TCS Buyback: Is it the Time to Buy TCS?

  • Stock Market Analysis

In its board meeting held on 12 January 2022, Tata Consultancy (NS: TCS ) Services has decided to offer Rs 18000 crore worth of buyback to its shareholders. India's largest IT company will repurchase four crore shares equivalent to 1.08% of the total paid-up equity share capital at Rs 4500 per share. It is the company's fourth such exercise in the past five years. However, the current offering is 10% higher than previous buybacks.

It holds an excellent opportunity for retail investors to realize a gain by participating in the buyback. During the buyback announcement, the offered price was 16.7% higher than the last traded price on the Bombay Stock Exchange (RS 3857). Along with that, the company has also declared Rs 7 per share as a third interim dividend. It shows companies' dedicated efforts to give back capital to their shareholders.

Under a buyback, the company offers to buy its shares from existing shareholders at a price higher than the prevailing market price, allowing investors to make clear-cut profits. Profits made, however, will depend on the acceptance ratio, i.e., how many tendered shares will be accepted for a buyback. The company will use a stock exchange mechanism and tender offer route to complete the process and offer shares on a proportionate basis.  

Buyback creates a positive image for the company in the market. It signals management's belief that the company's shares are undervalued. Moreover, it points towards enough cash available to meet its capital expenditure and interest payment obligations. As a result of buyback, the number of shares outstanding reduces in the market, and consequently, earnings per share (EPS) rises. 

The table below provides basic details such as Buyback price, Offer amount, and other buyback details.

TCS Buyback price, Record Date and Other Details

How can an Investor Participate in a Buyback?

  • To be eligible, firstly, investors must have TCS shares in physical or Demat form as on record date.
  • Next, shareholders have to fill out the form per the company's instructions and ask the broker on NSE and BSE to sell their shares.
  • After that, the payment will be made for accepted shares only, and unaccepted stakes will be returned to your Demat account.

How to calculate profit arising out of buyback?

Illustration: Suppose an Investor purchases 45 shares of TCS at the last trading price (LTP) of Rs 3833 (202500/4500 = 45 shares)

As per SEBI mandate, 15% of the offer has to be reserved for small shareholders holding less than Rs 2 lakh worth of shares. If the acceptance ratio is 100%, then an investor tendering 45 shares (bought at the price of Rs 3833) can make a profit of 17% approximately while at 50-75% rates, profits ranging 8-13% can be made as shown in the table above.

What's in it for Retail Investors?

This buyback does provide a profit-making opportunity for retail investors by offering a premium price for its shares. However, retail investors with positive prospects for the company and its financials can keep the shares for the long term. As the company's management have emphasized strong demand and cloud as crucial growth drivers, investors opting for tender offer now might lose out on dividends and capital appreciation benefits. To form a decision, investors should look at buyback price, offer size, and duration of the buyback.

Why are TCS Share prices falling?

Irrespective of the buyback, the share prices have been falling; it could be because of the effect of the declining market sentiment reaching IT Sector stocks as well. Many Tech stocks were trading in Red on 20 January, including TCS, Infosys (NS: INFY ), HCL Technologies Ltd (NS: HCLT ), etc.

On 20 January 2022, TCS share price fell over 1% on the record day of the dividend, whose payment will be made on 7 February. On BSE, the share reached an intraday low of Rs 3862.50 on the same day.

TCS has a stellar record of high performance in the IT sector, and long-term holders gain from rallying in its share price. For December 2021 quarter, the company has reported a 12.2 percent higher consolidated net profit of 9.769 cr and 16.3 percent higher revenue, equal to Rs 48885. Among Tier 1 IT stocks in India, TCS is one of the most expensively valued, trading at a one-year forward price to earnings multiple of approximately 31 times in FY21. Its financial highlights positive picture as the company managed decent performance even during the peak of Covid Outbreak; in the March quarter of 2020, revenue grew 3% YoY while operating margin increased 25.10 percent. Many investors might be looking to hold TCS for the long term and wouldn't be interested in tendering their shares at upcoming buyback.

