Tata Consultancy Services' IPO offering had, as of last Friday, been oversubscribed 1.62 times. A total of 64,000 retail applications had been made for the offer.
In the QIB (qualified institutional buyer) segment, the issue had been subscribed three times. A major portion of the bids had come in at much lower-than-expected levels, and were in the Rs 775-825 range.
However, as the bidding progressed, the value of bids moved up between Rs 800 and 850, still short of the Rs 900 level that most market men were expecting the issue to be oversubscribed at.
The lower price-bands seen in the initial bidding process came as a bit of a surprise, especially given the chest thumping endorsements given to the issue by a number of brokerages which had issued buy calls to their clients along with rave reviews.
Market participants had, therefore, expected the retail segment to be fully subscribed and, at best, even obtain a two-times oversubscription.
When a financial comparison is drawn between TCS and Infosys, though TCS scores over the latter as far as gross margins are concerned by a lead of about 258 basis points, it compares unfavourably on almost all other parameters.
The company's operating margin is over 200 basis points lower than that of Infosys while its net margins trail Infosys by 280 basis points. However, the company's operating margins are better than many other IT companies, including the likes of Wipro.
However, one reason for discomfort is that TCS is not cash-rich. Just to recall, the money generated from the issue is to be used to pay Tata Sons a purchase consideration of Rs 2,300 crore (Rs 23 billion) for the transfer of the assets and liabilities of Tata Sons pertaining to the TCS division.
Given that the fresh issue will generate Rs 2,000 crore (net of expenses) for TCS if subscribed at Rs 900, and given further that the company had cash equivalents of about Rs 157 crore (Rs 1.57 billion) at the end of March 2004, it is fairly certain that the company may have to dig into cash generated from operations in the June quarter to pay the purchase consideration.
This raises a key point of negative comparison with Infosys. TCS currently does not have enough cash on its books, compared to Infosys huge hoard of Rs 2,152 crore (Rs 21.52 billion) as on June 30, 2004. The price-to-book value for TCS (at Rs 900) would be around 37x times while it is 12x for Infosys.
On the other hand, at a current price of Rs 1,554, Infosys trades at 24.6x FY05 earnings, while TCS, at Rs 900 levels, gets a valuation of only 19x if it were to grow earnings at the same rate (34 per cent) as Infosys.
Given that the share prices of infotech companies have increased substantially over the past week or so, TCS' pricing looks relatively more attractive. This, combined with its huge size and expertise, makes it a good buy even at Rs 900.
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