TCS Buyback

The Board of Directors of Tata Consultancy Services Ltd, at its meeting held on June 15, 2018  approved a proposal to buyback up to 76,190,476 Equity Shares of the Company for an aggregate amount not exceeding Rs 16,000 crore  being 1.99% of the total paid up equity share capital, at Rs. 2,100 per Equity Share. The buyback announcement is in line with TCS stated intent to return 80-100% of free cash generated to shareholders through the dividend/buyback route.

Latest Updates:
  • 25/06/18 TCS buyback ends with 100% acceptance from retail
  • 01/09/18  Download TCS Buyback Tender Form Click Here
  • 31/08/18: TCS entitlement ratio is 43 Equity Shares for every 96 Equity Share held on the Record Date i.e. ~45%.
  • 30/08/18: TCS announces Buyback Issue date from 5 Sept 2018 to 21 Sept 2018.
  • 06/08/18: TCS sets 18/08/2018 record date for Buyback.

For a understanding of complete BuyBack Process & Terms, please see the link Buyback of Shares: A Primer for Retail Investors

TCS Share Buyback

Companies are increasing resorting to Buyback of their shares at a price higher than market price for  variety of reasons mainly driven by  the desire to return money to shareholders including promoters  in a  Tax efficient way.

For more on Buyback Benefits and other issues please refer the earlier Post Mphasis Buyback of Shares 2018

As TCS Buyback draws to an end, we have collated some basic data for this Buyback and previous Buyback by TCS  and this is solely for informative and educational purpose. Profit or Loss in this arbitrage opportunity is uncertain and will depend on final acceptance ratio of buy Back and price of TCS share ruling after the buy back. 

TCS Buyback: Present(2018) and Previous(2017) Buyback

Particular / Year
Present Buy Back
Buyback (2017)
Buy Back Announcment Date15-06-1820-02-17
Buy Back Type Tender Offer Tender Offer
Market Price on announcment Day1840.052420
Buy Back Price21002850
% Premium on Market Price14.13%17.77%
Buy Back Size in Rs. Crore16000.0016000.00
Buy Back Size ( Shares)76,190,47656,140,351
Equity Capital in crore382197
Face Value of Share in Rs.11
% Buyback1.99%2.85%
Shrholders Voting end date04-08-2018
Record Date18-08-201805/05/2017
Buy Back Issue date05/9/18 to 21/09/1818/5/17 to 31/05/17
Share Holding Pattern
1) Promoters ( %)71.92
2) Public (%)28.08
Buyback Shares reserved for Retail11,428,5718,421,053
Buyback entitlment 45%45%
No. of Shares Bid for by Retail Yet to Happen41,97,408
Actual Retail Aceeptance Yet to Happen100%
Some Possible Scenarios(Just Possibilities)

The absolute returns/Loss that may accrue to an Investors/Arbitrage trader are a function of Acceptance Ratio and Price Post Buyback.  We have depicted the estimated Returns  as a cross tabulation showing Absolute Returns as a function of various possible combinations of Acceptance Ratios and Price Post Buyback.

Shares Purchased
95
Nos.
Share Buyback Price2100per share
Tabulation of Absolute Returns
A) Based on Share Price when Posted
TCS Share Purchase Price1977Investment187815Rs.
Acceptance Ratio / Price Aft Buyback 1850190019502000
40%-1.37%0.15%1.67%3.19%
60%1.16%2.18%3.19%4.20%
75%3.06%3.69%4.32%4.96%
B) As Per Last Market Price & Trends
TCS Share Purchase Price kept same1977 Amount187815Rs.
Acceptance Ratio / Price Aft Buyback1950200020502100
60%3.19%4.20%5.21%6.22%
75%4.32%4.96%5.59%6.22%
90%5.46%5.72%5.97%6.22%
100%6.22%6.22%6.22%6.22%
Time Frame: 2-3 months
TCS Buyback: A Framework to Estimate Likely Acceptance Ratio:

This framework is based on shareholding of investors with upto 100 shares of TCS as on 31/03/2018 and making assumptions on likely additions by means of purchases by new investors as well as by  existing shareholders and estimated fresh additions due to bonus issue (record date 02/06/2018) and purchase by existing investors in view of Buyback offer. It also makes assumptions regarding the % of shareholders who are likely to tender their shares for buyback.