The uptick in EPS post buyback will only be marginal as the offer size of Rs 18000 Cr represents only 1.08% of the company's total outstanding shares. Moreover, buyback sometimes shows companies' deficiency in finding a suitable investment opportunity to position their funds.

Further, the IT stocks have been rising rapidly in the past few months; TCS 12 monthly return was 24.8 % and had 16.3% return over six months. Prices could be correcting as IT stocks have been overheated by the past year's overall market rally.
 
Like in the previous buyback, this time, SEBI has mandated TCS to reserve 15% of the buyback amount for small shareholders with holdings up to Rs 200,000 shares. Consequently, this might lead to a lesser acceptance ratio for institutional shareholders, depending on their tendering of shares. As of 7 January 2022, 3.88 percent of shares were held by Resident Individuals and others, while promoters had 72.19% of the company's total shares. 
Many analysts are estimating high participation especially by retail investors to avail benefits in the short run. The company is yet to announce the record date and the overall exercise might take up roughly three months to conclude.

Ending Note

The decision to buy (sell) the shares of TCS must be only taken if you or your advisor has a positive (negative) view on the company’s prospects. A buyback should not drive the decision to buy the stock, only the fundamentals and valuations matter. With how things are currently going, near term growth of TCS has already been priced in with it trading at expensive valuations (compared to historic metrics). 

To justify the valuations at which TCS is currently trading, it will have to clock-in a growth rate of 12-14% for the next 5 years. It isn’t impossible for the IT behemoth to achieve these numbers, but it will be very early to conclude that TCS can achieve an all-round performance like it has in the past.

Consult a SEBI Registered Investment Adviser like Tavaga Advisory for all the personal finance needs. Buying a stock on a tip won’t help you build wealth, it will only lead to net losses. 

Disclaimer: Above analysis is only for informational purposes. Not a buy/sell recommendation.

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  • F.M. Lakhani @F.M. Lakhani
    "As a result of buyback, the number of shares outstanding reduces in the market, and consequently, earnings per share (EPS) rises. " this is dificult to digest .
    Like 0
    • V R Kotha @V R Kotha
      @F.M. Lakhani Are you so dumb ? Rs.1000 profit for 100 shares is Rs.10 EPS.(1000/100). Say after buyback of 10 shares, only 90 shares will be in the market. So, Rs.1000 profit for 90 shares is Rs.11.11 EPS.(1000/90). Higher EPS means lower PE.
      Like 6
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  • Rajdeep Jagtap @Rajdeep Jagtap
    Can somebody analyze from past data w.r.t resident individuals % in previous buy backs vs situation now i.e 3. 88acceptance ratio was 100% in all 3 buybacks 2017,2018,2020
    Like 2
    • V R Kotha @V R Kotha
      @Rajdeep Jagtap you can Google
      Like 0
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  • Sj Roy @Sj Roy
    In the above analysis, 3.88% of TCS shares are held by Resident Individuals, but they may not necessarily fall under retail category (holding shares worth less than INR 2 L). What is the approximate %age of shares which are held in Retail category ?
    Like 1
    • V R Kotha @V R Kotha
      @Sj Roy not even God can tell that. (reason: Price fluctuates every minute, so, 2 lakhs criteria changes every minute)
      Like 0
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  • Deepak Nagpal @Deepak Nagpal
    I have more than Rs. 2 lacs shares... what would be acceptance ratio if I want to tender my shares in Buyback
    Like 1
  • Deepak Nagpal @Deepak Nagpal
    I have more than Rs. 2 lacs shares... what would be acceptance ratio if I want to tender my shares in Buyback
    Like 2
    • V R Kotha @V R Kotha
      @Deepak Nagpal Less than 1%
      Like 0
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  • Balesh Bagree @Balesh Bagree
    Well compiled information. Will look forward for other BB information as and when they are announced. Thank You
    Like 1
  • rajendra gupta @rajendra gupta
    very nice👍, But what about Havells after good revenue it's falling continuously.
    Like 2
  • karshandas ghetiya @karshandas ghetiya
    nice analysis of buyback
    Like 0
  • VIVEK GUPTA @VIVEK GUPTA
    well articulated
    Like 1

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