Biding Time

In the last six months, the CMC stock price has halved as the company's plans seem to have taken the back seat

When the market was going up in July, many smallcap stocks too rose One such stock was the state-owned CMC, which was hitting the upper end of the circuit filter. CMC moved from Rs 76 to Rs 145 in just 20 days. One reason was that information technology was a sunrise industry and CMC was attractive. Moreover, CMC has a low floating of 2.4 million shares which speculators could easily manipulate.

CMC is a prime example of a public sector company where things seem to have gone wrong. Although a pioneer in the information technology business in the country, it cuts a sorry figure today. Its performance for 1996-97 is reason enough. On a turnover of Rs 228.64 crore, it made a net profit of Rs 2.66 crore, while other companies in the same business were netting profit margins of 30 per cent on an average. What ails CMC? Here are the reasons.

The software business is people-centric and an established credo in the software industry is that good people will mean better profits. CMC seems to have understood this but partly. On one hand it is overstaffed, with a staff strength of 3000 employees, on the other it has failed to retain around 200 important employees in 1997-98. Though CMCs claims that it estimates a revenue of Rs 1 million per employee in 1997-98, will this translate into a higher net profit?

While it is believed that CMC pays lower salaries than the industry, the reality is different. Infosys paid Rs 51.63 to its employees while CMC paid Rs 50.47 crore in 1996-97. Both had about 2,500 employees. At CMC, staff expenses rose 37.41 per cent from Rs 36.73 crore in 1996-97 while total revenue increased only 12 per cent from Rs 204.03 crore. Material costs too increased 16.14 per cent to Rs 96.65 crore. These factors resulted in a much lower net profit as no other expenditure head saw a major increase. Both interest and depreciation are quite small and should not affect the profitability significantly.

CMC is considered a poaching ground for snaring software professionals as it has failed to pay salaries commensurate to their market worth in the past. Chairman and managing director of CMC, RP Jhunjhunwala is quick to add that the government has issued an ad hoc statement which allows it to pay its employees as per industry norms.

A comparison with Satyam and Infosys on revenue earned per person and net profit per person brings out the disparity of revenues that CMC has to catch up with in the next few years. Satyam Computers earns Rs 3.88 lakh per employee, with a net profit of Rs 0.9 lakh person. Infosys earns a revenue of Rs 5.5 lakh per person and a net profit of Rs 1.47 lakh per employee. While CMC boasts of a revenue of Rs 8.96 lakh per person, the net profit per employee is a dismal Rs 10,640. (All the three companies had around 2500 employees in the core business for 1996-97).

Analysts believe that government neglect combined with unfocused management policies have put the company on a downhill path.

But Jhunjhunwala is upbeat on the company. He says CMC's future growth is planned through the globalisation of their internationally competitive bank of products and services in focus business sectors like banking, insurance, securities, port and cargo, networking, enterprise resource planning (ERP) solutions, Java computing, pervasive technology and other technologies like Global Positioning System (GSP) based vehicle tracking system that will give them the cutting edge in the infotech market place.

We have forged several strategic alliances with Price Waterhouse, Baan, Sun Microsystems and others. With all these strategic tie-ups, work in the current IT applications and impressive portfolio, we are confident of gaining market leadership in our chosen areas of business, says Jhunjhunwala.

However, the general market perception is that CMC will survive if it can bag international projects where realisations are higher than domestic sales. CMC is not big globally, but at the same time it is facing severe competition and losing its earlier edge in India. Though it considers itself to be on the threshold of a new beginning, the market says the timing is not right.

Like other PSUs, it has plans to take off but for the shackles of the government. In the ninth plan period, CMC proposes to invest Rs 125 crore in expansion, which would entail tie-ups, joint ventures and subsidiaries. But plans of the company are in limbo, at least till April, when the new government is expected to give a go-ahead to the company, deciding on CMC's privatisation proposal. The government holds 84 per cent of the CMC stock.

The company has not decided how it will raise the funds. The plans for investing the Rs 125 crore are as follows. Rs 25 crore is to be expended on joint ventures and tie-ups, Rs 15 crore in their domestic software business, Rs 15 crore on research and development and Rs 25 crore is to be invested in gaining and consolidating their international offshore businesses.

Recently, CMC has submitted a privatisation proposal to the government prepared by ICICI Securities (I-Sec). The I-Sec proposal recommends dilution of the government's stake in CMC from 84 per cent to 51 per cent. The proposal is awaiting government's decision. According to this report, the equity base will increase from the current Rs 15 crore to Rs 30 crore. I-Sec also recommends that this additional equity be raised from domestic financial institutions which will reduce the government holding below 51 per cent.

Meanwhile the company is expanding the scale of its other businesses. With the government opening up the internet sector, CMC is looking for an international partner who will bring experience in running an internet service provider.

In the year ending March 1998, Jhunjhunwala expects a turnover of Rs 300 crore with a profit before tax of Rs 10 crore against Rs 6.66 crore in 1996-97. Jhunjhunwala expects that Rs 150 will come from the hardware maintenance business, Rs 50 crore will come from exports, Rs 25 crore will accrue from software education, Rs 5 crore from Indonet and the remaining Rs 70 crore from software integration for various companies.

CMC, is a major player in systems integration, networking support, management of networks and constancy for these functions. It also exports packages for image processing technology used for forensic sciences and various software services. The company is expanding into various business, which would entail various joint ventures and tie-ups with others in the field.

CMC has also restructured itself to increase efficiencies. The areas that the company plans to focus on the India focused business of education, networking support systems, management of networks and consulting.

It acquired the US-based Baton Rouge in 1991. This company had a turnover of Rs 36.58 crore in 1996 against Rs 19.56 crore in 1995. Even this companys net profit is low at Rs 0.84 crore in 1996 and Rs 0.37 crore in 1995. In the year ended December 31, 1996, this company earned 46 per cent of its revenue from two customers General Electric and Sun Microsystems. In 1995, CMC earned 50 per cent of its revenue from these companies. The management is trying to broaden the market and decrease the company's dependence on these two for a major portion of their revenue.

Sushanto Ray of Technology Capital Partners says CMC has great potential but the government should take some corrective steps. The general opinion among analysts is that as a stock, CMC is overpriced. An analyst says, The government's prolonged indecision on granting autonomy to CMC is hurting the company and accelerating the pace of destruction. He also attributes the sudden spurt in CMCs stock movement over the last year to the limited liquidity of the companys stock and the fact that the market was bullish on any software stock at that time.

Another analyst says that the company has a high equity base of Rs 15 crore and commands a price that it should not. He thinks that the company CMC should post enough profits so that the earnings per share is at least Rs 7. He adds that mere divestment of the government stake will not help as the PSU should clearly focus on profitability. It should focus on strategically profitable areas, failing which it is pointless to have tie-ups with a hundred companies and waste manpower.

In 1996-97 the company's turnover was Rs 228.65 crore, with a net profit of Rs 2.57 crore. The PSU has a good organisation, good motives and restructuring on its books. The stock of the company saw an upside recently because it is the only established PSU in software sector where government contracts and business is assured. In addition, people have realised the potential of the software industry, which resulted in large volumes of CMC traded at higher prices.

Though its plans to raise further money, it has a high debt-equity ratio of 1.31 which is quite high considering that it is basically a service company. But, one advantage that it has is its real estate in Mumbai and Delhi.

Vijay Baune, analyst, Jardine Fleming, says, The company is established and has a good infrastructure but 80 per cent of its business comes from India which is facing recession. Under the current situation, most analysts are clear on their view on CMC -- wait and watch.