Cummins India selling 60 pc in infotech arm

NetScribes/Ganesh Ramamoorthy

Cummins India is selling a 60 per cent majority stake in its infotech subsidiary, Cummins Infotech (CIT), to its US parent, Cummins Inc. According to the company, the move is aimed at making India a major software solutions and services provider for all Cummins organisations across the world.

However, analysts are not impressed. "It is not very clear why the entire stake in CIT cannot be held by the Indian company. The Indian shareholder stands to lose considerably in terms of share of profits as a result of this stake transfer," said an analyst with a Mumbai-based securities firm.

Analysts feel that the US parent is taking the stake in CIT mainly to garner a higher share of the profits. Cummins Inc currently holds only 51 per cent in Cummins India. With the acquisition of a 60 per cent stake in CIT, Cummins Inc would get a 60 per cent share in CIT's profits and also 51 per cent of Cummins India's 40 per cent share in CIT profits.

"This effectively works out to over 80 per cent, leaving only 20 per cent of the profits for the Indian shareholders. Besides, Indian shareholders will have no right to information about CIT's operations as the company will cease to be a subsidiary of Cummins India," the analyst said.

The company has, however, maintained that by picking up a majority stake, the parent was only trying to change the image of CIT as a small player and ensuring its faster growth and easier access to advanced markets.

Cummins India expects Cummins Infotech to record revenues of Rs 44 million for fiscal 2000, Rs 198 million for fiscal 2001, Rs 386 million for fiscal 2002. It is predicting a compounded annual growth rate (CAGR) of 196 per cent for the infotech company.

Analysts are not convinced by the projections. "Considering the total projected revenues of Rs 30 billion and a net profit of Rs 20.99 million for the entire group, a CAGR of around 200 per cent for the infotech arm over the next three years is not really big," said another analyst with Birla Sun Life.

"If you look at the projected revenues from the IT business, it only forms a very small proportion of the overall revenues," the analyst said. "A CAGR of 196 per cent is very ambitious, though it is still achievable if the parent company backs it. However, it has not given any concrete plans on what kind of clients it will target and which markets the business will come from," he added.

Cummins India currently has an investment of Rs 4.8 million in CIT and plans to invest another Rs 70 million in a phased manner. The company is expected to issue fresh shares to the US parent company, so it will not have to offload its equity in the company. However, the pricing and amount to be brought in are yet to be decided.

At 13:21 IST on Friday, during intra-day trade at the BSE, the Cummins India scrip was up Rs 3.50 (0.83 per cent) to Rs 423 from its previous close of Rs 419.50. The counter attracted very little activity on Friday, with volumes of just about 427 trades. The company's stock is currently trading at a price-earnings multiple of 17 times its fiscal 2000 earnings of Rs 1.95 billion, down from the year-ago levels of 30-35.

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