Analysts say the proposal may not move the needle for investors in the short to medium term, after the recent rise in the share price.
Analysts said that since this buyback is a public offering, as opposed to an open offering where promoters buy and extinguish shares, in the TCS exercise, the company will buy back only a small portion of the shares tendered. In that case, anyone who tries to buy the shares who now expects to offer them at a higher price in the buyback offer may end up having a larger portion of those shares.
And once the two dividend repurchase and payment events are out of the way, stocks are likely to weaken as current demand from buyers will disappear, which may provide a much better buying opportunity for investment to long term in stocks.
Shares of the main IT company have risen more than 60 percent since the start of this financial year, even as the benchmark BSE Sensex index gained 41 percent. The stock was up nearly 4 percent in Thursday’s trade, but then gave up some of the gains to close 3 percent higher at Rs 2,824.
On Wednesday, TI’s principal approved a share buyback of Rs 5.33 crore at Rs 3,000 each, which implies a total size of Rs 16bn. In addition, the company also declared an interim dividend of Rs 12 per share with November 3 as the record date. So at Thursday’s share price of Rs 2,824, the stock theoretically promises a cool profit of Rs 188 in a month.
But, that may not be the case, and how!
“The buyback will benefit only the promoters and former shareholders. On the other hand, I don’t see this offer as a business opportunity. Only a handful of shares are tendered considering the size of the buyback. The 2018 offering was more lucrative than the 2020 offering, ”said Sameer Kalra, founder of Target Investing.
The promoters held 72.05 percent, or 2,70,35,42,000 shares of the company as of September 30, and the public shareholders 27.95 percent, or 1,04,88,42,706 shares.
Of that, retail investors held just 3.24 percent ownership, or 12,16,05,157 shares. This means that the company will buy back only 1.42 percent of the share capital of a total of 375 million shares.
In this case, the company will buy shares from shareholders on a proportional basis.
Madhu Babu, an analyst at Centrum Broking, told ET NOW that Dalal Street would have been happier if the offer was around 25 billion rupees more. Considering they had 50 billion rupees of net cash, people expected a much bigger buyback.
But others say a higher bid is not possible in the case of TCS, as the promoter’s stake is very close to the 75 percent cap required by Sebi. In the event of a larger buyback, the promoter’s share will increase even more and promoters who need to do a buyback, say to support the share price in the event of a sharp drop, will have their hands tied.
AK Prabhakar, Head of Research at IDBI Capital Markets, said: “The repurchase announcement increases earnings per share only in the long term. However, I don’t see any short-term opportunity for investors in this. ”
However, analysts have since revised the stock’s target price higher after the company posted better-than-expected earnings for the September quarter on Wednesday.
The country’s largest IT company said its net profit fell 7.05 percent to Rs 7,475 crore for the quarter from Rs 8,042 crore in the same quarter last year.
Although it held a ‘buy’ call on TCS, brokerage Edelweiss Securities said the company delivered a stellar set of numbers for the second quarter of fiscal 21, which exceeded street expectations. Revenue also beat Street’s estimates, rising to Rs 40,135 crore from Rs 38,977 crore year-over-year. The company claimed that its cash conversion was strong as net cash from operations stood at Rs 10,618 crore, which was 125.9 percent of net income.
Brokers ICICI Securities and Edelweiss Securities are positive on TCS with price targets of Rs 3,300 and Rs 3,150, respectively, indicating a rise of up to 16 percent from the current market price.
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