It's a windfall even the 126-year-old industrial house has never had before. Within a couple of months, the house of Tatas will be richer by any amount between Rs 4,400 crore and Rs 5,200 crore. The treasure chest: Tata Consultancy Services (TCS), which will offload 5.54 crore shares (11.59 per cent of its total shares) through an initial public offering in the next two months.

Tata Sons Chairman Ratan Tata

The public issue is likely to live up to the years of speculation and anticipation: It will be the largest public issue by a private company and will create the most valuable company in the Tata stable, three time more valuable than Tata Motors. At the market value of roughly Rs 38,000-45,000 crore, it will also be the most valuable software company in India.

Now that the suspense over the IPO is over, a new set of questions have arisen. Why is TCS going public now? What will the Tatas do with so much cash? And what does this mean for a stockmarket still reeling under the hangover of election results? TCS has been a division of Tata Sons, the holding company of the Tata Group. By cashing part of its holding in the software giant, the group can raise funds for investments in its other businesses, such as telecom, power, steel and automobiles. "The monetisation of the TCS assets gives us greater liquidity for making investments in the future. At present, the cash required for Tata Son's major investment is primarily in telecom," says Ishaat Hussain, finance director, Tata Sons.

TCS will be offering shares of Re 1 each through a book-building route possibly in the price range of Rs 800-950. A share premium of almost 1,000 times will catapult the market capitalisation of the Tata Group from about Rs 46,000 crore to close to Rs 90,000 crore.

TCS will not directly benefit from the IPO financially, whereas Tata Sons will receive Rs 2,300 crore as transfer charges in addition to the cash sale of equity. Tata Sons could also use part of the funds to increase its holding in group companies through creeping acquisitions. The Tatas don't deny any of the possibility, though Hussain clarifies that "there are no specific plans at present".

For TCS itself, the listing, apart from giving the company greater visibility, will provide a currency for acquisition. Since the company's shares will have a market value and will be tradable, TCS will be able to use them as currency to enter into swap deals for acquiring businesses. Besides, it firms usually do not enter the capital market to raise cash. That is because they generate loads of cash reserves from their business. Of course, there would be other intangible but big benefits. Says Hussain: "The IPO and subsequent listing will enhance the TCS brand."

The company will also create fresh crorepatis in the Tata empire which will receive the company's shares at Re 1 under the employee stock option scheme. However, only long-serving employees will benefit from this.

The issue could also impact the stockmarket, especially shares of it companies, in a big way. For retail investors, it is an opportunity to partake in the largest technology IPO in a depressed market. Interestingly, when Infosys shares were listed in June 1993 the trading commenced at Rs 145. Currently, the Infosys share of Rs 5 is trading at over Rs 5,000.

The big question before the market is whether to bring in fresh funds or liquidate existing holdings in it stocks to invest in the TCS issue. Mutual funds currently have about 12 per cent of their assets invested in the IT sector. If they invest in TCS, they will have to sell their holdings in other it stocks or their exposure to the sector would go up to 20 per cent. If they decide to sell, the share price of other it companies could dip temporarily. However, most analysts feel fresh money will come in.

How much money flows in will also depend on the exact pricing of the issue. Fund managers are busy crunching numbers to see how the new entrant compares with other tech heavyweights. A report by JP Morgan, lead manager for the issue, values TCS at a 10-15 per cent discount to the current price to earning ratio of Infosys. Going by this calculation the share price works out to be between Rs 750-800, though most market observers expect the price to be above Rs 800 and closer to Rs 900.

An analyst with a foreign broking house says though TCS is the biggest and the oldest it services company, its growth rates aren't at par with Infosys or Wipro. For the nine months ended December 31, 2003, TCS turnover clocked a 26 per cent growth, while sales of Infosys Technologies rose by 39 per cent and that of Wipro by 27 per cent.

Some analysts are also concerned at TCS' heavy, though declining, dependence on a client like the GE Group, which is known for negotiating very low rates. In 2001-2, GE accounted for 24.4 per cent of TCS' total revenues from international business. In 2002-3, this declined to 20.6 per cent and stood at 18.9 per cent in the nine months ended December 31, 2003. Says Ashim Sayal, chief investment officer of ING Vysya Mutual Fund: "TCS will have to consistently reduce its exposure to GE and ramp up its other clients to grow the non-GE business (80 per cent) faster."

The pricing will also depend on the market sentiments, which are anything but buoyant right now. However, for the export-dependent it companies the outlook today looks better than it was a few months ago when the backlash against outsourcing was at its peak in the US. That's the reason why it stocks have found favour with investors after a being cold shouldered for months.

Whatever the final price of TCS shares is, the IPO will certainly be a rich harvest for the Tata Group. For now the Tatas are getting ready to laugh all the way to the bank.