TCS issue price at Rs 775-900 a share

Issue size Rs 4,942-5,740 crore, 60% for institutions.

Software major Tata Consultancy Services (TCS) yesterday announced a price band of Rs 775-900 for each share of face value of Re 1. The TCS initial public offer (IPO) will hit the market on July 29 and the book-built issue will close on August 5.

At an estimated issue size of Rs 4,942-5,740 crore, the IPO will be the largest equity issue by a private Indian company. At this price band, the TCS share will have a price-earnings (P/E) multiple of 23.20-26.95, in line with the information technology sector's P/E ratio of 27.

The TCS share will be marginally cheaper than the Infosys Technologies stock, which is currently quoted at a P/E of 28.99. Wipro Ltd is quoted at a P/E of 40.38.

Roadshows for the issue will start on July 21 in Mumbai. Teams led by holding company Tata Sons' Chairman Ratan Tata, Director (finance) Ishaat Hussain, TCS CEO S Ramadorai and Company Secretary SH Rajadhyaksha, along with merchant bankers, will fan out to the UK, Europe, Hong Kong and Singapore. JM Morgan Stanley, DSP Merrill Lynch and JP Morgan have been appointed the book-running lead managers for the issue.

TCS will offer 55.45 million shares of Re 1 each in the IPO. This includes a fresh issue of 22.8 million shares and an offer for sale of 32.6 million shares by Tata Sons and other existing shareholders in the company.

Ten per cent of the issue is reserved for subscription by employees and directors in India of the company, the holding company and the TCS division. There will also be a greenshoe option of 8.32 million shares to be offered by Tata Sons.

Sixty per cent of the net offer, amounting to 29.94 million shares, will be allocated on a discretionary basis to qualified institutional investors and a minimum 25 per cent of the issue, around 12.48 million shares, will be allotted to retail investors on a proportionate basis.

At least 15 per cent of the offer, amounting to 7.49 million shares, will be available for allottment to non-institutional bidders, including non-resident Indians.

The TCS Red Herring prospectus filed with the Registrar of Companies today says while foreign entities can participate in the issue through participatory note, it does not give any clear indication whether the book running lead managers and their associates are allowed to issue participatory notes.

According to reports, the lead managers had approached the Securities and Exchange Board of India (Sebi) for issuing participatory notes to their clients, making a plea that such an instrument would widen the investor base. Merchant banking sources said Sebi had refused permission.

The market regulator had made such an exception in the case of the recent Oil and Natural Gas Corporation (ONGC) issue.

If the TCS IPO is priced at the upper end of the band, at Rs 900 per share, on its post-offer paid-up capital of 478.28 million shares, the company will be valued at Rs 43,044 crore.

Even if the share is listed at the issue price, it will top the market capitalisation sweepstakes in the software industry.

At today's stock price, Infosys Technologies has a market capitalisation of Rs 39,423 crore and Wipro has a market capitalisation of Rs 36,956 crore.

However, market players were divided in their reaction to the TCS pricing. Sharad Shukla, head of investment advisory services at IL&FS Investmart, said, "The IPO is fairly priced and leaves scope for investors to make profits. The public offering should be oversubscribed and get a primium on listing."

Jaideep Goswami of HDFC Securities said, "It is reasonably priced and should get a good response from the investors, be it retail, high net worth investors or FIIs."

However, the chief investment officer of a domestic mutual fund said, "The price-band is slightly on the higher side, but the issue will sail through as the entire IT sector is currently being re-rated. However, I don't see immediate gains at the time of listing as in the case of many previous issues."

The head of a local brokerage firm said the TCS IPO looks aggressively priced and at these valuations other IT companies already listed on the bourses are cheaper.

TCS was the first Indian infotech company to chalk up a turnover of over $1 billion. In 2003-2004, it clocked a turnover of over Rs 5,940 crore and reported a net profit of over Rs 1,597 crore.

The total turnover of consolidated TCS stands at 7,123 crore and net profit at Rs 1,612 crore in 2003-04. TCS ranks 23rd among listed companies, just below Adani Exports.

In terms of net profit, TCS ranks seventh, after GAIL India. In March 2004, it employed 28,000 people.

The net proceeds of the fresh issue of shares will be used to pay the purchase consideration to Tata Sons for the transfer, and the remaining proceeds will be deployed for general corporate purposes such as investment in other industries such as telecom.

Tata Sons holds a 90 per cent stake in TCS Ltd, with the balance being held by other companies, including Indian Hotels and Tata Tea. The authorised share capital of the TCS Ltd is Rs 60 crore and the current paid-up capital is Rs 45.55 crore.