TCS buyback: Should retail investors buy? Here are 2 points to know

By: | Updated: February 22, 2017 3:22 AM

IN a bid to improve returns to shareholders, India’s largest software services exporter Tata Consultancy Services (TCS) has announced a Rs 16,000-crore share buyback.

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.

IN a bid to improve returns to shareholders, India’s largest software services exporter Tata Consultancy Services (TCS) has announced a Rs 16,000-crore share buyback. The board has approved the buyback of up to 5.61 crore equity shares of the company. This is 2.85% of the total paid-up equity share capital, at R2,850 per equity share, which is 13.7% premium to the stock’s R2,506.5 close, on the day of the announcement. The company has cash and equivalents of Rs 38,831 crore as of December 31, 2016. In fact, TCS’s buyback decision follows Cognizant Technology Solutions Corp.’s decision to opt for a $3.4 billion plan that includes buy-backs and dividends.

The buyback will be over and above R19.5 per share dividend declared for FY17 so far. This implies that the company will return R19,840 crore cash to shareholders during FY17, or around 75% of FY17 estimated profit after tax, excluding any final dividend that it may announce. “As skill set-based acquisitions continue to be minuscule and large acquisitions entail high integration risks, we believe returning cash to shareholders is a prudent strategy,” says a Edelweiss, a brokerage, in a note to its clients.

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 will take out a part of cash out of the books, which will enhance the overall Return on Equity (ROE) as the proportion of the low yielding asset or cash will be reduced in the balance sheet. This will reward the shareholders in the medium-term.

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What should retail investors do?

Of total equity shares of TCS in December 2016, promoters, mainly Tata Sons, hold 73.7% and the rest is held by non-promoters consisting of domestic and foreign financial institutions, and retail investors. In fact, of this pie, individuals with share capital of less than R2 lakh is 3.26% and those above R2 lakh is just 0.7%, which works out to less than 4% of the total equity share.

Analysts say, given the modest buyback premium, retail investors with a long-term positive view on TCS and its financials should ideally hold the stocks and not tender them now.

For any buyback, retail investors should look at the size of the buyback offer, the buyback price and the duration of the offer. The higher the percentage of the buyback, the greater the potential for profits. If the buyback size is too small compared with the overall market capitalisation of the company, the impact on the share could be very insignificant.

Investors prefer buybacks over dividends, as they are more tax-efficient. Dividend income in the hands of all residents attracts an additional dividend tax of 10% on dividend income over R10 lakh a year. Also, the effective dividend distribution tax is around 20%.

Why companies prefer buyback

In buybacks, the shares are bought back by the company and are shown in the financial statements as treasury stock. It can be sold later if the company decides so. 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 their own shares. This reduces the capital base and results in higher earnings per share.

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. Retail investors who would tender their shares in the buyback would get cash benefit now, but will lose out on the long-term benefits in terms of dividends and capital appreciation.

TO SELL OR TO HOLD

Individuals with share capital of less than Rs 2 lakh in TCS is 3.26% and those with above Rs 2 lakh is 0.7%
Buyback offer is for 2.85% of the total paid-up equity share capital, at Rs 2,850 per equity share
At a modest buyback premium of 13.7%, retail investors with long-term positive view on TCS should hold the stock

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