TCS board approves proposal to buy back up to 76 mn shares worth Rs 160 bn

At Rs 2,100 a share, this will mean a 15% premium over its current market price

The board of directors of Tata Consultancy Services (TCS), the country’s largest information technology services provider, on Friday approved a proposal to buy back up to 76 million equity shares worth about Rs 160 billion. The buyback price has been fixed at Rs 2,100 a share, a 15 per cent premium over its current market price. The promoters’ holding in the company now stands at 71.92 per cent.

This is the second year in a row when the Mumbai-headquartered firm has decided to go ahead with a share buyback programme in a bid to return excess cash to its shareholders.

“The board has approved a proposal to buy back up to 76 million equity shares for an aggregate amount not exceeding Rs 160 billion, being 1.99 per cent of the total paid-up equity share capital, at around Rs 2,100 per share,” the company said in a regulatory filing on Friday. The buyback would be conducted under the tender offer route, it added.

The announcement propped up the stock price of TCS, which ended up 2.75 per cent higher than its previous close at Rs 1,841.45 on the BSE. This helped TCS become the first Indian company to close the trading session with a market capitalisation of over Rs 7 trillion.

TCS conducted a similar share purchase last year in which it had bought back 56.1 million shares at Rs 2,850 each. The buyback had seen a sound response with a subscription of 221.39 per cent, or bids coming in for 124 million shares against 56.1 million shares on offer. Tata Sons had added over Rs 102.78 billion to its coffers from the previous buyback.

“We expect the buyback to be completed by the second quarter (September) of the current financial year,” said N Chandrasekaran, chairman of Tata Sons, at the annual general meeting of the company on Friday. As part of their capital allocation strategy, many Indian IT firms have conducted buyback programmes of late.

Infosys, the country’s second-largest software services firm, came out with such an offer last year to buy back Rs 130 billion worth of shares. Wipro had also bought back Rs 110 billion shares last year.

“I think regular buybacks will now be the norm for leading Indian IT firms, which is in line with what some of the US peers like Accenture have been doing for years,” said a top executive of an IT services company. “It’s good for the industry. IT firms have taken the lead in setting the new benchmark.”

Urmil Shah, research analyst and senior vice-president of IDBI Capital, said while the quantum of the TCS buyback was on expected lines, the price has come as a positive surprise. “The cash reserve level of the company may not come down after this buyback, as the accrual of free cash flow is likely to be in the range of Rs 240 billion in the current financial year against the share purchase offer of Rs 160 billion,” said Shah. It would, however, be difficult to ascertain the promoters’ holding as it depended on the shares tendered by them, he added.

Unlike some of the other large Indian IT services firms, TCS’ growth is predominantly organic in nature. However, the company’s performance has been quite consistent, backed by its early investment in the digital space. In the March quarter, the company posted double-digit revenue growth in the US dollar terms for the first time in the last 12 quarters.

According to Madhu Babu, research analyst at Prabudas Lilladher, the buyback will have neutral impact on TCS’ earnings per share (EPS). “The company has around Rs 400 billion of cash reserves and it is likely to add another Rs 260 billion this fiscal. In comparison, Rs 160 billion of buyback will not have any material impact,” Babu said.  

On the possibility of such offers coming from other IT firms, analysts said it would depend on the mergers and acquisitions strategy of a company and its future cash requirement.