Tata Consultancy Services Listing on the NYSE?

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April 24, 2007 | Stocks | | Author Asif

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 SINLetter.

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.




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Comments

  1. Sambit
    April 24th, 2007

    Asif,

    Do you have any recommendation (or just opinion or information) for online discount-brokerage service for the NRI’s to trade in Indian market?

    Thanks,

    - Sambit

  2. Asif
    April 24th, 2007

    Sambit,

    Most of the big banks in India like ICICI (IBN) and HDFC Bank (HDB) offer online trading at reasonable rates. The other online brokers I hear about a lot are Indiabulls and the very creatively named ShareKhan. I have not had any first hand experience with them and hence cannot recommend any of them. I would be interested in hearing about your experience if you decide to use one of them.

    A Non-Resident Indian can open an NRE or NRO account to trade online. Given below are a couple of helpful links,

    http://content.icicidirect.com/product_nri.asp

    http://www.nriol.com/resources/faqs/banking.html

    An NRE account could be a great way to get a higher rate of interest and hedge against further declines in the dollar provided the RBI stops pegging the rupee to the dollar. 

  3. Thomas Victor
    April 25th, 2007

    Asif,

    You mention that you’ve been reducing your position in WIT over the last few months. Is it your feeling that the high P/E offshorers like WIt and INFY will have slower growth from now on?

    CTSH has an even higher P/E ratio, but after a 2007 pullback it seems to be rising again. What is so special about CTSH other than it seems to be owned entirely by US institutional investors?

    INFY went through a sale of insider stocks recently in order to increase the number of ADR stocks. I thought that it was to make it more attractive to institutional investors and to make it eligible for Nasdaq 100. How can one tell if institutional investors are increasing or reducing their position? The Yahoo Finance figures on ‘Major Holders’ is as of Dec 31, 2006.

    Thanks.

    Thomas

  4. Anis Haroon
    April 26th, 2007

    Sambit,

    Apart from Indiabulls and Sharekhan that Asif mentioned, GeoJit is another good online broker option.

    Anis.

  5. Asif
    April 26th, 2007

    Thomas,

    I do expect growth at companies like Wipro (WIT) and Satyam (SAY) to slow down as the US economy slows down. They have been taking steps to diversify their revenue sources geographically but more than half the revenue still comes from the US. To validate the effect of this slowdown on consulting and staffing companies, check out the disappointing outlook mentioned by Kelly Services (KELYA) and Robert Half International (RHI).

    The declining US dollar has also been great for outsourcing companies as the rupee was pegged ot the dollar and this inflated revenues coming in from Europe and other parts of the world. With the rupee now gaining against the dollar and the dollar close to an all time low against the British pound, foreign exchange will actually negatively impact their earnings.

    There is nothing special about CTSH as it is in the same business as Infosys, Wipro, Satyam and TCS. The company has executed very well and since the shares do not trade in India, there is no premium associated with them.

    I was not aware of the insider sales at Infosys to increase the number of ADRs. Thanks for sharing that with me.

    Regarding institutional trading activity, Thompson Financial’s I-Watch service is an excellent resource. Check out this FAQ about how to profit from using I-Watch and this 1-week chart for Infosys.

  6. Krithika
    June 1st, 2007

    Why has TCS not yet been able to register with NASDAQ or NYSE even after 3 years of listing in Indian Stock Exchanges?

  7. Asif
    June 5th, 2007

    Krithika,

    With the outsourcing boom and all the major Indian IT companies generating a lot of free cash flow, TCS probably did not see the need the raise additional capital by listing on the Nasdaq or NYSE.

    I plan to post another blog entry about TCS in the next few days that may be able to address your question further.

  8. Jai
    March 1st, 2012

    is tcs finally listed in nasdaq and other international market??
    where all is TCS listed in the worlds stock markets???

  9. Asif
    March 3rd, 2012

    TCS did not list on the Nasdaq and from a quick search it does not look like they listed in any international market.

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