Tata very much

Investors have responded eagerly to the $1.2 billion IPO of TCS in India.

Enthusiastic investors have bid Rs400 billion ($8.6 billion) for Tata Consultancy Services' record-breaking IPO. The deal, which is India's largest-ever IPO by a private company, drew 1.3 million bids and was subscribed 7.7 times on an overall basis.

Lead managers JM Morgan Stanley, DSP Merrill Lynch and JPMorgan marketed the 55.5 million shares with a price band of Rs775 to Rs900. Some 10% of the total issue was reserved for employees and of the remaining shares, 60% was pitched at qualified institutional buyers, 15% at high net-worth individuals and 25% at retail investors.

The bankers priced the deal in the top half of the band, at Rs850, putting a smile back on the faces of the region's investment bankers after lacklustre responses to other recent billion-dollar IPOs, such as LG Philips LCD and China Shipping. The offer will raise Rs54.2 billion for TCS, plus Rs7 billion from the greenshoe - that makes it the second largest IPO in Indian corporate history behind ONGC.

The issue price values TCS at somewhere between 19 to 21 times 2004 earnings, depending on which forecasts you believe. That represents a discount of 10% to 15% on Infosys, the industry benchmark.

Given the turbulence of recent IPOs it was inevitable that TCS would price at a discount to Infosys, not least because of an earnings multiple that was high enough to chase away money from emerging markets funds. But there was sufficient interest from India funds and technology funds in the institutional tranche to keep that discount to a reasonable level.

In a statement released over the weekend Ratan Tata, the chairman of TCS, said the company had deliberately left some value on the table to attract long-term investors and expressed his satisfaction with the deal. "We greatly appreciate this overwhelming response from both the domestic and global investor community," he commented.

Although TCS is involved in the kind of outsourcing business that has drawn fire in the US, its main focus is at the higher end of the services industry - acting as a tech consultant to blue-chip clients such as GE, providing end-to-end information technology services and integrating multiple technologies. The non-cyclical nature and strong growth prospects of the industry, plus TCS's high quality clients, helped the sales force to attract investors into the deal. It also helps that Infosys has already gone out and educated the market, and the protectionist rhetoric spewing from the US, ironically, has provided well-timed marketing for the deal.

Indeed, for technology investors there is not really another industry in the world with the growth profile of India's tech services companies, which are now starting to offer serious competition to Accenture and its peers. TCS is already the largest Indian player in the industry in terms of both revenues and profits, and its IPO is only likely to increase its profile.

The next step is to sell shares in the US. Local regulations prevented a simultaneous offer in India and the US, so it is expected that an ADR offer will follow shortly.

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