Buyback, deal win to add to TCS’ earnings

Premium for buyback likely to be lower than last year, say analysts

Two important announcements after market hours on Tuesday, regarding share buyback and expansion of a mega deal, saw the Tata Consultancy Services (TCS) stock trading near its all-time high, before closing at ~1,824 (up 2.4 per cent) on Wednesday. The optimism is not without reason.

For one, TCS’ board will consider a buyback proposal on Friday which, if approved, should improve earnings, creating some headroom for the stock. Though the buyback details are awaited, analysts expect the pricing premium (buyback over current price) to be lower compared to last year’s offer.

“The buyback quantum will be similar to last year (Rs160 billion). We expect 510 per cent premium for TCS’ buyback as against around 30 per cent last year. Because, unlike last year, the buyback this time is coming when the stock is trading close to its alltime high, leaving little scope for premium,” says Vineeta Sharma, head of research at Narnolia Securities. The anticipated amount is about 58 per cent of its free cashflows expected in FY19, 2.3 per cent of its current market capitalisation, and 19 per cent of its FY18 consolidated net worth. While TCS may lose out on interest income to the extent of cash deployed to buy back shares, a large chunk of it would be compensated by reduction in capital. However, in the process, its return on equity ratio should improve and this should rub-off well on stock valuations.

Apart from this, TCS also expanded its partnership with M&G Prudential, which was announced in January 2018. This should add to TCS’ banking and financial services segment revenue— which contributed 32 per cent to its top line—and thus to overall earnings.

“The expansion of agreement will propel the company’s top line and improves the earnings potential for TCS,” says Harit Shah, research analyst at Reliance Securities.

TCS had posted flat profits in FY18 but indicated FY19 would be better. The analysts’ estimates of 12-13 per cent expansion in FY19 earnings should see some increase after these announcements.

A weak rupee will add to margins. Therefore, many analysts remain positive on the stock.