TCS gains as buyback kicks off. Should you tender shares?

Shares of Tata Consultancy Services (TCS) rose on December 1 as its share buyback offer kicked off. Along with its quarterly results in October, the IT services giant announced a plan to buy back shares worth Rs 17,000 crore at a premium price of Rs 4,150 through a tender route.

Shareholders with a maximum of 57 shares as on November 25, the record date, can participate in the buyback and benefit from the gap in the current market price and the buyback price.

At 11.01 am, TCS was trading marginally higher at Rs 3,501.10 on the National Stock Exchange (NSE). The stock has risen around 7 percent this year, while the benchmark Nifty has gained 11 percent during the period.

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TCS buyback acceptance ratio

According to TCS, the official entitlement ratio is 17 percent for small investors. The entitlement ratio represents the proportion of shares a shareholder is eligible to tender based on the total number of shares they hold.

According to brokerage firm Sharekhan, past experiences show that not all shareholders participate in a buyback and the final acceptance ratio is typically 30-35 percent.

Should you tender shares?

Those holding TCS’s shares for long-term investment in their portfolio worth less than Rs 2 lakh on November 25 could use the buyback route and tender their shares, a maximum of 57 shares, to get a premium buyback price of Rs 4,150, Sharekhan said.

Post the buyback settlement, investors can again buy back the same numbers of shares accepted in the buyback at the prevailing market price for long-term investment and continue to hold unaccepted shares in the portfolio, it added.

“Given the potential acceptance ratio and possible upside for retail/small investors, it is advisable to tender shares in buyback. After the buyback, investors have the option to reinvest in the same number of accepted shares at a relatively lower prevailing market price. Fundamentally, we have a “buy” rating on TCS, with an unchanged price target (PT) of Rs 4,200,” said Sharekhan.

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Prashanth Tapse, Research Analyst-Sr VP Research, Mehta Equities, said that short-term traders can use the opportunity to generate decent returns based on the assumed entitlement ratio. Based on the buyback rate of Rs 4,150, short-term investors can generate around 18 percent ROI based on last trading price of Rs 3,500.

“In addition, investors can get tax benefits, as the income generated from this buyback of shares is tax exempted,” he said, adding in the long term, they continue to be optimistic about the IT sector in which TCS and Infosys would remain investors’ favourite counters to hold.

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