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IPO Analysis
CMC Limited - Recommendation: BUY (Long Term)
Background & Business
Issue Details
Floor price Not Announced
Issue size 39.7 lakh shares
Face value Rs 10 each
Issue opens 23-Feb-04
Issue closes 28-Feb-04
Minimum Application 10 (Retail Investors)
Lead managers HSBC Securities & Capital Markets, Enam Financial Consultants
Registrar MCS Limited

Financial Snapshot

Particulars FY04 FY03 YoY FY03 FY02 YoY
(Rs. In Crs) 9 mths 9 mths (%) 12 mths 12 mths (%)
Net Sales
537.4
371.1
44.8
607.9
546.7
11.2
Total Expenditure
487.7
332.5
46.7
541.8
485.6
11.6
Operating Profit
42.2
35.3
19.5
59.4
42.5
39.8
Other Income
7.5
3.3
127.3
6.7
18.6
-64.0
Other Expenditure
8.9
6.5
36.9
9.5
9.9
-4.0
Profit before tax
40.8
32.1
27.1
56.6
51.2
10.5
Tax
13.3
8.8
50.6
19.6
17.5
12.0
Net Profit
27.5
23.3
18.2
37
33.7
9.8
Equity
15.2
15.2
15.2
15.2
EPS Annualized (Rs)
24.1
20.5
24.3
22.2
Margins
OPM%
7.9
9.5
9.8
7.8
NPM%
5.1
6.3
6.1
6.2

Concerns
Heavily dependent on government entities as it derives 2/3rd of its revenues and decline in business from these entities would adverse the revenues in future

CMC Americas Inc, a wholly owned subsidiary of CMC Ltd marketing its products in United States has losses to the extent of Rs 3.81 Crs as on 31st Dec 2003
Valuation & Recommendation

CMC is one of the leaders in third party maintenance, turnkey projects, and domestic facilities management in India and with the strong parentage of TCS and strong management it hopes to leverage its international business by leveraging on TCS's brand and global market reach. CMC has entered into various arrangements with TCS wherein both are jointly working on projects for TCS' clients in terms of deployment of project implementation. The management is confident of increasing its revenues and profits in future thru its various complementary synergies with TCS. At CMP of Rs 575 the stock trades at 24 X annualized EPS of Rs 24, we recommend investors to BUY for long term due to its committed promoters, strong backing of TCS as the front end for deriving business locally and globally with its strong product portfolio in future.

CMC Limited commenced operations as 'Computer Maintenance Corporation in the year 1976 and it is an end-to-end solutions provider engaged in the business of system consultancy, systems design, engineering & integration of software infrastructure management services, third party equipment supply, hardware and software maintenance, information technology enabled services (ITES) and IT education and training. CMC is among the top 20 IT companies in India and a leading player in third party maintenance, turnkey projects, and domestic facilities management.

In 2001, the Government of India disinvested 51.3% of the company’s equity in favour of Tata Sons Ltd at Rs.202 per share.
Issue Objective
The President of India offers for the sale of 39,76,374 equity shares of face value Rs 10 each, which represents 26.25 % of the fully diluted post offer paid-up capital of the company. The Government wants to disinvest its residual stake to garner good amount of funds and create liquidity in the stock for better price discovery in the market.

The offer is being made through a 100 % book building process wherein up to 50 % of the offer shall be allocated to QIB buyers on a discretionary basis whereas 25% offer will be available for allocation on a proportionate basis to non-institutional bidders and the remaining 25 % will available to retail investors.

After the proposed sale, the Tatas would continue to hold the 51.3 % as they are not participating in the offer while public and others would hold the remaining 48.7 % of the equity.
Past Performance

CMC operates through its five Strategic Business Units (SBU) namely Customer Services, Systems Integration, International operations, ITES and Education & Training thru its 18 offices in major Indian cities and over 150 Service locations including a state-of-the-art R&D centre at Hyderabad, Branch office in Dubai and CMC Informatics - trading branch office in UK.

CMC derives significant portion of its revenues from clients who are Government and Government entities. CMC has various prestigious and more demanding products in the following areas such as Facts for finger print analysis, MACH for marine container handling systems, Genisys for insurance, BOLT being developed for Bombay stock exchanges etc.

Fingerprint analysis and criminal tracking (FACTS): FACTS was developed using its core competencies in image processing and pattern recognition technology – a field in which the company is one of the few IT companies in the world conducting product development activities

Marine Container Handling System (MACH): A comprehensive, online, real time container management system for ports, developed to integrate all the complex and varied activities of container terminals.

  Vikas Jain
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