Background & Business

Incorporated in 1968, Tata Consultancy Services Ltd. (TCS) – part of the Tata Group) is a leading global IT services organization and one of the pioneers in exports of software services from India. It has distinction of being the first Indian IT services organization to report US$1 billion in annual revenues in FY2003.

TCS is a global organisation with offices in 32 countries and development centres in 10 countries. TCS offers a comprehensive range of IT services to its clients in diverse industries such as banking and financial services, insurance, manufacturing, telecommunications, retail and transportation. TCS’ client list comprises of some of the world’s largest and reputed organisation, including six of the top ten corporations in the Fortune 500 list of the largest corporations in the United States. It also has relationship with 39 out of list of Fortune 100 corporations.

TCS is the largest Indian IT services organisation in terms of revenues as well as profits. For fiscal 2004, TCS had total revenues and net income of Rs 7063 crore and Rs 1613 crore respectively. It has over 28,500 employees as on March 2004.

History of corporate structure

Till recently, TCS business has been conducted as an operating division of Tata Sons (Tata Group holding company). On October 25, 2002, the Board of Directors of Tata Sons Ltd. and TCS Ltd. approved the filing of the Scheme, for the transfer of the TCS Division to TCS Ltd (a shell company pre-dominantly held by the Tata Group).

The Scheme provides that the TCS Division shall be transferred to and vested in TCS Ltd. with effect from April 1, 2004, the Appointed date under the Scheme. From the Appointed Date up to the date on which the Scheme is effective, Tata Sons shall hold TCS Division in trust and on account of TCS Ltd. The Scheme provides that TCS Ltd. shall pay Tata Sons Rs 2300 crore as purchase consideration for the transfer. The consideration is non-interest bearing and shall become payable upon the successful completion of the current public offering. In addition TCS Ltd. has agreed to bear all costs, charges, levies and duties and expenses in connection with the Scheme.

Issue objective

Out of the total issue size of over 5.545 crore equity shares (face value of Rs 1), the fresh issue of shares only accounts for 2.278 crore equity shares. The rest around 3.268 crore equity shares are offer of sale from existing shareholders, with a green shoe option to offer another 83.18 lakh shares. Consequently, the equity base will expand from Rs 45.55 crore pre issue to Rs 47.83 crore after the IPO.

This essentially means that not only TCS as an entity will not accrue a single rupee from the mega issue of over Rs 5000 crore. However, in spite the issue of 2.2775 fresh equity shares, the company will end up shelling out over Rs 150 crore. Even at Rs 900 the higher end of the band, TCS will raise only Rs 2050 crore from fresh issue of shares, which is lower than Rs 2300 crore the company needs to pay Tata Sons as consideration for hiving it off as a separate company. This apart, TCS will be liable for expenses incurred (like merchant bankers fee, promotion expenses etc.) for the public issue.

Details about offer for sale

Name of Shareholders	Shares offered for sale (nos.)	Pre-issue holding (%)	Shares offered in greenshoe option (nos.)
Tata Sons	14457116	3.17	8317880
Jamshedji Tata Trust	9531250	2.09	0
Navajbhai Ratan Tata Trust	5468750	1.20	0
Kalimati Investments	413688	0.09	0
Indian Hotels	200000	0.04	0
Cameo Investments	83231	0.02	0
Shapoor Pallonji Mistry	1261788	0.28	0
Cyrus Pallonji Mistry	1261777	0.28	0
Total offer for sale	32677600		8317880

Peer group comparison

Strengths

Bigger scale of operations: It is much bigger in terms of revenues and number of employees as compared to comparable companies like Infosys and Wipro. First domestic company to reach US$1 billion mark in FY2003 and had over 28,500 employees as on March 2004.

Relatively low attrition rate: TCS had an attrition rate of 6.1% in FY04 as compared to 10.5% for Infosys and as high as 17% in case of Wipro.

Industry focus: It has strong foothold in key industry domains of Banking, Financial Services and Insurance (BSFI), manufacturing and telecom, which account for 68% of its revenues. However, the company lacks in its focus on emerging opportunities in retail and utilities industry domains.

Large and long-term contracts: TCS has the distinction of having four clients with annual business of over $50 mln. It has won two of the largest multi-year deals for any Indian IT services vendors i.e. $100 mln contract from GE Medical Services and $120 mln from NHS, UK.

Concerns

The biggest concern or weakness as compared to its peer group is the cash position of the company. After being hived off as a separate entity, TCS begin its operation with nil cash on its books as on April 1, 2004. On the other hand, its peers like Infosys has cash and cash equivalent of Rs 2152 crore in its book even after the distribution of Rs 860 crore of special dividend in April this year, which amounts to cash per share of Rs 80.

Relative valuations

* EPS based on post-IPO expanded equity capital of Rs 47.83 crore

Valuation

TCS is one of the largest and most reputed domestic IT services companies. Though there are concerns about the health of its balance sheet post hiving off into a separate entity, the company is engaged in high cash generating business, which will eventually lead to considerable improvement in its cash position in a short period of time. The issue is being offered at a discount to its peers like Infosys and Wipro. We recommend investors to subscribe in the public offer.

Consolidated financials (US GAAP)