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TATA CONSULTANCY SERVICES IPO

Discussion & Analysis | Investment Banking

Submitted By Amartya Dey 12408 Deepak Poddar 12419 Rahul K 12438 Surajsinh Gaikwad 12456

All the sources of data and other information have been mentioned in the document. All the views of the authors are personal opinions, and are not necessarily correct.

Tata Consultancy Services IPO

Question 1: What is the market capitalization of the company at the start and the end? Financial Year 2008-09 2012-13 No. of Shares Outstanding 97,86,10,498 195,72,20,996 Market Price (Last Trading Day) 538.55 1556.85 Market Capitalization ( Crores) 52703 304710

Question 2: What is the net worth of the company at start and at end? Financial Year 2008-09 2012-13 Share Capital (Crores) 197.86 295.72 Reserves & Surpluses (Crores) 15502.15 38350.01 Net Worth-Consolidated ( Crores) 15700.01 38645.73

Question 3: What is the debt -equity structure at start and at end? Financial Year 2008-09 2012-13 2008-09 Equity No. of Shares 97,86,10,498 Debt Secured Loan Unsecured Loan 2012-13 Equity No. of Shares 195,72,20,996 Debt Secured Loan Unsecured Loan 129.46 crores INR 1.52 crores INR Face Value 1 36.44 crores INR 11.69 crores INR Face Value 1 Equity (in crores) 97.86 195.72 Debt (in crores) 48.13 130.98

Question 4: What was the capital market activity of the company during the period, i.e., IPO, FPO, Rights, Bonus, ADR/GDR, FCCB, private placement of equity to institutions and promoters? The Capital Market activities of the Company during the period were as follows: F.Y. 2009-10 Bonus Issue o The company issued fully paid-up bonus shares during the year. The Bonus issue was a 1:1 issue, resulting in an issue of 97.86 crore equity shares. The company wanted to reward its shareholders, but not with cash (Most probably did not want to reduce cash balance and it anticipated that it could generate adequate returns good enough to service the increased equity) .This is why the company issued bonus shares. There were no other capital market activities that were undertaken by the company during the period under consideration. Question 5: At what price did they place equity, and what were the book value, market price and P/E multiple at the point of placing, one month before and after. If it is an FCCB, what was the exchange rate prevailing before the placement, after and now? How does the value of the firm, value of equity change with change in Exchange rate? The Price Band for the IPO of TCS Limited was fixed between Rs 775- 900 per share. The issue was finally completed at a consideration of Rs 850/- per share. The Respective Book Values prior and post issue were as follows: Financial Year 2003-04 2004-05 Net Worth (Crores) 47.08 3477.54 No. of Shares Outstanding 36440002 480114809 Book Value Per Share 12.91 72.43

The Company was listed on the NSE on the 25th of August 2004. The Market Price of the share on the date of listing and one month post it was as follows: Date Of Listing 25th August 2004 Listing Price 1049 Post Month Date 25th September 2004 Closing Price 987.95

The P/E multiple of the company on the basis of the EPS for the year ended 31st March 2004 is as follows: EPS: 47.37 (Excluding Exceptional Items-Consolidated) Date 25th August 2004 25th September 2004 Market Price 1049 987.95 P/E Multiple 22.14 20.85

The company did not raise any money via the FCCB mode initially, and the same has not been used till date.

Question 6: Discussion and analysis about the IPO of TCS in 2004 Issue Summary Type Size Price Face Value Shares on offer Issue opens Issue Closes Minimum Subscription Lead Managers Listing Promoters Promoters post issue holding Issue Structure QIBs Number of shares % of net offer to public (non-employees) Minimum bid/ Application size In multiples of Maximum bid/Application size 29,944,410 60% Rs. 50,001 7 shares Not exceeding the size of the offer Non-institutional Investors 7,486,090 15% Rs. 50,001 7 shares Not exceeding the size of the offer Retail Investors 12,476,840 25% 7 shares 7 shares Rs. 50,000 Public issue, 100% Book Building Rs. 43 billion to Rs. 50 billion Rs. 775 to Rs. 900 per share Re. 1 per share 55.45 million July 29, 2004 August 5, 2004 7 shares JM Morgan Stanley, DSP Merrill Lynch, JP Morgan BSE and NSE TATA Sons Limited 82.70%

