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CMC Ltd: A lackluster performance - Outside View by Luke Verghese
 
 
CMC Ltd: A lackluster performance

A basket case?

CMC is some sort of a 'basket case' minor sibling of TCS, and wallows about in limbo. It is quite apparent that the management still does not have a fix on how to go about its business. This state of affairs is even more flummoxing as both the ex CEO of TCS and its serving finance director are both on the board of CMC. About the only decision taken so far is that it there will be less emphasis on hardware, and more emphasis on software and services. (Which also brings us to the moot question - is there independent space for two companies operating in the same space, one a lilliput, and the other a titan, and functioning under the same umbrella?) The hardware business consists of buying products for resale, but given the company's pygmy size, there was no money to be made here.

Why it took so long to arrive at this learned conclusion, is another matter? But the slow exit from hardware has so far not led to any scaling up on the software side of the coin. Consequently, the sales and service income for FY10 fell sharply by 16% to Rs 6.9 bn from Rs 8.2 bn in the preceding year. (The sale recorded also includes a liberal dose of other income of Rs 131 m, generated from the lease rental of its office complex.) The only redeeming feature here was that the profit before tax rose 15% to Rs 1.5 bn. This is inspite of the negative gross effect of forex fluctuations aggregating to Rs 155 m.

The TATA connection

CMC is the new name avatar of Computer Maintenance Corporation, and it has been a part of the exalted Tata stable for close to a decade now. Though it was incorporated in 1975, it fell into the group lap through Tata Sons which acquired 51% of its equity in 2001, following a stake sale by the Central Government. This stake was subsequently hived off to TCS. In some 10 years the management has yet to figure out their act. However, in some sort of comic humor, the directors' report states that the company believes that the current trends in IT spend both domestically and internationally, presents unprecedented opportunity for growth. The report adds that the company is well poised to exploit the emerging opportunities, in synergy with TCS. Ha! Ha!

The revenue model

Not that the company is a big no no, per se. The holding company, TCS, and the many group companies help keep it chugging along. Some 40% of all revenues of CMC emanate as 'Service Income', care of TCS and other group affiliates. Further 5% revenue is derived from hardware sales to the parent. CMC in turn earns its revenue from four divisions. Two of the four divisions-Systems Integration and ITeS together bring in almost 60% of its overall revenues. While the former clocks in 40% gross margins, the latter makes do with 36% margins - group companies in all probability ensure that in abundant measure. The laggards are the two other divisions, Education and Training, and Customer Services. Relative to the margins churned out by the first two, the latter bring in sub margins of around 10%. With the cash that it generates from operations finding no worthwhile investment outlets as yet, the company plonked down the excess cash into mutual fund schemes. Excluding its equity investment in CMC Americas, the company's liquid investments at year end stood at almost Rs 2 bn.

The lackluster subsidiary

To add to the muddle it is also saddled with an American software subsidiary which goes by the rather 'off color' name of CMC Americas Inc. And, like the parent, it is another two bit entity, wondering what it is all about. The American subsidiary is however not a creature of the present management. It was acquired sometime in the 1990s when CMC was under governmental control, and prior to its acquisition and renaming, was known as Baton Rouge International. The latter is infinitely tinier than the parent and has very little to show for it. A turnover of Rs 2.2 bn and recording a pretax profit of Rs 197 m, or 9%, was all that it could muster up. The subsidiary operates purely in the Systems Integration business, but has to make do with much lower margins than CMC. Needless to add it is pardoned from paying any dividends.

Sound housekeeping?

Dividends apart, what is more perplexing about the operations of CMC is the seemingly large provisions for doubtful debts, bad debts and advances written off, and write backs of unclaimed balances and bad debts etc, which seem to characterize its very being. Shareholders will also be happy to know that the company spent a goodly Rs 74 m on research and development expenditure. Hopefully such expenditure will bear fruit in the top line front in the not too distant future.

Future imperfect?

Judging from the directors' report the company is not really pumping up the adrenalin. Barring the news that it is setting up an IT park in Hyderabad on land that it owns. One has to wait to see what benefits the company will derive from this side activity if one can call it that. There is really very little to commend this share from its present showing. But, there is a place in the hearts of market men even for underperforming companies. The market revved up the price of CMC from a low of Rs 318 in April 2009 to a high of Rs 1360 in March 2010, a 328% rise!

In this same period the Sensex went from a low of 9546 to a high of 17793 (an 86% rise).

Disclosure: Please note that I am not a shareholder of this company

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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