Should you buy TCS shares ahead of buyback? Find out if it is a money making opportunity

IT giant Tata Consultancy Service (TCS) saw massive buying in its shares on Wednesday, so much so that it jumped by nearly 3% on stock exchanges. Investors were upbeat on TCS share price after the company announced its buyback plan. However, it did not reveal the exact amount for this plan. TCS has been trading at a premium compared to its peers like Infosys, HCL Tech and Tech Mahindra, and has become the first Indian company to cross the $100 billion market capitalisation mark in over a decade. TCS is the top IT company in India, and the buyback plan definitely comes as a good news for investors. 

At around 1413 hours, TCS share price was trading at Rs 1,827.80 per piece up by Rs 46.80 or 2.63%. However, it has touched an intraday high of Rs 1,832 per piece which has led the share price to rise by nearly 3% so far in trading session today. 

In a notification, TCS said, “This is to inform you that the Board of Directors will consider a proposal for buyback of equity shares of the Company, at its meeting to be held on June 15,2018.”

The market cap of TCS today stood at Rs 6,99,404.11 crore on BSE, highest among all the companies. 

No information on how much buyback TCS is giving is not yet  revealed. But investors are excited because TCS made a history last year by launching the largest buyback plan in India. 

Last year, TCS had buyback 5.61 crore equity or 2.85% of the company's total capital.  The company said that it will buyback these shares at Rs 2850 per share thereby spending up to Rs 16,000 crore. 

What is a share buyback?

A company makes a buyback or repurchase shares from its existing shareholders usually at a market price or premium. 

This  is done usually in traditional open-market purchase or tender route. Both promoters and public shareholders can offer their shares in tender buyback, however only public shareholders can take part in open-market as per rules of Securities and Exchange Board of India (Sebi).

In tender buyback – a company fixes a price and accept shares on a proportionate basis directly from shareholders in the buyback period. While in open-market, a higher price band is decided for the shares offered, among which some are purchased by a company (they cannot get the entire amount announced) from the market within a specific time-frame.

Objective

One of the common objective of adapting this portal is to control the drop in the value of a company's stock price – by reducing the supply of stock. This in return drives price-over-equity (PE) ratio and also improves the earnings per share (EPS) of a company.

Another reason is that the amount of ideal cash a company holds in their balance sheet, as these affects ratios like Return on Equity (RoE), Return on Asset (RoA), etc.

Mostly, buyback price has been decided at a premium – which provides an opportunity to retail investors to exit the stock of a particular company with an intention to book some profits.

TCS has a cash equivalents of Rs 4,883 crore by end of FY18 compared to Rs 3,597 crore by FY17. 

In its Q4FY18 financial audit report, it announced a bonus issue of Rs 191.42 crore which will be dispatched on June 18, 2018. While announcing this, TCS also highlighted that free reserves and or share premium available for capitalization and the date as on which such is available of Rs 74,080 crore as on March 2018. 

Over Rs 26,800 Crore of cash has been returned to shareholders in form  dividends and buyback in FY18. 

Analysts are already optimistic on TCS share price post Q4FY18. 

Sharekhan said, “With favorable capital allocation policy for investors (80-100% of annual FCF), we expect TCS to continue to trade at a premium to its peers. Hence, we upgrade our rating on the stock to Buy from Hold with a revised price target (PT) of Rs 3,500.” 

IIFL said, “ We raise our EPS estimates for FY19ii-21ii by 2-3% on better growth outlook. Hence, we forecast 10%/12% USD revenue/EPS Cagr over FY18-20ii. Our TP of Rs3,050 implies 18X on FY20ii P/E. The stock is trading at 19X on FY20ii P/E leaving limited potential upside. Maintain ADD.”

Elara Capital said, “Considering low execution risk (given strong deal pipeline, low trainee bench per our estimate), we retain our Accumulate rating and arrive at a new TP of Rs 3,470 on 20x March 2020E P/E (vs 20x March 2019E P/E).”

IDFC Securities said, “We note despite the drag from BFSI, TCS has been accelerating growth and we do think cyclical pick up in BFSI can lead to additional upgrades. We raise our EPS estimates by 3% for FY19-20E. We think that premium execution deserves premium multiples. We raise our target multiple to 20x (18x earlier) and raise our March 2019 target price to Rs 3,425 (Rs 2,950 earlier). Retain Outperformer.”

Currently, TCS has an EPS of Rs 131.15 by FY18. 

When buyback was carried last year from May 18 to May 31, 2017, TCS share price rose to as much as 6%, which is an indication that investors have hope in TCS buyback. Considering analysts are already predicting over Rs 3,000-mark for TCS, one may thing of purchasing this stock before buyback as TCS share price are bound to rise ahead.