Note: 10% of the shares on offer (i.e. 5.45 million shares) are reserved for employees of TCS. Reasons for taking TCS public To project the company as a private sector IT major in the global markets To provide a separate corporate identity (The TCS division had been functioning on the principle of a separate commercial entity and was paying royalty for use of Tata's brand name till now, as said by Ratan Tata.) To create a public trading market for the equity shares of the company by listing them on the stock exchanges To utilise net proceeds of the fresh issue to pay transfer consideration of Rs 23 billion to Tata Sons To enhance visibility and brand name To use their equity shares for acquisitions

Promoters TCS is promoted by Tata Sons, which holds around 90% of the outstanding pre-offer equity shares. The principal business of Tata Sons is investment holding and TCS is one of its major operating divisions. In addition to the TCS division, Tata Sons has three other operating divisions: Tata Economic Consultancy Services

Tata Financial Services Tata Quality Management Services

The equity shares of Tata Sons are not listed on any stock exchange. Charitable trusts hold the largest portion (around 66%) of its outstanding equity shares. A study on the IPO Reasons to Apply Management Experience Reasons not to Apply Cash crunch as it has to pay Rs. 23 billion to TATA Sons Huge outsourcing opportunity Decreasing cost advantage Scale advantage Political concerns Less leveraged on the USA as compared to Conflict of interest of TCSs promoter TATA Infosys and Satyam Sons Tata Infotech, Tata Elxsi, and Tata Technologies, a subsidiary of Tata Motors Low attrition at 6.1% in FY 2004 Study of the price of the IPO and the cash crunch Weighted Average Earnings per Share (EPS) Year Fiscal 2001 Fiscal 2002 Fiscal 2003 P/E Multiple Serial Number 1 2 3 Ranking Highest Lowest Average Industry Composite Industry P/E 40.80 6.20 28.90 Pro-forma profit after Indian tax (after restatement) (Rs. Million) 8,625 11,450 11,764 Number of shares (Million) 455.5 455.5 455.5 Weighted Average EPS (Rs.) 18.94 25.14 25.83 24.45 Weight 1 2 3

Note: Based on Capital Market Vol. XIX/04 dated April 26 May 9, 2004 for the Category segment Computers-Software-Large. The Offer Price was determined on the basis of the demand from investors through the BookBuilding Process and is justified based on the above accounting ratios. The face value of the Equity Shares is Re. 1. Through the book-building process, the price range that was discovered per share: Rs. 775-900. Out of the 55.4 million shares on offer, around 32.7 million shares are Offer for Sale by Tata Sons, while the remaining portion of 22.7 million shares is a fresh issue. The proceeds from the former would go straight to the books of Tata Sons, and would not be added to the balance sheet of TCS.

Tata Consultancy Services (TCS) will pay Tata Sons Ltd, the holding company of the group, Rs 23 billion (US$497.1 million) as part of a net asset transfer after its initial public offer (IPO), which would also include use of the group's brand identity. Quote: The Rs 23 billion is a consideration for transfer of TCS division to a corporate entity TCS Ltd, Tata Sons chairman Ratan N Tata told reporters on Wednesday. The TCS division had been functioning on the principle of a separate commercial entity and was paying royalty for use of Tata's brand name till now, he said. (Source: http://www.atimes.com/atimes/South_Asia/FG23Df04.html) Now, even if TCS offered the fresh issue at the highest price i.e., Rs. 900 per share, the total will amount to only Rs. 20.4 billion. If we add the cash available to TCS on its books i.e., Rs. 1.6 billion, even then TCS falls short by Rs. 1 billion. In the event that payment of the consideration is delayed beyond the period of three days from the date of receipt of trading permission from the Stock Exchanges for the Equity Shares, interest at mutually agreeable commercial rates, which we currently expect to be approximately 6% per annum, would be payable to Tata Sons. (Red Herring Prospectus) It is interesting to note that many analysts had pegged the price at Rs. 1100 per share as the upper limit. To be able to pay the total consideration of Rs. 23 billion out of the fresh issue of equity, TCS shares have to be sold at Rs. 1013.26 per share. Using regression, we find the EPS for the year 2004 to be Rs. 30.19 per share. Then the P/E multiple at Rs. 1013.26 per share would be 33.56 which is higher than the average industry composite P/E multiple of 28.90. At the price of Rs. 775, the P/E multiple of TCS would be 25.67, while at the price of Rs. 900, the P/E multiple would be 29.81, which is higher than the average industry composite. During the same time, the P/E multiple of Infosys was 31.20 while that for Satyam was 20.40. Thus, the P/E multiple of TCS would be at a discount to that of Infosys. It is also interesting to note that though the cash equivalent of TCS in this period was only about Rs. 1.6 billion, at the same period the cash equivalent in the books of Infosys was Rs. 26.6 billion, while that of Wipro was Rs. 21.7 billion. Thus, though in terms of revenues and several other parameters, TCS might be doing better than Infosys, it had been priced correctly at a discount to the latter because of its cash crunch. Infosys was much better poised to make acquisitions and expand considering its cash reserves.

