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CMC: Bad 4QFY02

Jun 12, 2002

CMC that had managed to post growth in topline and bottomline (on a YoY basis) for the first 3 quarters of FY02 has posted a decline in net profits and revenues during 4QFY02. This is probably due to the weak business environment the technology sector has been facing. The company’s decline in revenues in 4QFY02 was 6%. The fall in net profits has been steeper at 25% due to a significant drop in operating margins and other income. While the company has managed to cut down on its material costs, it staff and establishment costs continue to rise. The establishment and staff costs grew by 23% and 33% respectively in 4QFY02 (YoY).

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Sales 2,226 2,083 -6.4% 5,377 5,467 1.7%
Other Income 99 54 -45.5% 156 186 19.2%
Expenditure 1,997 1,934 -3.1% 5,022 5,042 0.4%
Operating Profit (EBDIT) 229 149 -34.9% 354 425 19.8%
Operating Profit Margin (%) 10.3% 7.2%   6.6% 7.8%  
Interest 10 (1) -113.7% 29 20 -32.5%
Depreciation 38 21 -45.3% 86 80 -6.6%
Profit before Tax 280 183 -34.5% 396 511 29.1%
Tax 105 52 -50.0% 145 175 20.6%
Profit after Tax/(Loss) 175 131 -25.2% 251 336 34.1%
Net profit margin (%) 7.9% 6.3%   4.7% 6.2%  
Diluted number of shares (m) 15.2 15.2   15.2 15.2  
Diluted Earnings per share* 46.3 34.6   16.6 22.2  
P/E (at current price)   17.1     26.7  

For the full year FY02, the topline growth was a marginal 2% and the net profit figure grew by 34%. The decline in material costs helped the company post an improvement in operating margins for the fiscal ’02. Material costs are the largest cost head for CMC at 39% of revenues. Staff costs and establishment costs accounted for 21% and 33% of the revenues in FY02.

At the current market price of Rs 593, the stock is trading at a P/E multiple of 27x its FY02 earnings. This makes the stock more expensive than technology majors like Infosys and Satyam. While growth in topline continues to be a concern, the net profits could continue to grow on the back of improvement in operating efficiency. With the Tata’s at the helm since November 2001, this erstwhile public sector unit is likely show a significant improvement in financials. Also, part of the valuation also stems from speculation regarding CMC’s merger with the other Tata group software company, TCS. In the merger does not come through, the stock price could see a significant downside.

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