CLSA & Motilal Oswal say TCS buyback tad lower than their expectations, EPS negative

2| Tata Consultancy Services: Rs 8.26 trillion

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On Friday, Tata Consultancy Services (TCS) announced a buyback up to Rs 16,000 crore, which came in lower than expectations of most brokerages. The latter see feel it is slightly negative on earnings per share (EPS).

TCS' board approved a proposal to buyback up to 7.6 crore equity shares 'for an aggregate amount not exceeding Rs 16,000 crore'. Most brokerage were anticipating a buyback of over Rs 20,000 crore.

At Rs 2,100 per share, the buyback, which stands at 1.99 percent of its total paid up equity share capital, is at a premium of 14 percent over Friday's closing price of Rs 1,841.45 per share.

Post-announcement, CLSA has maintained its buy rating with a target price of Rs 1,850 per share. It said the buyback at 18 percent of networth or 34 percent of its cash reserve was a tad lower than its expectations.

It expects the promoters to participate keeping the acceptance ratio low at 2 percent. The global brokerage firm expects the buyback to be completed by Q3 FY19 and sees minimal impact on its FY20 EPS.

TCS had carried out a Rs 16,000 crore buyback of 5.61 crore shares, or 3 percent of its total equity, at Rs 2,850 per equity share last year. The buyback price was at a 16 percent premium to its market price back then.

Among major Indian IT players, TCS has been performing the best in terms of business, signing mega-deals even in a time of slowing growth for the overall sector.

Buyback slightly negative on EPS
The buyback should result in a 2 percent accretion to EPS from the reduction in share count. However, the cash reduction would result in a decline in other income, which is dominated by a yield of 8 percent on a pre-tax basis on cash.

“Other income foregone would be to the tune of Rs 1,200-1,300 crore, which would result in an adverse EPS impact of 2.5 percent, implying a net EPS decline of 50 basis points. However, given the reduction in networth, return on equity is likely to improve by 2 percentage points,” Motilal Oswal said in a note.

Acceptance likely to be high on the retail side
Like last time, in this buyback too, the acceptance ratio for small retail investors is likely to be high because of the Securities and Exchange Board of India's mandate that companies reserve 15 percent of the buyback for small shareholders with holdings less than Rs 200,000.

Motilal Oswal expects this would imply a lesser acceptance ratio for institutional holders, but that depends on how many shares promoters tender.