Rationale behind going for the IPO Fund Raising Options Debt Equity From Banks & FIs IPO FPO Public Issue of Bonds Rights Issue and Debentures Preferential Issue ECB ADR/GDR Hybrid Various forms of Convertibles FCCB & FCEB

In India Outside India

What you got in China is a lot of entrepreneurship, a lot of rush to get to market. Also companies don't list locally out of China and a Nasdaq listing is their first step into the capital market. They are registering in Cayman Islands and through that listing on Nasdaq. In India, a lot of companies prefer to step into the capital market through a domestic listing. Because the markets function differently in India and companies have been able to get a lot in their early stage capital from the local market. -Ms Charlotte Crosswell, Head of Nasdaq International (November 15, 2005 The Hindu Business Line) (Source: http://www.thehindubusinessline.in/bline/2005/11/15/stories/2005111502590300.htm) Considering the objectives of the company to create a public trading market for the equity shares of the company by listing them on the stock exchanges and use their equity shares for acquisitions, debt stops being an option. The only options that thus remain are an IPO in the domestic market or go for a listing in a foreign market. In India, a company has to list in the domestic market before being able to list in a foreign market or go for simultaneous domestic and overseas issues. Considering the fact that most of the business of the TCS is based out of the USA, it does make sense to go for listing in Nasdaq, but Ms Charlottes observation needs to kept in mind. TCS would prefer going for a domestic listing only because of the stringent norms that need to be followed in the USA exchanges. The norms to be followed in the Indian market are much lax and Tata Sons knows the market very well, and so does the market know the Tata group. The same cannot be said with confidence about the Tata brand in the USA. Considering the Rs. 23 billion consideration payment and the consequent cash crunch, it could have been much difficult for TCS to go public in the USA, but it was possible in India because of its brand equity and the confidence of the investors in the Tata brand name and the Tata connections. Another reason for going for domestic issue alone would be the percentage of equity that is intended to be sold by the company at that point. Post offer only 11.6% of the shares would be with the public, while the rest would remain with Tata Sons and others. Note: Prior to 4th June, 2010, Rule 19 (2)(b) provides that a company can get listed with just 10 per cent holding with the public provided the minimum net offer to the public is Rs 100 crore (Rs 1 billion), a minimum of 20 lakh (2 million) shares are offered to the public in an IPO through book-building method and allocation to qualified institutional buyers is 60 per cent of the size of an issue.

Also, public shareholding means equity shares of the company held by the public and not the shares held by the custodian against depositary receipts issued overseas. From the IPO issue of TCS, it is clear that it just wants to list in the exchange but with a public shareholding close to the minimum possible, as per the guidelines. To go for a simultaneous issue in the domestic and the foreign markets would thus mean a further dilution of the promoters shareholding. This is thus anot her reason because of which TCS went with the domestic listing route through IPO only. Placement Impact India's largest IT company, Tata Consultancy Services Ltd, offered 5.54 crore (55.4 million) equity shares of Re 1 each, including a fresh issue of 2.27 crore (22.7 million) shares, in its initial public offering through a book-building route. The Rs 5,000 crore (Rs 50 billion) IPO opening coincided with the birth centenary of JRD Tata, who was at the helm of the Tata group for over four decades before Ratan Tata took charge. The TCS IPO created a record as the IPO was oversubscribed by 6.69 times and received a total application amount worth Rs 34,000 crore (Rs 340 billion) as against the issue size of Rs 5,000 crore. The issue also comprised an offer for sale of 3.26 crore (32.6 million) shares by Tata Sons Ltd and certain other shareholders of TCS, and a further greenshoe option by Tata Sons for 8,310,000 shares each. The company raised about Rs 5,420 crore (Rs 54.20 billion) through the IPO. (Source: http://www.rediff.com/money/2003/feb/06tcs.htm) Total shares issued: 55.45 million + 8.31 million (greenshoe) = 63.76 million The shares of the Company were issued at a face value of Re 1 per share and a share premium of Rs 849 per share. There has been no follow-on offering from the Company. Post Placement Impact The stock started trading on 25th August, 2004 and it was only in the month of January, 2008 that the share price went below Rs. 850 which was the issuing price during the IPO. This is spectacular considering the fact that the company went for a bonus share issue of 1:1 on August 9, 2006. The maximum share price between August, 2004 and January, 2008 was Rs. 2043 (in the month of May, 2006). The company again went for a bonus issue of 1:1 on June 18, 2009 after a bad 2008-09 FY. Post this bonus issue, which is also the last of its kind till date, the share traded in the Rs. 370 400 range (because of the stock split) for sometime but gradually picked up and is currently trading in the range of Rs. 1900 2000. Thus, the IPO issue has been a huge success for the company, the investors and the shareholders. Currently, as of June 30, 2013, TCS had 1,957,220,996 shares outstanding i.e., 1957.22 million shares as opposed to 455.5 shares during the IPO.

