Buy On TCS: Sharekhan Says To Tender Shares In Rs 17,000 Crore Buyback, Sets Target Price At Rs 4,200

Tata Group-backed tech giant, Tata Consultancy Services (TCS) has opened its Rs 17,000 crore buyback on December 1, which will be available till December 7th for bidding. Given the potential acceptance ratio and possible upside for retail/small investors, Sharekhan said it is advisable to tender shares in buyback. The brokerage has even set a buy rating on TCS shares for a target price of Rs 4,200 apiece, which is higher than the buyback floor price of Rs 4,150.

Explaining in detail, Sharekhan highlights that earlier retail shareholders owning shares on the record date of Rs 2 lakh or less will get a reservation in the buyback offer to the extent of 15% of the buyback size. As of the Record Date, the closing price on NSE was Rs 3,457.10 per equity Share. Accordingly, all eligible shareholders holding not more than 57 Equity Shares (less than Rs2 lakh worth) as of the Record Date are classified as 'Small Shareholders' for the Buyback.

The largest Indian tech company's buyback offer involves a buyback of up to 4.09 crore equity shares at a face value of Re 1 each. The size of the buyback is up to Rs 17,000 crore. For the buyback, TCS has fixed a floor price of Rs 4,150 per piece. The floor price is at a discount of 15.4% from the closing price of Rs 3,509.60 apiece on BSE after market hours of December 1st.

TCS has a market cap of over Rs 12.84 lakh crore, making it the largest IT firm and the second-largest company in India in terms of market share.

Notably, TCS announced the record date for buyback on November 25th, but since it was a weekend holiday, the share price turned ex-buyback on November 24th. So shareholders who hold TCS shares by the end of November 24th, are eligible for the buyback.

The buyback entitlement ratio for the reserved category of small shareholders is 1 equity share for every 6 equity shares held on the record date. While for general category shareholders, the ratio will be 2 equity shares for every 209 equity shares of TCS held on the record date.

Sharekhand explained how the buyback gives opportunity to existing small shareholders.

As per the brokerage, existing shareholders, who are holding TCS's shares for long-term investment in their portfolio worth less than Rs2 lakh as on record
date (25-Nov-2023), could use the buyback route and tender their shares (maximum of 57 shares), to get benefits premium buyback price of Rs4150 (around 19% higher than the prevailing market price).

Post the buyback settlement, the brokerage stated that 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.

Sharekhan said that the potential acceptance ratio in TCS buyback could be around 30-35%.

It said the acceptance ratio has been 100% during the previous buybacks in 2017,2018 and 2020. However, the acceptance ratio was ~24% during the last buyback in 2022. The official entitlement ratio is ~17% based on small investors. However, the experience shows that all shareholders do not participate in buyback and the final acceptance ratio could be at 30-35%.

Accordingly, Sharekhan's note said, "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."

Sharekhan's target price on TCS is a premium of 1.2% from the buyback floor price and a potential upside of nearly 20% from the current market price.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.