The Hindu Business Line : Will TCS offer be a market stimulant?

WILL Tata Consultancy Services' public offer enthuse the stock market? Some contend that it will. TCS is the largest software company in the country. If the tech sector does well, TCS will be the major beneficiary. So, the argument is that these factors will prompt the FIIs to buy the stock. And that could have a positive effect on the secondary market. But it is a moot point whether the TCS offer can by itself act as a stimulant to the otherwise lacklustre secondary market. Foreign direct investment and positive macro-economic variables are some of the factors necessary for the FIIs to buy Indian stocks.

Market allocation: The benefits of portfolio diversification drive FIIs to invest in international equity. The major factor in such exposure is asset allocation. This process determines the proportion of portfolio that will be invested in each market. A US-based emerging markets fund may, for instance, decide to invest 50 per cent of its total assets in the Asia-Pacific region with 25 per cent allocation to India.

The important point is that the asset allocation process is a macro-level concept. So, the asset allocation decision is based on market valuations and not on security specific factors. If that is the case, how can the TCS public offer bring in more FIIs to the country, unless these investors are convinced about the asset valuations in India?

Secondary effects: Existing FIIs that have moved into cash may prefer to pick shares of TCS. But will the money moving into this stock have a positive effect on the overall market? That is unlikely. The market is starved off quality primary offers. Unless more growth companies enter the primary market, money flowing into the TCS offer is unlikely to push up asset prices.

Moreover, institutional investors seem overly concerned about "real growth" or potential for such growth. By this, we mean growth due to increase in real output and not due to increase in financial assets. This can be discerned from the fact that the asset prices started falling sharply because there was a perception that the new government will not structure policies that will improve the country's GDP growth.

In that case, the TCS public offer may not have a positive effect on the market. After all, TCS is not raising money to invest in a project. So, the public offer will not lead to creation of higher real output by the company. Besides, there will be no secondary growth effect. In fact, the offer is strictly not an IPO. A substantial proportion of the shares are being sold by existing shareholders, which are the Tata group companies. The money raised by TCS from issuing shares to the public will be primarily used for paying Tata Sons. Of course, the FIIs and domestic institutions will get to share the company's earnings through the public offer. But so was the case with ONGC, the country's largest oil company. Yet, that public offer failed to reverse the market sentiment. There is no indication to believe that TCS will be any different.

Portfolio rebalancing: The FIIs, mutual funds and high net worth individuals (HNIs) could push down asset prices if they were to invest in the TCS offer. The reason is that most of them are fully invested. So, these funds and HNIs have to generate cash by offloading their current holdings in other stocks to invest in the TCS offer. With the secondary market currently lacking large buyers, increase in the supply of shares from these investors will only push down asset prices.

This is not to say that other tech stocks will automatically take a beating. Infosys for one could be a beneficiary of the TCS offer. At present, all the FIIs and domestic institutions, including mutual funds, own Infosys stock. This stock is, hence, `over-owned'. The problem with over-owned stocks is that there is always a large institutional seller waiting to exit its position if the stock moves up. This caps any substantial increase in the stock price. After TCS is listed, there is a good chance that it may be become a more over-owned stock than Infosys. So, after the initial euphoria of buying TCS shares dies down, the problems of over-ownership may kick in. This may lower the over-ownership effect for Infosys.

(Feedback can be sent to bvenky@thehindu.co.in)

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