TCS buyback offer: What should investors do—should you tender shares?

India's largest IT company Tata Consultancy Services (TCS) has announced Rs 18,000-crore buyback offer. The IT major will buyback 4 crore equity shares worth Rs 18,000 crore at a price of Rs 4,500 per share, it informed exchanges while announcing Q3 results on Wednesday.  

The Mumbai-based firm reported a 12.2 per cent rise in its consolidated net profit to Rs 9,769 crore for the December 2021 quarter. Revenue of the IT giant grew by 16.3 per cent in the quarter to Rs 48,885 crore from Rs 42,015 crore in the corresponding period last fiscal, TCS said in a regulatory filing. 

"We wish to inform you that the Board of Directors of the Company at its meeting has approved a proposal to buyback up to 4,00,00,000 (Four crore) Equity Shares of the Company for an aggregate amount not exceeding ₹18,000 crore," the company said in a regulatory filing.   

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What is buyback of shares? 

The buyback is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price. When the company buys back its shares, the number of shares outstanding in the market reduces. A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. 

What should investors do with TCS buyback offer? 

Explaining the TCS buyback offer, Vinod Nair, Head of Research at Geojit Financial Services, said post buyback the outstanding share will reduce by 1.08%. "Due to TCS’s sheer size, Rs.18000 crore buyback will have marginal uptick in EPS. However, the company’s commitment to add value to shareholder in growth and returning capital is appreciabl," he said.  

The stock is currently trading at 32.4x FY23E EPS which is at premium valuation compared to its 5 year Average of 23.4x supported by current tailwinds in IT industry, Vinod Nair said.  

"As per our analysis, we foresee the buyback to provide a return of 12% to 16% at CMP, in the short-term, assuming high acceptance ratio. A short-term investors can consider the opportunity, while long-term investors can hold-on," recommended Geojit Financial Services Head of Research. 

TCS' previous buyback offer of around ₹ 16,000 crore had opened on December 18, 2020, and closed on January 1, 2021. 

Manoj Dalmia, Founder and Director-Proficient Equities Limited, also suggested suggested that short-term investors can tender their shares, while the long-term investors should stay put in this share.  

"Currently, it is trading around Rs 3900 per share.  Those who want some profit in short term can tender their shares at a good premium. Others can hold shares for a long-term basis, considering its strong fundamentals," advised Proficient Equities Limited founder.  

Earlier, the IT giant had declared a third interim dividend of Rs 7 per Equity Share of ₹1 each of the Company.