Particulars
Numbers
Assumptions
1) No. of shareholder Holding upto 100 shares on 31/03/18478,452Actual data. We assume this no. to be Retail investors as mrkt value of 100 shares is near to 2L limit of retail investors
2) Share Held by this category of Shareholders on 31/03/1816,475,896Actual data
3) Additional Shares Estimated due to combined impact of bonus shares & susbequent increase in Shares of existing shareholders (110% increase considered i.e.(3) X 1.1)18123486Due to Bonus the shares just doubled by some invstors may have exceeed the 2L retail limit, some sold for profit and some added to benefit from Buy Back. Net effect assumed at 2x of the original retail holdings.
4) Addl. Shares Estimated assuming fresh purchase by 1 Lac A/c's and assuming avg. 40 Shares per A/c4,000,000Normal IPO issue attracts 10-12 Lac Applicants, About 10% of these have been assumed to purchase avg 40 shares for arbitrage purpose. Some isuch investors have also liquidated their positions as share touched Rs. 2000.
5) Estimated retail Shares as on record date (2+3+4)38,599,382
6) Estimated % of Shareholders who will tender shares for Buyback65%In 2017 this ratio was just 22%, Higher ratio of 65% assumed. Some may not Tender recent bonus shares due to higher short term Tax. A low gap between buyback price and price after buy back record date will also impact this ratio. Howver those making excess will make up for those offering less.
7) Total Shares Tendered (5 x 6)25089598
8) Total Buyback reserved for Retail11,428,571
9) Estimated Buyback ratio based on above assumptions*46.00%

In above assumptions we have taken some degree of safety by assuming generally on the higher side. The extent of Impact of bonus shares (record date 02/06/18) on retail quota is a debatable issue and cannot be exactly quantified. While bonus shares will lead to doubling of shares,  some retail investors may have exceeded the 2 Lac limit set for retail , some sold to book profit due to bonus stripping and some may not tender bonus shares for buyback since bonus shares are at zero acquisition cost and so they may prefer to sell them  in next buyback thus availing lower Long term gain tax. Also some arbitragers who bought into the share have made an exit as share neared Rs. 2000 mark a few days earlier.

If these assumptions are not very wrong, TCS Buyback could end up with 40-60% final Acceptance Ratio since we have included some factor of safety in our calculations.

Also see TCS Performance in Q1FY19, Risks and Analyst Views

Some Observations:
  • Number of shares held by individuals went down  to ~5.62 Lacs at the end of 31st March 2018 from ~7.71 Lacs as on 31st March 2017. (13.5% decrease). The total shares held by individuals also went down by 21.5% decrease. This can be explained due to the intervening buyback effected in 2017. 
  • There was increase in shares March 2018 to June 2018 by Individuals which coincided with issue of bonus shares (Record date 02 June 2018) and announcment of Buyback in June 2018. Number of Individuals added in this period stood at about 1.5 Lacs ( 27% increase) and total shares held by individuals increased  by 116% due to impact of bonus and as new shareholders bought the scrip and existing shareholders may have also beefed up their holdings of TCS. 
  • In 2017, the actual entitlement of  retail shareholders in the buyback was  47% ( 9 out of 20 shares held). The buyback was 100% as all shareholders did not participate. Also against the Buyback bids received were only for 41,97,408 shares against retail quota of 84,21,053 shares indicating that the retail offered only about 1/4 of their entitlement.
  • While there has been a sort of unprecedented frenzy to add TCS shares in recent past and also % tendering for buyback could also see a big uptick, based on above data there are even chances that arbitrage traders could benefit subject to the condition that there is no major downturn in market or IT sector shares.  The next shareholding data will show the pace of addition of new individuals and total shares held by this category.
Buyback Procedure

