With Tata Sons having acquired a controlling 51 per cent stake in software services behemoth CMC Ltd, Tata Consultancy Services (TCS), the software services division of Tata Sons, proposes to begin the process of strengthening and consolidating its position in the Indian software services industry.

Tata Sons has also come out with an open offer to acquire another 16.69 per cent stake in the company at Rs 281.26 per share. The total value of the open offer is Rs 72 crore. Tata Sons now holds 51 per cent share in CMC, while the Government of India holds 32.31 per cent and the public holds another 16.69 per cent.

For TCS, which gets a majority of its revenues from overseas, notably the US, this acquisition provides an opportunity to consolidate its operations in India. It also indicates that the domestic market is attaining greater importance for the company.

TCS CEO S Ramadorai said: “We believe the domestic market has a tremendous opportunity for the company, and CMC already has an established presence in India. The domestic IT services sector is expected to grow in the medium- to long-term period at the rate of 25 per cent CAGR till the year 2004.”

CMC had recorded revenues of Rs 657 crore in the year ending 30 June 2001. More importantly for TCS, over Rs 442 crore or 83 per cent of its total revenue during the last fiscal came from the domestic market, representing a 4.6-per cent share. CMC also has a strong hold on the government market, which accounted for 34 per cent of the total domestic IT market last year. It is also a preferred vendor to public sector banks, which together account for 16 per cent of the domestic IT market.

In niche areas such as maintenance and support, which is a Rs 450-crore domestic market, CMC is the undisputed king with an overwhelming 70 per cent market share. CMC declared a net profit of Rs 32 crore in 2001 and its profit registered a rise of 33 per cent at Rs 3.08 crore for the first quarter ended 30 June as against Rs 2.31 crore for the corresponding period last year. The company has also recorded a 28-per cent increase in revenue at Rs 90.30 crore for the quarter as against Rs 70.34 crore for the same period last year.

The key areas in which TCS is likely to benefit from the CMC acquisition is through CMC’s expertise in customer support, facilities management and hardware and software maintenance. CMC also has expertise in executing large turnkey projects; it has a strong research and development focus and can offer a wide range of services with complementary domain expertise.

In trying to carve out niche areas, CMC has set up five strategic business units for customer services, systems integration, international operations, education and training and indonet (a project). TCS’s delivery capabilities can be used by CMC to mine its international client-base for offshore work.

TCS, on the other hand, provides information technology and management consultancy services to organisations in over 50 countries across the globe. It has a strong market in the US and employs over 14,000 professionals at 60 offices worldwide. Its development centres are assessed at CMM Level 5.

TCS’s key service practices comprise e-business, application development and maintenance, outsourcing, large projects, systems management and technology consulting.

At a press conference held at the Taj, Mumbai, on October 17, 2001, Mr Ramadorai said CMC will remain an independent entity within the Tata Group and will be managed by TCS. It has been given the following mandate:

• CMC will have to confirm to a topline growth of 30 to 35 per cent.
• There will have to be improvements in margins.
• Return on capital employed will have to be enhanced.
• It will have to maintain and strengthen the domestic market leadership in key service areas and will have to leverage key technologies and domain expertise to strengthen international presence.

Tata Sons will have four nominee directors on the CMC board — S. Ramadorai (chairman), S.S. Ghosh (managing director), Ishaat Hussain (director), R. Ramanan (executive director).

Also, there will be four independent directors on the board: C.B. Bhave (managing director, National Securities Depository Ltd), Dr K.R.S. Murthy (former director of IIM, Bangalore, director, ONGC and member, Disinvestment Committee), Surinder Singh (ex-Cabinet secretary, GoI and executive director, World Bank) and Shardul Shroff (partner, Amarchand Mangaldas Shroff & Co).