IT major Tata Consultancy Services (TCS) has announced that the company board has approved Rs 18,000 crore buyback of shares at a price of Rs 4,500. This price is at a premium of around 15 per cent to the current market price of Rs 3,950.
Share buyback refers to the process where the company buys its own shares from existing investors. Typically, companies undertake this when they have a surplus and is seen as another way of rewarding investors apart from dividend distribution.
The Offer
The current buyback amounts to 27 per cent of the company’s Rs 66,985 crore cash balance and 17 per cent of net worth. “This buyback implies a payout of 47 per cent on the FY2022 profit after tax (PAT) estimate and 54 per cent of FY2022 estimates. The buyback should result in slight accretion to earning per share (EPS) from a reduction in share count,” writes Sharekhan, a broking firm, in its research report.
According to the announcement, retail investors owning shares worth Rs 2 lakh or less as on the record date will get reservation in the buyback offer to the extent of 15 per cent of the buyback size. The record date refers to the cut-off date by when the offer can be availed. This means if you own less than 51 TCS shares, you will get the benefit of the reservation. The reservation for these shareholders would be Rs 2,700 crore (0.6 crore shares at a price of Rs 4,500 per share).
Experts believe that this is a good option for retail investors. “The company offers a 16 per cent premium which is good opportunity for retail investors in the short term,” says A.K. Prabhakar, head of research, IDBI Capital.
"(Global) economies are passing through a phase of automation, which will benefit all global tech firms. We are bullish on the tech sector for the next 3-5 years and, of course, when it comes to India, TCS is the largest IT services company. In last 10 years, TCS's market sap has multiplied by seven times, or we can say the stock has given 600 per cent return, which is an excellent performance by any large-cap company globally. TCS is a cash-rich company and offers to buy back its shares at â¹4,500/share. In our view, this is an excellent opportunity for medium- to long-term investors to accumulate the stock at current levels," said Amit Jain, chief strategist-global asset classes, Ashika Group.
Buyback History
The quantum of the buyback is higher than TCS’s last three buyback programs. The company had gone for a buyback of Rs 16,000 crore of shares each in 2017, 2018 and 2000.
In the last five years, this is the fourth buyback offer from the company. However, this is bigger than what was offered in the past. In February 2017, the company came up with a buyback offer of Rs 16,000 crore, with an offer price of Rs 2,850. This was a 21.8 per cent premium to then market price. Similarly, in June 2018 and November 2020, it came up with a buyback offer with a premium of 20.5 per cent and 18.9 per cent, respectively, to then market price. This time this premium is 16.7 per cent as the share closed at Rs 3,857 on January 12, 2022, the day the buyback was announced.
In the last three instances, the acceptance ratio was 100 per cent. This means whoever wanted to encash their share at the buyback price got accepted. “Most small shareholders do not take part in such offers, which would result in a higher acceptance ratio. However, the theoretical retail entitlement ratio stands at 25-30 per cent,” writes the Sharekhan report.
What Should You Do?
Investors looking for a short-term opportunity can buy shares up to a value of Rs 2 lakh in the open market before the record date and offer them in the tender offer. TCS has not declared the record date for the same.
The number of shares you can offer for buyback depends on the acceptance ratio. When there are a greater number of investors, the acceptance ratio goes down. For instance, you own 51 shares of TCS and the acceptance ratio is 30 per cent in this scenario, you will get the benefit of buyback price only for 15 shares.
