TCS buyback: Expected return, risk-reward, margin funding and more-What retail investors need to know about this offer

Tata Consultancy Services (TCS) has approved a buyback of 4 core shares (1.1% of its equity size) at a price of Rs 4500 per share. The buyback size is worth Rs 1,8000 crore. As per SEBI regulations, 15% of the offer size (appx INR 2,700cr) has been reserved for small shareholders holding shares up to a value of Rs 2 lakh as on February 23, the record date to ascertain eligible shareholders for the buyback offer.  

On buy back price of Rs 4500, a retail shareholder can buy up to 44 shares (Rs 2,00,000) to be eligible for retail category. 

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The retail holding in TCS is less than 0.6% as on March 31, 2021.A 15% reservation for the buyback of 1.1% of paid-up equity implies at least 0.16% of paid-up equity will be bought from retail investors as on March 31, 2021, says Motilal Oswal.  

Expected return

It is is of the view that a retail investor can get a potential return of 5-9% (pre-tax) with the acceptance ratio to be in the range of 30-50%. The acceptance ratio might get lower, as retail participation might have increased over last 10 months and is likely to increase further post the Buyback announcement. 

"Retail investors looking for a short-term opportunity can buy shares of TCS from the open market and tender them in the buy-back offer. One could get could get a potential return of 5-9% in 1-2 months, provided one is able to sell the remaining un-tendered shares at current price ~Rs3818)," said the brokerage.

Source: Motilal Oswal

Risks

The risk is that additional retail shareholders may buy the stock before the record date leading to lower acceptance ratio. Also, current market price (assumed for calculation of profits) may drop before one is able to exit post buy back.  

Margin funding by Motilal Oswal 

It says the brokerage will provide 50% of margin funding, while balance 50% needs to be self-funded. "Assuming 50% margin funding is availed, then for the acceptance ratio in the range of 30-50%, it could generate a potential return of 16-31% (pre-tax) with a time frame of 2 months (assuming one is able to sell the remaining un-tendered shares at current price of ~Rs3818)," it said.  

Source: Motilal Oswal

Risk-reward from buyback perspective turns unfavourable beyond price of Rs 4200, as per Motilal Oswal