Impact Measurement The pricing and other parameters have been rated below on a scale of 1 to 10: Serial Number 1 2 3 4 5 Parameter Pricing Product Design Marketing Selection of Market Post Placement Impact Score 8 10 10 10 10 Reason The price could have been set higher than Rs. 850. There could not have been a better option. The over-subscription says it all! No better option considering the objectives and the norms and guidelines. The company could not have asked for more!

Sources: http://www.cmlinks.com/pub/nim/nimshow.asp?code=5400 http://www.internationallawoffice.com/newsletters/detail.aspx?g=3a668824-322c-4fb4b475-316b375bcec3 http://www.tcs.com/investors/investor-faq/Pages/default.aspx Note: Companies normally go for reverse stock split to make their market offering look more attractive to the potential investors. But this was not the case with TCS which went for a stock split of 10 shares with a face value of Re. 1 for every share with a face value of Rs. 10. The most probable reasons are: To rub the employees the right way, the more the better. TCS was reserving 10% of the shares for its employees. To encourage retail investors for investing Higher the volume, higher the trading volume! The higher the trading volume, the better the price discovery by the market.

TCS Secondary Market Analysis

Tata Consultancy Services Ltd (TCS) is an Indian public Ltd company. Its shares are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Ever since TCS went for an IPO in 2004, its shares have been actively trading in both the exchanges. To understand the secondary market operations better, let us consider the share holding pattern of TCS over the last 6 years shown below. Share holding pattern in %(as on March31 each year) Promoter' holding(mainly Tata Son's) Institutional investors(mutual funds, UTI,banks,LIC,etc) Foreign institutional investors Non institutions(individuals, body corporates, etc) 2007 81.65 4.88 2008 77.55 5.36 2009 76.21 7.86 2010 74.12 7.84 2011 74.05 8.12 2012 73.97 7.2 2013 73.95 5.45

7.06 6.41

10.79 6.3

10 5.93

12.43 5.59

12.63 5.19

14.01 4.8

16.13 4.46

The following observations can be made about the share holding pattern: The promoter holding has declined over the last 6 years. The stake of the individuals and body corporates has declined over the last 6 years. The stake of foreign institutional investors (FIIs) has increased substantially from about 7.06% in 2007 to 16.13% in 2013. Securities Contracts Regulation Rule 19 (2) (b) was amended on 4th June, 2010 to make the following necessary: o The minimum threshold level of public holding will be 25% for all listed companies. o Existing listed companies having less than 25% public holding have to reach the minimum 25% level by an annual addition of not less than 5% to public holding o For new listing, if the post issue capital of the company calculated at offer price is more than Rs. 4000 crore, the company may be allowed to go public with 10% public shareholding and comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum. o This is one of the reasons which must have contributed to the reduction of the Promoters holding across the years. The promoters stake is mainly held by Tata Sons Ltd which has the largest stake in TCS. One of the reasons why the promoters stake has declined over the last 6 years is because there were a number of block and bulk deals in the BSE and NSE through which Tata Sons has sold its stake in TCS as shown below:

