Coming Soon

The buzz in merchant banking circles is that the IPO will hit the market soon after the presentation of the Union budget on July 8. Tata group officials are tight-lipped about the nitty-grittys, but speculation is rife about the offer price and the listing price of TCS. Retail investors have been waiting for a long time for the IPO from the company which pioneered the infotech revolution in the country—much before even Infosys and Wipro were set up in the ’80s.

Price wise

TCS is offering 6.37 crore shares to the public, constituting around 13-14 pc of the equity capital. Out of this, retail investors will get around 25 pc and the balance will go to various institutional investors.

Though it has not yet announced the offer price—the offer document is yet to be cleared by Sebi—merchant bankers unanimously say that the TCS offer price would be Rs 1,000 (face value of Rs one and a premium of Rs 999).‘‘It is too early to comment on anything about the IPO, but the price and everything else will depend on the investment sentiments at that time,’’ said A Balasubramanian, head, fixed income, Birla Sun Life Mutual Fund.

But a fund manager associated with the Tata group, who preferred anonymity, said the Rs 1,000 offer price being talked about by Dalal Street could be on the higher side.

‘‘The IPO size is also big. If Rs 1,000 is the offer price, the company would raise Rs 6,370 crore. Is the market climate conducive for such a big IPO?’’ he asked. The Infosys stock is quoted at Rs 5,478 per share. Wipro, another IT giant, with a face value of Rs two was traded at Rs 1,584 per share (Rs 532 ex-bonus) on the bourses.

How does TCS compare with Infosys? ‘‘Earnings growth forecast for TCS is lower than that for Infosys (26 pc annual growth FY 2004-06 for Infosys versus 22 pc for TCS) due to slower-than-company average growth from top client GE. In terms of sales and profit growth, Infosys leads the industry, though the difference between the peers is not large,” says a DSP Merrill Lynch study.

It adds TCS compares favourably to its peers due to its large and complex project management strength, ability to execute strategic acquisitions, domestic market leadership and people management.

The big question

And just how does Dalal Street gauge the offering? ‘‘Fundamentally, it is a good opportunity. It is a well-known company and it has very good future potential,’’ said Sanjay Sachdev, managing director and CEO of Principal MF.

‘‘Compared to the other (software) firms, TCS provides end to end solutions and is into a very broad spectrum of software,’’ added Sachdev. ‘‘We believe TCS would be appropriately valued toward the top-end of Indian IT valuations on a PEG (price-earning growth) basis. However, the market might view a slight discount to Infosys as appropriate due to the shorter track record,” stated the Merrill Lynch study. JP Morgan, another leading global investment firm, has valued TCS at a market capitalisation of $7.5-8.9 billion (Rs 34,500-40,940 crore) using the DCF methodology. “On a comparative P/E basis, we are looking at a value of $7.5-7.9 billion assuming a 10-15 pc discount to the Infosys multiple,” Morgan said.

Despite a much higher on-site proportion of revenues than its peers and a high proportion of domestic business, TCS has comparable margins to its competition due to lower employee costs, lower depreciation costs and good execution of fixed price contracts, says Morgan.

A fund manager said, “We will churn our existing portfolio to buy TCS shares’’.

Will it become another goldmine for investors? For the answer, one will have to wait till July.