HCL Tech's Rs 40-bn buyback starts today; should you tender your shares?

Analysts say investors can easily give this one a miss

The buyback offer of India’s third-largest IT firm, HCL Technologies (HCL Tech), opens on Tuesday.

The Noida-based company announced a buyback of up to 2.61 per cent at Rs 1,100 per equity share for an amount of up to Rs 40 billion. The offer closes on October 3.

Most analysts recommend investors give the buyback a miss. The company, they say, remains on a firm fundamental footing and the rupee’s slide against the dollar should aid financial performance. That apart, the stock trades at an inexpensive valuation as compared to peers and the current market price (CMP), too, does not leave much on the table for an arbitrage play for investors, they say.

“Despite the recent run-up in the stock, valuation still looks inexpensive relative to peers. One can stay invested for a target price of Rs 1,215 for 12-15 months,” says Sanjeev Hota, assistant vice-president for research at Sharekhan by BNP Paribas.

Satish Kumar, senior research analyst at Choice Broking, agrees. Since the buyback price is now near the CMP, one needs to evaluate the stock on a fundamental basis.

“Given the strong fundamentals of the IT sector and HCL Tech, we recommend investors not to tender in this buyback offer. At the current levels, HCL Tech is well placed on the financial and valuation front compared to peers. The company is likely to grow at 12-15 per cent in the next two fiscal years. Given all these fundamentals, HCL tech’s stock is available at P/E of 15x, which is trading at a discount to Infosys (18.4x) and TCS (27.3x). One should stay invested,” Kumar says.

Thus far in calendar year 2018 (CY18), HCL Tech has gained 21.16 per cent as compared to 38.46 per cent rise in the Nifty IT index. The Nifty50, on the other hand, has moved up 8.42 per cent during the same period, the ACE Equity data shows. The outperformance of IT stocks comes on the back of a sliding rupee, which has depreciated 12 per cent thus far in CY18 and is the worst-performing currency in Asia.

“If we incorporate change in currency assumption of to 71 (from 68/68.5 in FY19E/FY20E), our earnings per share (EPS) estimates for FY19E and FY20E could increase by nearly 3.5-4 per cent. Further, the company has a higher share from the US (63 per cent), which could act as a lever from a margin perspective if the dollar strengthens against the rupee further,” says Deepti Tayal, research analyst at ICICI Securities.

On the flip side, Sudip Bandyopadhyay, group chairman of Inditrade Capital, suggests the offer price is attractive and is also at a premium to the weighted average six-month market price. That apart, the government is now taking steps to arrest the rupee’s fall. In this backdrop, the gains on the rupee front could be limited. The stock, he says, factors in most positives from a near-term perspective. 

“While sharp depreciation in the rupee has benefited technology companies including HCL Tech, it seems to have been arrested by the RBI’s active participation. It also seems that the government would not like to see the rupee depreciating further in the near future. Under the circumstances, future gains on account of rupee depreciation are to an extent capped. Thus, the prospect of further rupee depreciation should not be the reason for holding back HCL Technologies shares.”