The Hindu Business Line : TCS public issue: Pricing key factor for hedge funds

FOREIGN institutional investors (FIIS), especially hedge funds, are of the opinion that their exposure to the forthcoming TCS initial share sales will hinge on pricing, as they are averse to paying a premium to TCS over its peers.

"Exposure to the (TCS) IPO will depend on return risk of the investment and comparable pricing with other similar companies. The investment will be held on to achieve targeted returns; it may be short or medium term", said Mr Tushar Patel, Director (Alternative Investments), GAIM Advisors of UK.

Pricing is going to be "very important", he added.

"We will look into the relative valuation of TCS to peers like Wipro and Infosys ... there's no point in paying a premium to its peers since all of them have performed well," said an investment manager with an India-dedicated fund.

Moreover, sustained interest of the foreign funds is likely to be guided by the possibility of "money moving from Infosys (stock) to TCS, which could lead to a slight de-rating of the tech sector itself", he added.

However, sources at the lead manager for the TCS IPO said that responses from prospective overseas investors were "very positive" with "lots waiting to pump in this long-awaited IPO". "We will decide on our exposure depending on the valuation and scope for capital appreciation, since our India exposure is guided by sector caps," said the investment head of a large New York-based hedge fund.

"India is growing in importance in the overseas investors' universe and the TCS IPO can boost investor sentiment, but pricing has to be realistic."

Market sources said that lead mangers to the issue are currently advising the company to price the offer at indicative floor rate in the range of Rs 700-800, down from previous estimates of Rs 1,000-1,100.

"We think retail participation is likely to be limited even at this price level," the India-specific fund manager said.

The size of the issue has been pegged between Rs 4,500 crore and Rs 5,000 crore, making it the largest private sector IPO.

It may be recalled that book-running lead managers to the issue have sought the SEBI nod to issue participatory notes to overseas investors.

Participatory notes are contracts issued by locally registered foreign institutional investors to overseas investors who are not registered here and hence cannot trade directly.

Such route broadens market participation and has traditionally been used to rope in larger foreign investors to ensure smooth share sale.