After years of speculation, Tata Consultancy Services (TCS), India's largest IT services company, is ready to list on the Indian stock market.
The company, which is a part of the $12 billion Tata group, filed for an initial public offering of the sale of its shares in what promises to be the largest IPO by a private Indian company.
Analysts estimate the size of the offer, which is expected to be in the market in July, to be between Rs550 billion and Rs600 billion ($1.3 billion) priced at between Rs800 and Rs950 a share. Foreign participation in the share issue also appears likely.
The company, India?s largest exporter of IT services and the first IT firm in the country to have posted annual revenues of more than $1 billion, is offering 13% of its post-IPO equity capital (including a greenshoe option) in the Indian stock market, of which about 40% will be new shares. The stake of TCS?s core shareholder, Tata Sons, will fall from 90% to around 81%.
The market capitalization of TCS is expected to be about Rs454 billion or $10 billion, ahead of peers Infosys and Wipro, which have about $7.9 billion each.
The market capitalization of Infosys shares in free float, which is around $6 billion, is however far higher than TCS?s is likely to be. TCS?s free float market capitalization is estimated at about $1.5 billion, about the same as the free float of Wipro shares.
About 60% of the TCS offer could be marked out for qualified institutional buyers. DSP Merrill Lynch, JPMorgan and JM Morgan Stanley are the lead bookrunners.
If the offer price is sufficiently attractive, TCS?s pedigree and market trends should ensure that foreign investors buy its shares.
According to one estimate, foreign portfolio investors already own about half of the shares in free float in listed Indian IT companies. IT stocks outperformed the market in the month to mid-June when the shock result in the national election caused the markets to nose-dive.
Although the benchmark Sensex lost about 9.4% of its value, the IT index has lost comparatively little ? about 4.8%. ?Indian IT and pharmaceutical companies that are not reliant on the domestic market look attractive,? says a banker.
Sustained recovery in the US, the biggest market for Indian IT services, as well as the recent fall in the rupee, have contributed to rosier prospects for Indian IT companies.
Analysts expect the price range that will be announced for bids on TCS shares will be comparable to, if not better than, the price that Infosys or Wipro shares command in the secondary market.
Infosys shares trade on a historical P/E ratio of about 28, while Wipro shares are at 38 ? the higher rating on Wipro shares including a premium paid for the smaller number of its shares in free float.
Although TCS is slightly ahead in terms of sales revenues and leads in export earnings, Infosys is not far behind. For the nine months to December 2003, TCS?s revenues were Rs50.8 billion and net income was Rs11 billion.
TCS employs 28,000 people and Infosys about 24,000. Operating margins at TCS, points out one analyst, are around 27%, compared with 33% at Infosys.
The IPO will enable TCS to issue stock options to loyal employees, and to pay for future acquisitions with its shares. TCS, like its peers, operates on an offshore outsourcing model that taps India?s low-cost IT labour to deliver services to global companies.
The company operates in 32 countries and its clients include six of the top 10 Fortune 500 companies in the US. Competition is heating up from global IT service majors such as IBM Global, Accenture and EDS, which have set up base in India to tap the same advantages that Indian companies such as TCS enjoy.
?Indian IT companies must now move from cost to value, from an offshore to a global delivery model,? says Sujoy Chohan, vice-president at IT research firm Gartner. TCS is set to face that challenge.