TCS: A decent debut

TCS lists at a multiple similar to Infosys Technologies'

The markets have valued TCS at around Rs 990 per share, a 16 per cent premium over its issue price. Also, it recorded the highest turnover in the cash market, about 6 times its nearest contender, indicating that a large number of investors who got allotment in the IPO have decided to cash in already. What's more, most IT stocks were under selling pressure "" the CNX IT index fell 1.3 per cent.

This probably means that TCS could trade at higher levels going forward. But based on Wednesday's prices, TCS's FY05 PE of around 23.5 is almost identical to that of Infosys, which trades at 24 times estimated FY05 earnings. It would fair to say that TCS has had a decent listing.

After all, Infy scores over it on most financial parameters. In the two years for which TCS's financial data is available, Infy's revenues grew at a CAGR of 39.6 per cent based on US GAAP financials. TCS, even with the benefit of CMC's acquisition, grew at 27.7 per cent.

Its operating profit grew by 20.2 per cent during the period, lower than Infy's 28.1 per cent growth. Also, Infy's operating margin (27.6 per cent) is superior than TCS's (25.4 per cent). But analysts say TCS would get a comparable PE because of its bigger size, ability to execute much bigger orders, and its wider range of service offerings. However, if Infy continues to outperform in terms of profit growth, this would warrant a rethink. For TCS to maintain its high discounting, it would have to deliver comparable results going forward.

UltraTech CemCo

UltraTech CemCo's share price has settled at around Rs 250, a 27 per cent discount to the price Grasim had paid in its open offer.

Investors who couldn't dispose their holding in the open offer would be disappointed, but those who have held on to the L&T (non-cement business) as well have some solace.

L&T shares have risen smartly and currently trade at over Rs 820. An investor who held 100 shares prior to the de-merger would now hold 40 shares of UltraTech CemCo (the cement company) and 50 shares of L&T (non-cement). Just before the delisting, the value of the 100 shares was Rs 50185, and now the combined value of the UltraTech and L&T works out to around Rs 51200, which means investors have at least achieved a break-even.

UltraTech had an EPS of 3.12 for FY04 and as a result the current valuation of the scrip on the bourses appears stretched. However, going forward analysts expect a substantial improvement in its performance """" the company is a large exporter of clinker and cement and export prices of both these items have risen substantially.

In the case of clinker their has been a 40 per cent year-on-year improvement in realisations and for cement it is 43 per cent. Moreover, in the domestic markets price realisations have improved approximately 25 - 27 per cent year-on-year.

Also the company is expected to substantially reduce a key cost component""freight handling""- due to synergies expected to be realised with Grasim's existing cement plants. Hence analysts are expecting FY05 EPS to rise three times and that should help its valuations be in tandem with other well established cement players.

Non-resident Indian outflows

One of the strategies for combating inflation apparently is to let the rupee appreciate. That's easier said than done these days, what with net inflows from foreign institutional investors down to a trickle. Data from the Reserve Bank of India shows that NRI depositors too have been taking funds out of the country.

With interest rates being raised in the US and the UK, and with interest rates on NRI deposits being slashed in India, these deposits have clearly become unattractive. That's borne out by the figures. For the first two months of FY 2005, the latest period for which data is available, NRI deposits fell by $214 million. For the calendar year to May, they fell by a total of $327 million.

That's not much, but they must be seen against the context of these deposits rising by $932 million in the first two months of FY 2004, and an inflow of $3.6 billion for FY 2004 as a whole.

Moreover, May also saw the outflow of $180 million worth of Non-Resident (External) deposits.

When the rupee was appreciating these deposits saw huge inflows, since depositors benefited from the appreciation in the value of the rupee.

Now that the rupee is no longer appreciating, these deposits aren't attractive. Add to that the new tax deduction at source on NRI deposits, and these outflows could only get worse.

What's more, as these deposits are withdrawn rupees are sold and foreign currency bought, which would lead to a further pressure on the rupee.

With contributions from Mobis Philipose and Amriteshwar Mathur