  • An exchange say BSE Limited will be appointed as the “Designated Stock Exchange” to provide a separate “Acquisition Window” to facilitate placing of sell orders by Eligible Sellers who wish to tender their Equity Shares in the Buyback.
  • The Company will announce a Buy back issue which will have a opening date and closing date. For TCS in buyback of 2017, the Buyback Issue was open from 18/05/2017 to 31/05/2017. The shares can be offed by investor in this period through his broker subject to the maximum held by him as on record date which will also contained in the intimation of buyback from the company. The  exact procedure of tendering  varies from broker to broker and while some could ask for a copy of letter/email from the company, others may do it just by seeing the holdings in the depository etc. 
  • The Company after acceptance will returned the shares (Nil in case of 100% acceptance) to your Demat account and the payment against the accepted shares will be  credited to your Bank Account.

SEBI Guidelines on Buyback

  • At least 15 percent of the securities a company proposed to buy back should be reserved for small shareholders, while the maximum limit is capped at 25 percent of the paid-up capital.
  • Companies are allowed to buy back as much as 10 percent of shares outstanding without shareholders’ resolution.

TCS: Quarterly Performance 
Particulars/ Rs. CrJun-18Mar-18Dec-17Sep-17 (Cr)
Gross Sales34261320753090430541
PBIDT10296964691578983
PBDT10279963491518976
Adjusted Profit After Tax7362692565456460
EPS 19.1736.0734.1233.67
Dividend (%)4000700700
Equity383191191191
Face Value 1111
PBIDTM(%)30.0530.0729.6329.41
PBDTM(%)3030.0429.6129.39
PATM(%)21.4921.5921.1821.15
*Bonus 1:1 in  June 2018

TCS Performance in Q1FY19, Risks and Analyst Estimates

TCS delivered a robust performance in the first quarter of fiscal 2018-19,posting INR 7,340 crore consolidated net profit registering 23.5% yoy growth and 6.3% sequential qoq growth. The stock price took a quantum jump after these results. The strenght of Dollar is also in favour of TCS. The risk to TCS arises from any global sell off, sell of in emerging markets, curbs by US on Indian IT sector, considerable run up in Indian stocks and political uncertainties facing the country in coming months.

Post the Q1-Fy19 results, views of major brokerages are indicated in the table below: C from and views of major brokerages are indicated in the table below:

BrokerageRatingTarget in Rs.
CLSABuy2200
EdelweissBuy2266
HDFC SecuritiesHold2130
JefferiesHold2140
Kotak Reduce1790
MacquaireOutperform2015
Motilal OswalNeutral1950

General Observations:

  • After the bonus issue, the number of outstanding shares has increased. This will lead to increase in shares tendered.
  • Investors have earned good returns in recent past in buy-backs of IT companies like Infosys, TCS, Wipro, HCLTech, Mphasis which might lead to many investors to purchase shares aggressively with the intent of tendering them in the buy-back.
  • Big spurt in Arbitrage investors who are buying shares to tender in buyback and sell thereafter
  • In last year buyback  there was 100%  acceptance from retail. Additionally  only 50% of the retail quota was received for buyback. This indicates that even with significantly higher interest and activity the buyback may still work out to a respectable figure like 50%.
  • The biggest risk to this arbitrage opportunity is that market is at a high with run in Tech shares  as well. Any meltdown on this count could change the scenario totally.
  • On the Other side TCS is a strong counter having churned out good results and belying such expectations of downturn after this event,  it may continue to show a firm trend even after buyback period. In this case the return of the  investor/arbitrage trader can improve further. 

Disclosures

I held a small position in TCS prior to announcement of buyback and have over a period of time added more quantity to participate in the buy back. Iam inclined to keep some remaining shares for long term too. 

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.