Shares of Tata Consultancy Services (TCS) rose about 3 percent in morning trade on NSE on March 8, a day before the company's proposed buyback of shares will commence.
TCS has offered a buyback of shares worth ₹18,000 crore and the IT major intends to buy back 4 crore shares of the face value of ₹1 at ₹4,500 per share. The record date of the buyback is February 23, 2022. The buyback of shares will open on March 9 and close on March 23. The last date for the receipt of completed tender forms is March 23.
JM Financial is the manager of the buyback while Link Intime India is the registrar.
The notable point of this buyback is that it is reserved for the small shareholders under the ratio of one share for every seven shares held on the record date. That means TCS will purchase one share for every seven shares of a small shareholder. While under the general category, the ratio of the buyback is one share for every 108 shares held on the record date.
The company has said that those shareholders who are not holding more than 56 shares of the company as on the record date will be considered as small shareholders for the buyback. As many as 60 lakh shares are reserved for small shareholders.
Share buyback simply means repurchasing the shares by the company that issued them. A company buys its own shares from its shareholders to consolidate its ownership, boost the company's financial ratios and also lift the stock's valuation.
Should you participate in the buyback?
Analysts find the current valuation of the stock at a premium so advise short-term investors can tender their shares. However, the company has an impressive historical record and its growth outlook is also healthy so long-term investors may choose to remain invested.
"The stock is currently trading at 29 times one-year forward PE (price-to-earnings) ratio which is a premium valuation compared to its five-year average of 23 times supported by current tailwinds in the IT industry. Considering the historical trend, we assume a high acceptance ratio for the small shareholder category and foresee the buyback to provide a return of 15-25 percent return. Short-term investors can consider the opportunity while long-term investors can hold on in view of long-term positive outlook," said Vinod Nair, Head of Research at Geojit Financial Services.
Some analysts point out that the ratio of buyback for the reserved category will disappoint small shareholders.
"TCS has said that in the reserved category for small shareholders, the ratio of buyback will be one equity share for every seven equity shares held on the record date. This has disappointed small shareholders against Street expectations which were more than 30 percent," said Prashanth Tapse, Vice President (Research), Mehta Equities.
"The ratio for small shareholders works out to be 14.3 percent which is very low. We assume that this acceptance ratio got lowered, as retail participation has increased a lot in the last 12 months post-Covid," he said.
Tapse advises short-term investors to consider this opportunity and tender their shares as per entitlement offer, while long-term investors can hold on for long-term wealth.
Small Investors can also tender more shares than their entitlement, and acceptance will solely depend on the company and non-accepted shares will be credited back to your demat account by the RTA.