TCS: Buyback will boost cash utilisation, return ratios
Near-term price trajectory depends on premium, Sept quarter showing
The buyback announcement by TCS led to a 7.3 per cent jump in its share price to an all-time high on Monday.
TCS’ announcement was looked at in positive light by the Street, given that it is expected to improve the firm’s return ratios, reward shareholders, and enable it to use cash more efficiently.
While details are not known, analysts expect the buyback offer to range from ~18,000-20,000 crore. An analyst at a domestic brokerage says: “While the price is not known, past experience indicates that the offer should help boost return on equity (ROE) by 150-200 bps.” Though ‘other income’ will reduce, analysts say given the lower yields, a buyback is a more efficient way to utilise cash.
Reliance Securities’ Suyog Kulkarni believes the buyback balances the need to keep adequate cash for acquisitions, while ensuring consistent return of cash to shareholders. At the end of the June quarter, TCS had cash and cash equivalents of $6.5 billion (~48,000 crore).
In addition to a higher ROE, analysts believe the stock rally had other triggers.
While it is currently trading at ~2,706 a share, the Street expects the offer price to be in the ~2,800-3,200 range.
In the last buyback (of ~16,000 crore), premium to the closing price was at 15 per cent. If today’s price is taken as the base, the offer price could be at close to ~3,100. Second, there is optimism that tier-1 players will perform better in the September quarter, compared to earlier expectations. TCS, according to brokerages, could surprise on the sequential revenue growth front, led by demand recovery across verticals, easing supply side issues, as well as execution of the deals won in previous quarters.
Finally, TCS has been a laggard compared to its tier-1 peers and had some catching up to do. While the company’s stock was up just over 19 per cent, the stock gains for peers were twice that for the market leader. While Infosys delivered close to 38 per cent, Wipro’s gains were the highest at 50 per cent.
Though the TCS stock was up sharply, analysts believe the stock will stay at elevated levels in the near term with triggers being the buyback price, deal wins in Q2 and margin trajectory.
Further, if the promoters participate in the offer, the buyback could be a temporary relief to the overhang related to the buyout of the Pallonji Mistry family’s stake in Tata Sons.