India's IT Pioneer Sparks an IPO Frenzy


By Manjeet Kripalani S. Ramadorai's phone has been ringing off the hook. But they're not calls from would-be customers for his $1 billion, privately held software services behemoth, Tata Consultancy Services. Too bad, since business has been off a bit since September 11. These days, callers are more intent on getting news of TCS's plans to list its shares on the Bombay bourse this summer. The word leaked out last month, and scores of investment bankers across the world have been begging to represent TCS as it makes its public debut. "I get at least 20 calls a day from bankers," says Ramadorai, TCS's CEO.

Their enthusiasm is understandable. TCS is the pioneer of India's highly successful software services model -- it began writing code for its parent, India's $8 billion Tata Group conglomerate, way back in 1968. TCS then began selling its services to clients like IBM outside of India, and it has become hugely profitable.

All the while, TCS has remained stubbornly private, its growing revenues adding greatly to Tata Group's wealth -- and frustrating investors. Now, however, "market conditions [are] right, and only getting better," according to Ishaat Hussain, finance director of Tata Sons, the Tata Group holding company that owns TCS. So, Tata has agreed to sell 10% of its stake in TCS, hoping to raise between $750 million to $1 billion.

BRINGING CHEER. If it happens, this would be India's largest IPO ever, and Asia's largest this year. More important, the phenomenon of an Indian high-tech powerhouse going public will likely expand the size of the country's IT industry and dislodge domestic rivals Infosys Technologies and Wipro as long-time investor darlings whose stocks have demanded steep premiums. "TCS's issue will bring cheer to India's IT industry and to the stock market," says Ravi Datar, an analyst with Gartner India.

The public offering will certainly also bring cheer to its parent. The conglomerate comprises 80 companies, many of which are globally competitive players like Tata Steel and tea producer Tetley.

TCS has long kept a low profile, even though it's Tata's most profitable division, generating $250 million for the bottom line in 2001. With TCS going public, analysts think Tata will come back in favor and be seen for what it really is: "an ideal mix of old and new economy," says ABN-Amro's Mohan Swamy. A 10% sell-off of TCS will bring in funds the group badly needs for its plans for get into India's emerging telecom sector.

PRESTIGIOUS CLIENTS. A listing will also give TCS a global brand, which could attract international talent and open up a market for global acquisitions. It already earns 30% on nearly $1 billion in revenues, is growing at 32% annually, and has 18,000 software consultants spread across 80 offices in 25 countries offering everything from tedious Cobol programming to high-end corporate IT strategy.

TCS's 14 development centers in India work for prestigious clients like General Electric, American Express, Standard Chartered Bank, British Rail, and the Swiss Central Depository. It's twice as large as Wipro and Infosys, and aims to be like international consulting firm Accenture. "By 2010, we want to be among the world's top 10 IT consulting companies," says chief executive Ramadorai.

TCS has plenty of hurdles to cross before it gets there. Going from a culture of intense privacy to public scrutiny will likely be painful. TCS will be subject to the pressure of quarterly earnings and transparent accounting from thousands of investors, instead of just one.

LOST CASH FLOW. Nor is the company comfortable with disclosing its fee structure, its actual profit margins, and its cash flow, which its parent has diverted to prop up the sagging balance sheets of the other companies in Tata Group in the past. "TCS is what made the Tatas' red ink turn black," says a Bombay-based marketing consultant. Finance director Hussain says after the IPO, the group will no longer be able to requisition TCS's cash flow, the loss of which will be compensated for by the proceeds of the issue and the resultant dividends.

And then there's the competition, which is intense worldwide but also getting stiffer within India. An increasing number of multinationals such as IBM Global Services are setting up development centers in India to cater to their clients. Covansys, a Michigan-based software consultant with $400 million in annual revenues, recently opened a center in Bangalore. Since September 11, more U.S. enterprises are sending work offshore, "but only if it is managed locally," says Covansys President Martin Clague. "American companies with flexible and seamless offshore capabilities are seen as a much better bet, and I don't see that changing any time soon."

With a higher IT profile and more foreign fund managers looking at Indian tech stocks, the country's markets could get a lift overall. And high investment premiums for investing in Indian IT companies could begin to dissipate. Some competitors are not so sanguine, however. Already, they're eager to troll TCS's financials, line by line. "The big question: Is TCS the Kmart or the Wal-Mart of India's IT industry?" asks one.

The answer will come when the company lists this July. Investors with a global horizon may want to watch closely. Kripalani is Bombay bureau chief for BusinessWeek


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