TCS Buy-Back & how I got it Right

  • Stock Market Analysis

BACKGROUND

Tata Consultancy Services Ltd. (NS: TCS ) declared its Q3 results last evening and it was expected to announce a share buy-back proposal. This news was available ahead of the results and therefore, I decided to work out what could be the likely buy-back price that it may offer.

Based on my observations, TCS has a tendency to cross the buy-back price and then retrace either below or around the buy-back price just when the buy-back approaches. The logic is that scrip is unlikely to trade above the buy-back price and is more likely to fall for some time.

INTENT

I have holdings in the scrip so I was eager to test my logic of arriving at the likely buy-back price.

In the past, I have traded TCS pre and post-buy-back with the intention to make trading gains so I may enter a trade when I find a good risk-reward opportunity.

So my intent was to know the likely range that it may offer should I decide to buy TCS.

WORKING

In my view, a company that opts for buy-back of shares is either trying to compensate the shareholders from the available surplus or it may be willing to consolidate its own position as it expects improved performance in the coming periods. It could also be for both reasons. In reality, I am not affected by their reason as long as the price offered is at a better premium than the ruling price. This will motivate me to stay put with my holdings and or induce me to initiate a new trade.

My work to arrive at the price was done a day ahead of the announcement and for those who may be quick to think that what is the point of writing the article post-facto, I have pasted a link to the video where I have stated the price range that may be used for arriving at the buy-back price.

On 11-1-21, TCS closed above 3900 so I kept 3900 as the base and did the following:

Case 1

The offer price could be at a premium of 10% to the ruling price.

So, 3900*1.10 = 4290 so I rounded off to 4300.

Case 2

The offer price could be at a premium of 15% to the ruling price.

So, 3900*1.15 = 4485 so I rounded off to 4500.

The reason for 10% is that it is a good enough incentive to the shareholders to tender the shares and is more than the returns that a debt instrument would give.

The reason for 15% is that the company may want to top up the premium with a hidden component of dividend which is otherwise taxable.

My conclusion was that TCS may offer the buy-back within this range with 4500 being the cap as I felt anything more would mean that the company may be doing social service than rewarding its shareholders.

My reading was that the shares would in any case not cross 4000 immediately as TCS has the tendency to go sideways to negative post results and as the time elapses from the result release, it goes down if the sentiment is not positive.

CONCLUSION

Since I have some holdings in TCS, I am happy that a part of that would be tendered at the final price that the company may announce [I understand that TCS has mentioned that it would be up to 4500].

I now have a range of 600 points from 3900 to 4500 which is available for me to decide about trading the scrip subject to the right set-up and more importantly funds availability.

I am now encouraged to test the approach for such announcements that the other companies may make.

Here is the link to the video:
https://youtu.be/5K9Fx43M7rI

I would be happy to read your feedback.



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Shared for the purposes of Educational & Informational purposes only.

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  • samir SF @samir SF
    👍
    Like 0
  • Shailesh Patel @Shailesh Patel
    👍
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  • Sujata Prakash @Sujata Prakash
    Too late. you could have shared this logic earlier.
    Like 1
    • Umesh Rindani @Umesh Rindani
      Please check the video. I shared it on 12-1, but waited for the announcement to confirm the price. Thank you for the feedback.
      Like 1
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  • pankaj parekh @pankaj parekh
    Excellent assessment but as per my opinion is nothing is certain in the market. Just take one example of Wipro's last buy back offer that happened just few months back. In that case, market price was higher than offer price..
    Like 0
    • Umesh Rindani @Umesh Rindani
      Thank you for the feedback. Is that so? I missed that!
      Like 0
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  • Pradip Shah @Pradip Shah
    Impressive estimation on pure logic.
    Like 1
    • Umesh Rindani @Umesh Rindani
      Thank you for the feedback.
      Like 0
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