TCS share buyback: A good opportunity for retail investors?

IT giant Tata Consultancy Services (TCS) on Saturday announced that the company has fixed Wednesday, February 23,2022, 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 TCS' share buyback.

The IT company, while announcing its third quarter earnings last month, had unveiled an upto ₹18000 crore buyback offer entailing 4 crore equity shares at ₹4,500 apiece. TCS promoters - Tata Sons and Tata Investment Corporation Ltd - intend to participate in the buyback offer by tendering about 2.88 crore shares.

“Fundamentals of TCS have never been better. TCS being the leader of the tech pack continues to generate free cash flows in geometric proportions, and the latest buyback announcement is music to the market’s ears - as it underlines the management confidence,” said Sreeram Ramdas, Analyst, Green Portfolio.

This is TCS' fourth and biggest buyback in the past 5 years. The previous buyback of the TCS, worth about ₹16,000 crore, had opened on December 18, 2020, and closed on January 1, 2021.

“The buyback is coming at an over 18% premium, and from what we have seen in the past, retail investors get above 70% acceptance when they tender their shares. All in all, this might be a good opportunity for market participants with a short-term horizon. Even though the valuations are expensive compared to their close peers, long term investors can continue to hold the stock,” Ramdas added.

A share buyback, also known as share repurchase, is a corporate action to buy back its own outstanding shares from its existing shareholders usually at a premium to the prevailing market price. It can be an alternative tax-efficient way to return money to shareholders. Share buybacks reduce the number of shares in circulation, which can increase the share value and the earnings per share (EPS).

“TCS buyback might create a good opportunity for market participants with a short-term horizon, as the buyback price is 22% higher than Friday’s close on 11th Feb 2022, and it will have a good acceptance ratio. The long-term investors may continue to hold the stock as the outlook for TCS continues to be strong,” said Omkar Tanksale, Senior Research Analyst, Axis Securities.

“TCS stock has already corrected significantly in the last month creating a favorable risk-reward opportunity for the traders and investors. We have seen an acceptance ratio of more than 70% in recent buybacks for retail investors however this time it could be a little lower as the majority of retail investors are likely to participate. The outlook for the sector and TCS is bullish despite short-term volatility therefore investors should take benefit of this buyback,” said Santosh Meena, Head of Research, Swastika Investmart Ltd.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.