materialise.

On the operational front, CMC's revenue growth will hinge largely on the performance of the systems integration division, which undertakes software development and related projects.

The performance of this division has to be seen in the backdrop of three factors.

One, revenue growth of Systems Integration, the key segment of CMC, has been under 10 per cent for the past two financial years. This is quite a disappointing trend for the future.

In software services, CMC had already deployed its skills in TCS projects, both offshore and onsite, in 2003. But, it has not reflected in a discernible improvement in margins.

Two, CMC America Inc, a subsidiary of CMC, which provides customers with IT outsourcing and engineering services in the US markets, is loss-making as of December 31, 2003 and also has accumulated losses from earlier years. It has also witnessed a steady decline in its revenues over the past three years.

Finally, CMC is pursuing the strategy of leveraging synergies with TCS to widen their reach in the US and European markets.

As this will call for a major realignment of CMC's internal management structure, the progress on this front may be slow over the next year or so.

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CMC: Avoid

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