Tata Consultancy Services (TCS), the country's largest software services exporter, is buying back shares worth Rs 16,000 crore, in a move that will help return part of the huge cash on its books to shareholders. This is the second time in two years that a buyback has been announced by the Mumbai-based company.
TCS board of directors met on Friday and approved a proposal to buyback up to 7,61,90,476 equity shares (Seven crore sixty one lakh ninety thousand four hundred and seventy six) for an aggregate amount not exceeding Rs 16,000 crore, which would be 1.99 per cent of the company's total paid up equity share capital.
The buyback will be done at Rs 2,100 a share, which is a 14 per cent premium to TCS' closing price on Friday.
TCS is not the only tech firm buying back shares. Rival Cognizant too has announced share repurchase plan worth $600 million, which is a part of its plan to return $3.4 billion to shareholders. Infosys, Wipro and HCL Tech too have repurchased shares in the last fiscal year.
Companies buyback shares for various reasons. It may simply be to reward its shareholders. Buying back shares also helps in increasing the value of the remaining shares, as the number of shares in the market will come down post the buyback.
Last year, TCS had bought back 5.61 crore shares at Rs 2,850 a share. The company says in totality via dividends and buybacks, over Rs 26,800 crore of cash was returned to shareholders in the year-ended March 2018.
As of March 31, 2018, TCS had cash and cash equivalents worth Rs 48,830 crore, up from Rs 35,970 crore at the end of March 2017.
“The buyback announcement is in line with TCS' stated intent to return 80-100 per cent of free cash generated to shareholders through the dividend/buyback route,” notes Kawaljeet Saluja of Kotak Institutional Equities.
The buyback will be done via the tender offer route. Through this route, shareholders have the option to tender or sell all or a portion of the shares they hold in the company. Securities and Exchange Board of India's rules mandate that companies need to reserve 15 per cent of the buyback for small shareholders with holdings worth less than Rs 2 lakh.
A big beneficiary, though, could be parent Tata Sons, as it will be able to strengthen its balance sheet with the extra resources generated through participation in the share buyback. As on June 3, promoters held 71.92 per cent stake in TCS, with public shareholding at 28.08 per cent.
The acceptance ratio from the small shareholders is also expected to be high.
“As per the annual report of FY2018, 4,78,452 small shareholders held 164.8 lakh shares (of value Rs 2,910 to Rs 2,91,000) and the reservation in the current buyback is 114.3 lakh shares. Assuming that all these shares would be offered, then the theoretical acceptance ratio works out to 70 per cent,” according to HDFC Securities.
Post buyback, there is expected to be a marginal impact on the earnings per share (EPS).
“The buyback should result in 2 per cent accretion to EPS from a reduction in the share count. However, the cash reduction would result in a decline in other income, which is dominated by a yield of 8 per cent on a pre-tax basis on the cash. Other income foregone would be to the tune of Rs 1,200-1,300 crore, which would result in an adverse EPS impact of 2.5 per cent, implying net EPS decline of 50 basis points,” noted Ashish Chopra, analyst at Motilal Oswal.
TCS has won several large deals over the last few quarters, which should help drive the growth momentum. Chopra feels there is a potential to hit double-digit growth in constant currency terms towards the later half of the year.
“The onset of digital technologies is very different from prior technology changes, and is having a far more profound impact on businesses and entire industries, triggering very deep rooted transformations that will play out over the next few years. Your company's strategic and early investments in digital have positioned it well to benefit from the immense opportunities that lie ahead,” N. Chandrasekaran, the chairman of TCS wrote to shareholders recently.
However, its current valuations, may not be as attractive, point out analysts. According to ICICI Securities, the valuation is already “more than fair” at 21 times FY2020 expected EPS and thus has maintained a “hold” rating on the stock. Kotak too has a “cautious” stance on TCS, citing “expensive valuations” and Motilal Oswal also remains “neutral” on valuations.
TCS shares closed down 0.6 per cent at Rs 1,830.70 on the BSE on Monday. The stock has surged 42 per cent in the past six months, versus 5.8 per cent rise in the benchmark Sensex.
For short-term investors, the buyback may present an opportunity, as they could buy the shares now from the open market and tender them in the buyback, points HDFC Securities. But, there are risks. For instance, if the share price were to rise by the time of record date, the returns in percentage terms from the buyback will be lower, the brokerage added. Also, if more number of investors buy shares now in the hope of tendering them in the offer, the acceptance ratio could be lower, it added.