TCS buyback: Analysts hail move but see limited upside to stock

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26 Aug, 2025 12:21

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Moneycontrol BureauTata Consultancy Services' (TCS) decision to buyback equity shares worth Rs 16,000 crore pushed the stock up 4 percent on Monday. However, the stock saw some selling pressure in early trade on Tuesday as investors looked to book profits.While analysts have hailed the company’s decision calling it a tax-efficient way of paying dividend, they still remain wary of the stock due to challenges on overseas visa issue, clarity on client budgets, among others. Kotak has hailed TCS’ move to use tax-efficient route of returning excess cash. It feels that the firm desires to return excess cash back to the shareholders, which is a positive cue. The move will also consume 35 percent of its December quarter cash reserves. The brokerage has maintained a cautious stance on the stock with an unchanged target price of Rs 2,415.While earnings per share (EPS) may see a dilution, but investors should view the compensation by realised higher buyback price for the investor, Kotak said. CLSA too expects the impact on EPS to be small at 0.1 percent. Macquarie expects EPS in FY18 to increase over 1 percent. This is left will partly be offset by lower other income. The return on equity is set to receive a boost, brokerage feel. CLSA expects TCS’ return on equity (ROE) to rise by 600 basis points (bps). Meanwhile, Morgan Stanley feels that the buyback may help the ROE by about 200 bps. However, it sees no trigger in re-rating due to the buyback as business prospects need to improve. In fact, this buyback will lead to a lower net income of 2.7 percent. JP Morgan feels that the buyback is more than expected on the quantum and price and hopes that it marks the beginning of a consistent capital return policy by TCS. It is awaiting articulation of a structured capital return policy that boosts its future EPS as well as ROE. CLSA expects the firm to elaborate its long term capital return strategy with higher returns.CLSA also sees promoters participating in the tender offer and pegs the acceptance ratio at 2.85 percent. BofA ML foresees this ratio to be over 9 percent even if the promoters do not participate in the offer. Bank of America Merrill Lynch (BofA ML) feels that a defined capital allocation strategy may work better for the company. It expects annual payout ratios to move to 80 percent on defined basis. Meanwhile, Macquarie feels that investors could press for an increase in the payout ratio.However, brokerages are still wary on the overall business environment for the firm and the impact of factors such as H1-B visa issue. Kotak’s cautious stance is due to multiple portfolio-related headwinds, higher risks from protectionist measures, which will impact TCS more than its peers. Though TCS’ execution and strength is appreciated compared to IT peers, this has been more than adequately captured in the stock price, the brokerage added. Bank of America Merrill Lynch maintained its underperform rating with a target price of Rs 2,130 per share. It foresees event risk from changes to H1-B program in the US to remain and any demand recovery with this hurdle could only be seen in second half of this calendar year. Macquarie has maintained its neutral call on the stock with a target price of Rs 2,408 per share. It sees clarity on client budgets to be the key catalyst for the stock. The brokerage expects stock to be dominated this calendar year by return of capital to shareholders as well as visa reform in the USMorgan Stanely has an equal-weight rating on the stock with a target price of Rs 2,300 per share. It feels that the buyback cannot trigger a re-rating as it is important for business prospects to improve. In fact, the buyback will lead to a lower net income of 2.7 percent. The IT firm on Monday announced a buyback of up to 5.6 crore equity shares of the company for an aggregate amount not exceeding Rs 16,000 crore. The buyback offer constitutes 2.85 percent of total paid-up equity share capital. The buyback price has been set at Rs 2,850 per share.