Buyback offer: Should you accept the TCS buyback offer?

Retail investors with a long-term positive view on TCS and its financials should ideally hold the stocks and not tender them now

The price is 16.7% higher compared to its last traded price (Rs 3,857) of the stock on the Bombay Stock Exchange when this buyback was announced.
The price is 16.7% higher compared to its last traded price (Rs 3,857) of the stock on the Bombay Stock Exchange when this buyback was announced.

The country’s largest software services exporter Tata Consultancy Services (TCS) has announced a Rs 18,000-crore share buyback by offering shareholders Rs 4,500 per share. The price is 16.7% higher compared to its last traded price (Rs 3,857) of the stock on the Bombay Stock Exchange when this buyback was announced.

This is the company’s fourth and the biggest buyback exercise in the past five years. The cash-rich company—strong growth has helped it hit the $25-billion mark in revenue in calendar year 2021— also declared a third interim dividend of Rs 7 per share.

Buyback by companies
When a company accumulates surplus cash and has no alternative investment opportunities or is not looking at any acquisition, then it can go for buyback of its own shares. In buybacks, the shares are bought back by the company from the existing shareholders usually at a price higher than the prevailing market and are shown in the financial statements as treasury stock. After the buyback, while the number of shares outstanding in the market reduces these can be sold later if the company decides to do so.

A buyback exercise reduces the capital base and results in higher earnings per share. Analysts say buybacks send a positive signal to the markets as the promoters and management believe that the share is undervalued and the company doesn’t need cash to cover future commitments such as interest payments and capital expenditures.

“The buyback is proposed to be made from the shareholders of the Company on a proportionate basis under the tender offer route using the stock exchange mechanism. The buyback size does not include transaction costs, applicable taxes and other incidental and related expenses,” TCS said in a statement on the outcome of the board meeting.

What should investors do?
Retail investors with a long-term positive view on TCS and its financials should ideally hold the stocks and not tender them now. The company’s management has highlighted that the strong demand environment and cloud remain as key growth drivers. Edelweiss Research in a note to clients said that TCS delivered strong growth numbers and the overall pipeline remains robust. “We believe demand for core transformation remains strong, and this coupled with exemplary execution is likely to drive strong earnings,” it said.

Investors who would tender their shares in the buyback would get cash benefit now. However, they might lose out on the long-term benefits in terms of dividends and capital appreciation. Analysts say, as a rule, retail investors should look at the size of the buyback offer, the buyback price and the duration of the offer. If the buyback size is large, the company has greater potential for profits.

To be eligible for the buyback, investors must hold the company’s shares in demat or physical form as on record date. Shareholders who are willing to offer their shares will have to fill out the form as per the instructions of the company and the shares will have to be sold through a broker on National Stock Exchange and Bombay Stock Exchange. Also, if the shares are tradable only in the demat segment, the acceptance will only be on a proportionate basis irrespective of the number of shares tendered in the buyback.

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