Bulk and Block Deals of TCS on BSE and NSE BSE Bulk Deals Deal Date 06-02-2007 06-02-2007 14-11-2006 14-11-2006 24-03-2006 24-03-2006 24-03-2006 24-03-2006 30-09-2010 30-09-2010 09-06-2010 09-06-2010 14-01-2010 14-01-2010 13-01-2010 13-01-2010 24-03-2006 24-03-2006 24-03-2006 24-03-2006 31-Oct-07 31-Oct-07 06-May-09 18-Dec-07 18-Dec-07 25-Jun-09 25-Jun-09 30-Jul-09 30-Jul-09 01-Oct-10 01-Oct-10 19-Sep-11 19-Sep-11 Client Name Tata Sons Ltd. Copthall Mauritius HSBC Global Investment Funds Tata Sons Ltd. Shapoorji Pallonji & Co. Rajkot Shapoorji Pallonji & Co. Rajkot Shapoorji P. Mistry Cyrus P. Mistry BSE Block Deals SPS Capital & Money Management Shapoorji Pallonji & Co. Ltd. Citigroup Global - Mauritius ABN AMRO Bank Citigroup Global - Mauritius Swiss Finance Corporation - Mauritius Citigroup Global - Mauritius Credit Suisse - Singapore Shapoorji Pallonji & Co. Rajkot Shapoorji Pallonji & Co. Rajkot Cyrus P. Mistry Shapoorji P. Mistry NSE Bulk Deals HSBC Global Investment Funds Tata Sons Ltd. Tata Limited NSE Block Deals Navajpai Ratan Tata Trust Tata Investment Corporation Ltd Barclays Global - Mauritius Citigroup Global - Mauritius Barclays Global - North Asia Citigroup Global - Mauritius Shapoorji Pallonji & Co. Ltd. SPS Capital & Money Management Ishares BSE Sensex Mauritius Co. The Royal Bank of Scotland Deal S P P S P P S S S P S P S P S P P P S S Quantity 6900000 5626457 7095920 8500000 249626 1542374 896000 896000 400000 400000 228515 228515 234710 234710 234710 234710 249626 1542374 896000 896000 Price 1285 1285 1059 1059 1890 1890 1890 1890 928 928 755 755 781 781 756.5 756.5 1890 1890 1890 1890

BUY 50,74,718 1020 SELL 82,51,495 1020.08 SELL 1,03,21,324 615.04 SELL BUY BUY SELL BUY SELL BUY SELL BUY SELL 1,00,000 1,00,000 1,84,680 1,84,680 1,52,760 1,52,760 6,98,672 6,98,672 1,82,962 1,82,962 1012.4 1012.4 386 386 500 500 935.5 935.5 1020 1020

Another big reason for selling the holding by Tata Sons has been to fund the bulk on investments by Tata Sons in other group companies. Some facts that highlight the point: Tata Sons has invested Rs 34,000 crore in various group companies, including unlisted ventures, since 2004. During the period, Tata Sons earned around Rs 10,000 crore as dividend from TCS. Another Rs 9100 crore was raised by selling TCS shares (including IPO). A further Rs 11,500 crore came from borrowings largely secured by pledging shares of TCS, the groups most valuable company. TATA SONS: HOW IT EARNED AND SPENT (Rs crore) Year Dividend* TCS Shares sale ** Borrowings Investments FY05 445.2 2800 0 3241.1 FY06 540.6 835.9 178.5 1640.7 FY07 753.7 696.6 1802.6 2610.6 FY08 740.7 3873.8 4662.5 9111.5 FY09 1019.2 892.5 1969.2 5772.9 FY10 1226.9 0 361.3 3032.7 FY11 2886.8 0 1661.9 4712.8 FY12 2453.8 0 446.3 2451.3 * Dividend from TCS; ** Proceed from sale of TCS shares including IPO Source: Capitaline, BS Estimates

For example: To finance the Corus deal in 2007, Tata Sons diluted nearly 1% of its shareholding to generate over Rs. 1000 crores. In 2008, Tata Sons, the Tata group's holding company, sold 1% stake in Tata Consultancy Services for Rs 701 crore. It was speculated that it was raising funds so that it can subscribe to the Tata Motors (TML) rights issue. Tata Sons has sold around 1% of its stake in TCS, the group's biggest company by market capitalization, to help refinance a $2-billion bridge loan taken by Tata Motors. It was sold through a bulk deal in NSE. It thus raised Rs. 633.4 crore in 2009. Thus, we see an alignment in the objectives for going for an IPO and the actions of Tata Sons. One of the objectives for taking TCS public was to use their equity shares for acquisition, and this is actually happening. A consistent financial performance by TCS and its high market valuation enabled Tata Sons to act as the investor and lender of last resort to group companies. For example, when Tata Motors Rs 4,145-crore rights issue in October 2008 devolved on promoters and Indian Hotels Companys rights issue in 2008 received muted response from retail and institutional investors. Business Standard

Source: http://www.business-standard.com/article/technology/tcs-provided-wings-to-tata-sdreams-112122400128_1.html) http://www.business-standard.com/article/companies/tata-sons-raises-rs-1000-cr-throughtcs-stake-sale-107020901082_1.html http://articles.economictimes.indiatimes.com/2008-10-08/news/27700123_1_tata-sonstata-sons-rights-shares http://articles.economictimes.indiatimes.com/2009-05-07/news/27664532_1_hvtransmissions-jlr-loan-tata-motors-finance