TCS BUYBACK RECORD DATE ANNOUNCED AS 14 AUG 2018 MEANS THOSE WHO BOUGHT ON OR BEFORE 13 AUG WILL ENTITLE FOR BUY BACK
TCS has approved the proposal to buy back the shares worth around 16,000 Crore in attempt to distribute available cash among its shareholders. It is a great reward for investors.
Total no of shares to be brought back: 761.9 lakhs shares out of total 38,285.75 lakhs shares, implying overall acceptance ratio of 1.99%.
Out of which 15% is reserve for small shareholders holding less than worth INR 2 Lacs share as on recorded date which is around 329.51 lakhs shares as of March-2018, implying acceptance ratio of around 35% or more.
Thus, overall acceptance ration for retail investors under SEBI guidelines is better and provides an incentive to earn short term profit.
The news itself is so prominent that the stock traded at INR 1841(the previous sessions closing was INR 1792), up 3 per cent in the market on Friday after the news broke. It lifted the company’s market capital back to INR 7 lakh Crore. Share closed 2.94 percent higher at 1845 apiece; the market capital of INR 7 lakh core for the first time, and it had first crossed the milestone in intra-day on May 25. (Share has jumped to a high of INR 1849 in intraday)
TCS will buy back at INR 2100 per equity share which is a handsome premium over 17 percent against Friday’s opening price INR 1800.
TCS promoters hold 71.92 per cent stake in the company.
The company has cleared in his BSE filing that this buyback is proposed to be made from the shareholders on a proportionate basis under the tender offer route using stock exchange mechanism in accordance with provisions contained in the SEBI Regulations and the Company Act, 2013.
What does buyback of share suggest?
A buyback of share indicates that the shares are undervalued. By buyback, company reduces the outstanding shares which boost earnings per share.
Do buybacks really add value to remaining shareholders of TCS?
McKinsey did an in-depth study on whether buybacks add value to shareholders in 2005. The outcome was that minority shareholders do not gain much from buybacks. The reasons are as below.
- Most small shareholders are outside the ambit of dividend tax in India. Therefore the arbitrage of buyback over dividends is not relevant for small shareholders.
- Generally we believe that the same profits are distributed over lower number of shares and therefore the EPS will go up. However, McKinsey’s finding was that markets viewed buyback as an indication that the company did not have too many capital investment opportunities and that resulted in depressing the P/E of these companies. Therefore the increase in EPS was compensated by the fall in the P/E with the result that the net impact on valuations was negligible.
If one looks intuitively at the buybacks in India in the recent past, McKinsey’s findings are almost true.
I would like to mention a well known case of McDonald’s buyback.
McDonald’s did buyback of 18.7 million shares for $1.8 billion dollars — an average price of $96.96. Without the share buyback, McDonald’s would have finished the year with 1,008.7 million shares outstanding. Each shareholder thus ended that year owning a 1.8% greater share of the company than they would have otherwise.
With fewer shares out there, earnings per share increased. Book value per share decreased – but each shareholder got a bigger share of the pie, the pie itself became smaller when McDonald’s spent a lot of money on the buybacks.
| McDonald’s FY 2013 Metric | With Buyback | Without Buyback (estimated) |
| Earnings per share | $5.55 | $5.45 |
| Book value per share | $16.17 | $17.65 |
Scenario1
Buy TCS 100 Quanity at Rs 1850
Acceptence Ratio 40%
Let’s forecast the future trend of TCS after buyback if acceptance ratio is 40%. Also the different price assumption and its calculation for remaining 60 stock of TCS.
| 1750 | 1800 | 1900 | 2000 | |
| 40% acceptance | 84000 | 84000 | 84000 | 84000 |
| Amount of 60 Remaining Shares | 105000 | 108000 | 114000 | 120000 |
| Total
|
189000 | 192000 | 198000 | 204000 |
| Final profit
|
4000 | 7000 | 13000 | 19000 |
Let’s forecast the future trend of TCS after buyback if acceptance ratio is 30%. Also the different price assumption and its calculation for remaining 70 stock of TCS
| 1750 | 1800 | 1900 | 2000 | |
| 30% acceptance | 63000 | 63000 | 63000 | 63000 |
| Amount of 70 Remaining Shares | 119000 | 126000 | 133000 | 14000 |
| Total
|
182000 | 189000 | 196000 | 203000 |
| Final profit | -3000 | 4000 | 11000 | 18000 |
From above two table we have given calculation with both 30% and 40% acceptance ratio and the different price to sell for remaining quantity of TCS post buyback. Based on that calculation its clear that the TCS buyback is very attractive for individual investor and can give 5000 to 20000 profits on 100 shares of TCS
We anticipate acceptance ratio would be more than 40% for retail category, but in worst case it can be 30%. Hence, we considered both in our calculations.
Recent history of buyback by Infosys and TCS gives confidence as in both case investors had decent profit to take home post buyback.
As per our knowledge and calculations we find the TCS buyback as an attractive bet to go for. You should consult your financial advisor before taking final decision.