TCS' Rs 16,000 cr buyback opens this week. Should you tender your shares?

Information technology (IT) major Tata Consultancy Services' (TCS) Rs 16,000 crore share buyback programme is scheduled to open on December 18 (Friday). In November, TCS shareholders had approved a proposal to buy back up to 5.3 crore equity shares, or 1.4 per cent, of the total paid-up equity share capital of the company at Rs 3,000 apiece for an aggregate amount not exceeding Rs 16,000 crore. The buyback offer will close on January 1, 2021.

So, should you tender your shares in the repurchase programme?

Analysts say the stock is unlikely to see a significant jump in the interim period as TCS, along with other IT stocks, have risen quite well from the March 2020 lows, discounting the opportunities arising out of the Covid-19 pandemic. Hence, one can consider tendering their shares in the buyback offer.

TCS has rallied a huge 85 per cent from its March low. In comparison, the benchmark S&P BSE Sensex has rallied around 80 per cent from its March low, BSE data show (as of December 11).

"TCS shareholders can offer shares in buyback as there is a spread between the current price and the buyback price. This is despite the fact that all of the offered shares may not be accepted. For investors who are bullish on TCS for the long-term, the post buyback price fall (though not expected to be large) will offer an opportunity to buy back an equivalent of the accepted shares from the market. For shareholders who are not so bullish, the shares may be sold in the market," suggests Deepak Jasani, head of retail research at HDFC Securities.

Valuations of the stock may no longer be very attractive; however, we don't see a large downside from the current levels, though the rise from here may also be gradual, Jasani adds.

Abhimanyu Sofat, head of research at IIFL Securities agrees with this view. "We feel that around 70-80 per cent of the shares will get tendered in the retail segment. It does make sense to tender shares in the repurchase programme. It is unlikely that the stock will go beyond Rs 3,000 any time soon. However, lower acceptance ratio remains the key risk," Sofat says.

Acceptance ratio is the number of shares accepted in a buyback offer as compared to the total number of shares tendered. As per Sebi norms, 15 per cent of the total buyback size is reserved for small investors with holdings up to Rs 2 lakh in the company. Hence, the number of shares reserved for small shareholders will be nearly 0.8 crore shares (15% of 5.3 crore shares). So, an increase in retail holding will lead to lower acceptance ratio.

Sudip Bandyopadhyay, group chairman at Inditrade Group of Companies, on the other hand, believes TCS remains a good long-term bet and one should stay invested.

"If you are a long-term investor, frontline IT stocks are a good bet to remain invested. If you believe in the globalisation story and the technology going forward, TCS is a good bet to remain invested. But, if you had bought it for a limited period of time and want to book profit, this buyback offers a good opportunity as the buyback price is attractive," Bandyopadhyay says.

Further, the buyback will be tax-efficient as capital gain taxes will not apply here. Hence, traders/investors who had a short-term horizon can definitely consider tendering their shares in the buyback programme, says Jyoti Roy - DVP- Equity Strategist at Angel Broking.  The analyst also believes that if someone has an investment horizon of three years or more, they should stay put.