Press Release
Riding on Rising Profits, CMC Seeks
to Expand Global Presence
by Lison Joseph
www.livemint.com
CMC Ltd wants to expand into overseas markets to achieve its ambitious revenue target of $1 billion (around Rs.4,600 crore) in the next four to five years, having made the transition from being a state-run firm that used to sell computer hardware and software to government departments.
Over the last decade, CMC’s profit margins have grown from around 3% in 2001 to about 20% currently. Revenue for this fiscal is estimated at Rs.1,078 crore.
The transition began in 2001 when the company was taken over by the country’s largest information technology (IT) services exporter Tata Consultancy Services Ltd (TCS), which currently owns 51% of CMC, as part of a government divestment programme.
The company had been set up as Computer Maintenance Corp. in 1978 to look after IBM machines after the US company was forced to exit India by the government. It now specializes in software engineering and IT infrastructure maintenance. The CMC turnaround took longer than anticipated, chief executive R. Ramanan said in an interview.
“Because of the earlier government ownership, we had quite a few challenges,” Ramanan said of the transition. “As a company, we haven’t been focusing on the international market, which contributed only about 4% of our revenue.”
CMC, known for iconic computerization projects as the BSE On-Line Trading (BOLT) trading platform of the Bombay Stock Exchange (BSE) and the Indian Railways passenger reservation system, is now betting on monetizing such software product-based solutions in international markets.
According to Ramanan, one of the biggest challenges that CMC had to overcome as a company was the lack of a global mindset.
“Because we were inwardly oriented, the company wasn’t focusing on replicating our product solutions for the domestic market in the international market,” Ramanan said.
Thus, a part of the transition involved adopting and internalizing global standards in software development and project management.
CMC is leaning on TCS, with which it now has a joint go-to-market strategy for markets in the US and Europe. The results are beginning to show.
From roughly 4%, international revenue now contributes up to 55% of the total.
In the quarter ended September, CMC reported revenue growth of 24% driven primarily by 46% growth in international revenue as against 11% in the year-ago period.
Analysts concur on CMC’s international strategy and expect it to be the major growth driver going forward.
Motilal Oswal analyst Rakesh Tarway cites “higher rate of growth in international revenues of more than 40% year-on-year as compared to last five years’ compounded annual growth rate of 15%”, as one of the main reasons for having a positive view on the stock.
Faster growth in international business augurs well for CMC as such
business comes with significantly higher profit margins compared with the
domestic business.
However, in its pursuit of higher profitability, CMC has taken a hit on the topline, which stayed more or less flat or has decreased marginally over the last five years as the company exited high-volume, low-margin businesses.
With the profitability turnaround completed, the next major item on CMC’s to-do list is boosting revenue.
“We have reached that stage where we can focus again on the topline and over the last quarters you can see that we have been (doing this),” Ramanan said.
He ruled any plans for a merger with TCS, rejecting speculation to this effect, and said CMC wanted to be among the top 20 global system integration companies.
Analysts expect the stock to get better valuations, in line with the improving performance and expected future growth.
“We believe that the company (CMC) should be trading at a premium to other mid-cap IT companies owing to promoter quality, consistent dividend track record and very good consistency on free cash flow generation,” Tarway noted in his 27 September research report.
CMC shares were trading at Rs.1,895 at the time of that report. Since then, the shares have risen about 15%, closing at Rs.2,185 on BSE on Monday.