If you are a TCS shareholder and wondering whether you should tender your shares in the buyback which opened today, here are some details that can help you decide.

The buyback which opened today, closes on December 7. The buyback of around ₹17,000 crore while might appear big in absolute terms, is miniscule when compared to the market cap of TCS which is at around ₹12.8 lakh crore. So the buyback represents just 1.3 per cent of TCS’s market cap and is unlikely to add any meaningful value to long term shareholder value. Further the buyback price of ₹4,150 per share is at a trailing PE of 34 times. This is a quite expensive valuation relative to TCS’s recent performance and long term growth prospects, further diminishing any prospects of value addition to long term investors who do not tender in this offer. Buybacks add value to long term shareholders only if it is done at cheap valuations, as explained earlier in this column.

So the key thing to understand is that, this buyback by TCS is just a means to return excess cash to shareholders. Excess cash can be returned via dividends or buybacks. Historically TCS has followed a policy of using both means.

The entitlement ratio for small shareholders has been fixed at 1:6; ie for every 6 shares tendered by retail investors, 1 will be accepted in the buyback (assuming all small shareholders tender all their shares). Small shareholders are defined as those individuals holding shares whose value is below ₹2 lakhs. Given SEBI regulation warrants 15 per cent of buyback size (in this case 15%*₹17,000 crore) to be reserved for small shareholders, the entitlement ratio has been fixed based on the holdings of small shareholders as on the record date – November 25, in this case.

The Math

Here is an illustration to explain what will be the gain if you tender shares based on the acceptance ratio. If all shareholders tender their shares, the acceptance ratio will be 1/6 which equals around 17 per cent. So assuming you own and tender 12 shares of TCS worth ₹42,000 at current price of around ₹3,500/share, and the acceptance ratio is 17 per cent, 2 shares will be accepted in the buyback. Your net gains from the two shares accepted in the buyback will be ₹1,300 (2* buyback price of ₹4,150 minus current price of ₹3,500). Against your total value of ₹42,000, this represents 3 per cent gain, assuming other things (like share price) remain constant. However if less number of shareholders tender their shares and acceptance ratio is 50 per cent, then your net gains in the above example will be 6*650 or ₹3,900; representing 9 per cent gain over the current value of ₹42,000.

Ultimately the returns will depend on the acceptance ratio.  

What should investors do?

So we recommend investors to tender their shares to pocket the cash that is due to them. Further investors need to take cues from the last buyback of TCS done at ₹4,500 per share in March 2022. Today the shares are trading at around ₹3,500 per share -  significant 22 per cent lower today. Investors who did not tender have lost out. With economic outlook in developed markets hazy and enterprise  IT spending weak in recent quarters, chance of material outperformance in TCS shares also appear unlikely in the near to medium term, unless a soft landing plays out in the US economy. The recently reported September quarter results were muted with year on year constant currency revenue growth decelerating significanty to just 2.8 per cent. Headcount also reduced in the quarter, which may be indicative of expectaions for slowdown ahead.

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