Tata Consultancy Services Listing on the NYSE?

  • April 24, 2007

Less than two years ago, Ratan Tata, the head of the Tata group, made the following comment about listing Indian consulting and outsourcing firm Tata Consultancy Services (TCS) on an international market,

“We always visualized TCS as needing an international listing and expect to have an international listing. The underlying reason is that if TCS wanted to make acquisitions, it would need currency.”

As you can see from this list, while the Tata group as a whole has been on an acquisition binge since 2001, TCS made just one small acquisition in 2006 by taking over Australia based TCS Management for AUS $15 million (to be paid over a 5 year period). In contrast, competitors Wipro and Infosys were more active. Wipro acquired Portugal based Enabler for $53.3 million; Finland based Saraware for $32 million and Quantech Global for an undisclosed sum. Infosys acquired Citibank’s 23% stake in Progeon Limited for $115 million, making Progeon a wholly owned subsidiary of Infosys.

While both Wipro and Infosys have an adequately stocked acquisition war chest with well over a billion dollars in cash and investments on their rock solid balance sheets, TCS only has roughly $266 million ($1 = 41.65 Rupees) in cash and short-term investments on its balance sheet. An international listing would certainly help TCS go after bigger acquisitions as organic growth slows down and there have been rumors that TCS may list its shares on the NYSE soon.

With 2006-2007 annual revenues of $4.3 billion and net income of $950 million, a NYSE listing for TCS is likely to generate a lot of interest. I have created a table that compares the key statistics of the major Indian IT firms using the 2006-2007 income statements just like I did in the June 2006 edition of InsideArbitrage.

Comparison of Indian IT Companies (April 23, 2007)

Infosys (INFY) Wipro (WIT) Satyam (SAY) TCS (TCS)
Price/Earnings 36.02 35.27 27.91 29.51
Price/Sales 9.91 6.88 5.70 6.54
Annual Revenue Growth 43.59% 45.24% 33.30% 40.68%
Annual Earnings Growth 53.15% 48.39% 19.65% 43.30%
Annual Revenue $3,090 million $3,467 million $1,461 million $4,300 million
Annual Earnings $850 million $676.77 million $298.4 million $950 million
Profit Margin 27.51% 19.52% 20.42% 22.09%

Based  on its growth and margins as well its leadership in revenue, TCS appears to be attractively valued when compared to Wipro or Satyam. The higher valuation of Infosys appears justified on account of its industry leading profit margin and strong balance sheet. However if you are an institutional investor or a Non-Resident Indian (NRI), you would be better off buying TCS on the Indian market rather than waiting for an NYSE listing because of the premium usually associated with the American Depository Receipts (ADRs) of Indian IT companies.

Infosys ADRs currently trade at a 7.97% premium to its closing price on the Bombay Stock Exchange (BSE), while Wipro trades at a whopping 21.79% premium to its closing price on the BSE.

It is important to note that there are multiple risks associated with buying TCS at this point,

  • The Indian rupee, which has long been pegged against the dollar, has been gaining strength in recent weeks. With more than 50% of revenue coming in from the United States, this is going to hurt earnings at TCS and other Indian IT companies.
  • Employee turnover continues to remain high with an attrition rate of over 11%.
  • Rising inflation (residential mortgage rates are over 12.5%, yikes!), rising wages and a highly volatile stock market are some of the other risks that to be kept in mind while investing in India at this juncture.

Full Disclosure: I hold a long position in Wipro but have been slowly reducing my stake over the last few months.