Asia's software giant opens for investors

By INDRAJIT BASU, UPI Business Correspondent  |  July 30, 2004 at 1:59 PM
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CALCUTTA, India, July 30 (UPI) -- After much speculation, the Tatas, one of India's largest and most diversified industrial groups, launched its software gem Tata Consultancy Services Ltd. -- known as TCS to the world, on the stock markets this week.

The industrial group floated TCS's IPO Thursday, which not only opened an investment opportunity for India's most eagerly awaited stock to locals as well as foreign investors, but it also brought Asia's oldest and largest software exporter out of a decades-old and tightly-held family run business.

But even as the markets have cheered this IPO, questions that have started arising are: why are the Tatas, who dithered for six years, suddenly taking TCS public; and how would this IPO, the largest float yet by a privately held Indian company, affect the country's information technology (IT) sector, stock markets, and most importantly, TCS?

Tata Sons, the holding company of TCS, is offloading only about 14 percent of TCS's shares, but foreign institutional investors (FII) would be eligible to apply for roughly 60 percent of the 63.7 million shares offer, each of which will carry a price band $16.8 to $19.5, making it India's most valuable share issue yet by a privately held company. Going by the response that the IPO has received so far, it is slated to raise more than $1.10 billion over the next few days.

Indeed, ever since the Tatas announced about two months back that they have decided to take TCS public, baiters have said that Ratan Tata -- the groups' chairman -- missed the bus during the 1990s IT boom, and wondered why now is suddenly the time to go public.

And, many have also found this IPO, which comes after more than three decades of the company's existence and scorching performance, intriguing.

Admittedly, TCS's exemplary track record and performance apparently make it difficult to see why it needs to go public at all. It is the first IT company in Asia, which was formed at a time, in 1968, when perhaps the word "software" was unknown not only to most in India but many in Asia. The company that started with four people is now a giant of around 28,000 software engineers -- adding 3000 to 5000 every year -- of 30 nationalities working in 32 countries, with revenues in the latest financial year of $1.6 billion. It pioneered offshore operations when it began operations in America in 1973, and now offers services to a range of firms in the insurance, telecom, retail and transport sectors.

As many as 39 of the top 100 Fortune companies outsource some of their software work to Tata Consultancy Services. Its 548 clients include AT&T, American Express, Boeing, British Telecom, Compaq, IBM, Dell, Microsoft, General Motors and the state governments of Montana and Pennsylvania.

And, even as hip Indian IT companies like Infosys and Wipro have managed to outshine TCS in terms of "global brand familiarity," the company, with its 6.5 percent attrition rate -- Infosys's 11 percent and Wipro's 17 percent -- is a favorite among software engineers.

The IPO document clearly reveals that the main purpose of taking TCS public is hardly for the financial benefit of the company itself. In fact, the real financial beneficiary would be its holding company Tata Sons, which will get about $498 million from TCS as transfer charges for hiving of TCS as a separate company.

"These funds will be a part of Tata Sons' future resources," Ratan Tata said. "Tata Sons would continue to expend funds on its main businesses, which are promoting companies and growing its own portfolios. We would restructure our balance sheets. We'd look at enhancing the value of Tata Sons."

The Tata group companies will also gain, as post-listing TCS is expected to double the stock market valuation (called market capitalization in analysts' jargon) of all Tata Group company shares to over $20 billion.

Still, this IPO is perhaps the most important floatation, not only for the TCS, but also for corporate India.

Let's take TCS first. According to the Tatas, being a corporate listed company like its competitors, as against a division of a private holding company, will be a terrific boon to its visibility when it calls on customers. Most importantly, "it will provide the visibility TCS needs to go ahead with business rather than a division of a privately held holding company (Tata Sons)," said Ratan Tata. Besides, it will provide a currency for acquisition.

"I believe TCS will grow organically and inorganically through acquisitions. IT has had a strong organic growth rate through its history. It will now have currency with which to make acquisitions. TCS will be a company that will stand up with the best in the world and keep India's flag high," Tata said.

According to Nimesh Kampani, of JP Morgan Stanley, a FII which is also managing the IPO, this floatation is likely to boost the capital market as well as inspire fresh investments. It would be an opportunity for FIIs, to invest in a technology IPO of global stature in a market that is on the softer side, Kampani says.

Indeed, perhaps the last time when investors in India, including foreigners, got an opportunity to participate in a blockbuster IPO was in June 1993, when shares in Infosys -- the country's most celebrated IT company until now -- were listed at Rs 145. Currently, the Infosys share (Rs 5) trades at over Rs 1400 -- after three stock splits.

Moreover, stock market sources feel that this could also open doors for other software and services companies for floating IPOs. There could be more IPOs in the IT and ITES sector especially by companies that have foreign stakes, said a stock broker-analyst.

Nevertheless, not everyone is impressed. Analysts say that the price of the IPO, which is getting most of its bids at $17.7 per share, looks to be on the higher side, "considering developments in the United States economy and Nasdaq."

"Of late, the Nasdaq has softened significantly and is said to have turned technically weak following results and forecasts of many IT companies that were below market expectations" said Capital Market, a stock market publication. "Indian IT stocks can not remain immune for long to the goings on at Nasdaq and thus, TCS's future performance in the stock markets remain a cause for concern."

Morover, analysts are also concerned about the impact of the outsourcing backlash against India on the performance of the TCS going forward.

Nevertheless, for the time being though, investors are grabbing this "most wanted" IPO up. On close of the second day of the float today, TCS was already oversubscribed by 1.5 times -- meaning that investors have already applied for 50 percent more than what TCS has on offer. And, there are 5 more days to go before the issue closes.

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