Tata Consultancy Services’ share buyback has already been subscribed over twice the offer size on the BSE, with the issue still open for bidding till the end of the day today, May 31. Up until 10.30 am today, shareholders have tendered more than 11.63 crore TCS shares on the BSE against the 5.61 crore shares the company wants to repurchase at a tempting price of Rs 2,850 per share.
For those still holding the shares of India’s largest information technology services company, consensus seems to be that this might be a good opportunity to exit the stock in the absence of growth triggers and challenges to the business.
Earlier this month, TCS opened its buyback offer to buy back 5.61 crore shares through the tender route at a fixed price of Rs 2,850 per share on a proportionate basis for an aggregate amount of Rs 16,000 crore. The buyback comprises just 2.85% of the company’s paid up capital. Record date was May 8, meaning that only those holding the shares on May 8 in the company records would be eligible to tender their stock.
The buyback price is at a mouth-watering premium of 18% over the closing price of Rs 2,408 on February 17, the last trading session before the buyback was announced. TCS shares have run up about 7% since then to Rs 2,572 now. (Also read: TCS buyback offer price tempting, but you may not benefit from it)
Experts say that investors should rather sell TCS shares in the open market to book current profits, specially considering the potentially low acceptance ratio in the company buyback. “It’s a great exit opportunity. My view is that the investors shouldn’t go for offering in the buyback. They should take advantage of this price hike and gradually sell from now till the last day the buyback is available,” capital markets veteran and member of BSE and NSE Dipan Mehta had said earlier in February when the buyback was first announced.
Mehta had suggested that investors must look to exit TCS once and for all. “Buybacks are done when companies become extremely mature and growth rates slow down, and they have no actual use for the money,” he said.
Research and brokerage firm HDFC Securities has a ‘Neutral’ rating on TCS shares with a target price of Rs 2,520. “The margin outlook (26-28% EBIT)… comes with its downside risks (largely currency-related). Structural headwinds (including a shorter contract duration) in TCS’ BFSI and Retail & CPG verticals (53% of revenue) are reflecting in its underperformance vs Infosys,” HDFC Securities said in a recent research report.
Credit Suisse also said in a recent research report that concerns over lack of growth, rupee appreciation, and US immigration curbs could remain overhang on TCS in the absence of a cyclical pick up. Similarly, Motilal Oswal too has a ‘Neutral’ rating on TCS shares with a target price of Rs 2,400 on account of an expected margin contraction due to adverse currency movement, and an expected pressure on the significant premium in the stock price.
On the other hand, another firm, PhillpCapital has rated TCS at ‘Sell’ with a target price of Rs 2,000. Nirmal Bang has also rated the company at ‘Sell’ with a target price of Rs 1,996, as it expects the stock to trade at par with Infosys in the coming days. “Positive sentiment of clients around likely change in business/regulatory environment in the US has not translated into improved spending and is dependent on the Trump administration’s moves,” Nirmal Bang said in a recent research report.
According to TCS’s filing to the stock exchanges, the promoter group held 73.31% equity stake in the company with 144.45 crore shares as on March 31, 2017, while the public shareholding is at 52.59 crore shares.
Calculations show that the promoters will have to tender at least 87.99 lakh shares to limit their shareholding to 75% of the post-buyback shareholding structure. Capital markets regulator SEBI’s rules mandate that the promoters may hold a maximum of 75% of equity stake in a listed company, with the remaining 25% to be vested with the public.This would leave only 4.73 crore shares to be accepted from the public shareholders, implying 2.4% of the current share capital.