TCS announces Rs 18,000 crore share buyback: How can Investors benefit from the opportunity?

TCS announces Rs 18,000 crore share buyback: How can Investors benefit from the opportunity? 

Tata Consultancy Services Limited board on 12^th Jan, 2022 approved a proposal to buy back upto 4,00,00,000 Stocks for an amount not exceeding Rs 18,000 crore at Rs. 4,500 per share. 

TCS on 12^th Jan, 2022, Wednesday closed at Rs. 3857 which means that the buy-back will be executed at a premium of Rs. 643 or 16.6% from the last closing stock price.

TCS also announced a dividend of Rs 7 with record date of 20th January, 2022. TCS is India’s largest Technology company with a Market Capitalisation of nearly 14 lacs crores. The stock price of TCS is up by 30.5% in 2021.

TCS Buy-back History 

If we look at the buy-back history of TCS then this is their 4th buyback since 2017 and the first by any Information Technology firm in this calendar year. 

TCS had earlier approved stock buy-backs which was worth Rs 16,000 crore each in 2017, 2018 and 2020 which was a part of their long term principal allotment policy to return excess cash to shareholders.

The below table shows how the stock price has performed over last 4 buy backs:

Note: Buy Back Date – The date on which investors start tendering the shares [1][2][3]

What is a Share Buyback?

 A Share Buyback (also known as Share Repurchase) is when a company buys back its own outstanding shares from stakeholders to reduce number of stocks accessible in open market which is also an alternative to return money to investors.

 Companies buy back stocks to increase the demand in the market, thereby inflating the stock value, Earning Per Share (EPS) and ROE of the company. A Stock buy-back is a sign the investors can use to make informed decision as it shows that the business has sufficient cash set aside for emergencies and the possibility of economic trouble is less.

 What will be Acceptance Ratio and how does it matter? 

 Acceptance ratio is the number of shares accepted in a buyback offer as compared to the total number of shares tendered. As per SEBI rules, regulations, circulars etc. 15 % of the total buyback size is reserved for small investors with holdings up to Rs 2 lakh in the company.

 There are 2 Categories - Reserved Category and General Category

Reserved Category means those investors holding Upto ₹2,00,000 shares in DEMAT. The below table depicts last time reservation vs response.

 How can I benefit from TCS buy-back offer?  

The simplest thing is to buy TCS is from a long term perspective. It is the largest Tech Stock in India. TCS has been a wealth creator for multiple decades.

TCS Q3 results were above our estimates on revenue front. In terms of revenue by geographies (in CC terms), North America market (52% of mix), grew by +18.0% YoY, while UK and Continental Europe reported healthy growth of +12.7% and 17.5% YoY respectively.

The demand outlook continues to be strong as clients are accelerating their spending on cloud transformation and new technologies to remain ahead of the curve.  Watch out for our earnings update on ICICIdirect here at https://www.icicidirect.com/research/equity/investing-ideas

Can I buy TCS under Margin Trading Facility (MTF) to benefit & tender shares at Rs 4500 per share?

You can buy the Stock under Margin Trading Facility with ICICIdirect and take delivery of stocks before the Buy-back date to tender your shares. You can book profit anytime in-between as well.

The thing to be aware about while using the Margin Trading Facility is the funding cost. ICICIdirect offers Margin Funding at amongst the lowest in market with upto 7.9% P.A.

The funding cost depends upon the number of days its takes for the process to be completed. The average number of days in last Buy-back from date of announcement to Date of tendering in buy-back is approximately 80 days. If you are looking at funding Option, the cost of funding with prevailing ICICIdirect Margin Funding Interest rates will be approximately 1.7% considering past time frames. The dividends will be credited to your account which will reduce the cost.

What are the key things to note before looking at Options like Margin Trading Facility (MTF) to buy TCS?

 Here are the top factors which are very important.

• Acceptance Ratio: The tendering of shares will depend upon the acceptance ratio and this is very important. For category less than 2 lacs, there is reservation of 15% of the issue and acceptance ratio generally here are higher.
• Bringing cash to take delivery: If you have taken funding to buy the stock, your shares will be pledged as per SEBI guidelines of Margin Trading Facility. Before the tendering date, you would need to bring the cash in your account to take delivery of the shares. Only Free shares can be tendered.
• Price Volatility: During buy back process, there can be volatility in stock prices and if you have taken funding on the Stock and you will be required to ensure that you always have minimum margins available.

Read more about Margin Funding at ICICIdirect here.  

Will I get benefits of dividend if I buy TCS shares under Margin Trading Facility 

 Yes, you will get dividend even if shares are pledged with ICICIdirect under MTF.

 How do I tender my share under buy-back online on ICICIdirect? 

Tendering shares for Buy-Back is very simple on ICICIdirect. It’s completely online and just few clicks. Just visit www.icicidirect.com , click on IPO / Buy Back, enter the number of shares you wish you tender and you are done. Our systems will automatically block and tender your shares and credit the money in your accounts as eligible.

Sources:

[1] https://www.tcs.com/investor-relations

[2] https://www.nseindia.com/get-quotes/equity?symbol=TCS

[3] https://www.tcs.com/events/tcs-buyback-2020