TCS Buyback Likely to Earn Less Than Expected Per Share

New Delhi: Tata Consultancy Services (TCS) announced a buyback of up to Rs 16,000 crore on Friday which most brokerages think was a bit lower than expectations and is slightly negative on earnings per share (EPS).

The TCS board approved a proposal to buy back up to 7.6 crore equity shares “for an aggregate amount not exceeding Rs 16,000 crore”. Most brokerage firms were anticipating a buyback of over Rs 20,000 crore

The buyback is at 1.99 percent of the total paid up equity share capital, at Rs 2,100, which is a premium of 14 percent over TCS’ closing price of Rs 1,841.45 on Friday.

CLSA which maintains a buy rating on TCS with a target price of Rs 1,850 said that buyback of 18 percent of net worth or 34 percent of its cash reserve was a tad lower than expectations.

The global brokerage firm expects promoters to participate keeping the acceptance ratio low at 2 percent. It expects the buyback to be completed by the third quarter and see the impact on its FY20 EPS which could be minimal.

TCS had carried out a Rs 16,000 crore buyback of 5.61 crore shares, or 3 percent of its total equity, at Rs 2,850 per equity share last year. The buyback price was at a 16 percent premium to its market price back then.

The buyback should result in 2 percent 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 percent on a pre-tax basis on the cash.

“Other income foregone would be to the tune of Rs 12-13 billion, which would result in an adverse EPS impact of 2.5 percent, implying net EPS decline of 50bps. However, given the reduction in net worth, the RoE is likely to improve by 2pp,” Motilal Oswal said in a note.

Like the previous time, in this buyback too, the acceptance ratio for small retail investors is likely to be high because of the SEBI’s mandate that companies reserve 15 percent of the buyback for small shareholders with holdings worth less than Rs 200,000.

Motilal Oswal expects that this would imply a lesser acceptance ratio for institutional holders, of course depending on how much the promoter tendering is.

Shares of the IT major hit the 52-week high of Rs 1849.00 after the announcement but slipped a little to end the day at record closing high at Rs 1,841.45 — 2.75 percent higher — on Friday.

The company had said earlier in the week that it would consider a buyback at its annual general meeting of the Board. Brokerages had pegged the quantum of buyback to be between Rs 10,000 crore and Rs 20,000 crore.

The company returned USD 4.1 billion of cash returned to shareholders in dividends and buyback last year. It had USD 7.51 billion in cash and cash equivalents on its books at the end of March 31.

"With multiple mega deals in the bag, TCS is set to continue on its path of gradual acceleration in growth witnessed over the past two quarters, and potential hitting double-digits in constant currency toward the latter half of the year," research analysts Ashish Chopra and Sagar Lele at Motilal Oswal had noted in a note earlier this week.