TCS' Rs 18,000-crore buyback opens today; should investors tender shares?

The mega Rs 18,000-crore buyback by IT giant Tata Consultancy Services (TCS) opens today and will run till March 23. The 14-day long buyback offer is priced at Rs 4,500 per equity share, a 23.53 per cent premium to the volume weighted average market price since January 7, 2022, and about 25 per cent higher than the current market price.

The company plans to buyback 40 million equity shares of Re 1 face value. Of this, promoter companies - Tata Sons, and Tata Investment Corporation, will tender shares worth Rs 12,993.2 crore. Tata Sons plans to tender 28.8 million shares whereas Tata Investment Corporation intends to tender 11,055 shares.

The company had set February 23 as the record date for the purpose of determining the entitlement and the names of the equity shareholders who shall be eligible to participate in the buyback. The buyback ratio will be 1 share for 108 equity shares for general investors.

However, should investors tender their shares in a bearish market?

According to AK Prabhakar, head of research at IDBI Capital, the IT behemoth is a good long-term investment bet. "The buyback will act as a dividend for retail investors. Since the market is at a corrective stage, retail investors can leverage this opportunity before the stock consolidates to lower levels," he says.

That apart, with the depreciating rupee, analysts remain positive on the sector going ahead as the IT services companies make most of their revenues servicing clients in the overseas market.

Vinod Nair, head of research at Geojit Financial Services says the stock enjoys twin benefits of attractive valuation, which is at 29x forward PE of one year, a premium valuation compared to its five-year average of 23x, and overall tailwinds for the industry.

Acceptance ratio scenario

Historically, TCS has seen 100 per cent acceptance in all the three buybacks. However, during the last two buybacks, the market price of the company was on a rising trend and was very close/above the buyback price on the last day of tendering. Thus, many shareholders could have stayed away from the buyback on expectations of a better market price, analysts said.

This time, though, there is a wide gap between the buyback price and the market price. 

 

Given this, HDFC Securities believes the likely acceptance ratio could be between 45-70 per cent. "Even at this low acceptance, an investor who would have bought shares from the market till ex-date and tenders the shares in the buyback can make decent absolute and annualized returns, provided the stock price does not fall below Rs 3,500 on the payout date," it said in a report.

Those at Motilal Oswal, meanwhile, expect the acceptance ratio to be in the range of 30-50 per cent, which could give a potential return of 5-9 per cent within one to two months. CLICK HERE FOR GRAPHIC

"Considering the historical trend, we assume a high acceptance ratio for the small shareholder category and foresee the buyback to provide a 15-25 per cent return. Short term investors can consider the opportunity while long-term investors can hold on in view of a long term positive outlook," said Nair of Geojit Financial Services.

Shares of the company closed at Rs 3,600 apiece on the BSE on Tuesday, up 3 per cent. In comparison, the S&P BSE Sensex settled 1 per cent higher.