INSUBCONTINENT EXCLUSIVE:
TCS is the largest IT company in India.Tata Consultancy Services (TCS) has fixed 23 February 2022, as the record date for the purpose of
determining the entitlement and the names of the equity shareholders who shall be eligible to participate in its share buyback.In January
this year, the company had announced its biggest share buyback in the last five years of Rs 180 bn at Rs 4,500 per share.A share buyback is
a corporate action where a company buys back its own shares from its shareholders usually at a premium to the prevailing market price
potentially benefit from a trading opportunity by tendering their shares in the buyback and earn a return up to 83.1%.Sounds
This opportunity is for retail investors only, i.e
investors holding up to Rs 200,000 worth of shares of TCS.The quota for retail investors is always reserved at 15% of the total
buyback.Hence, of the 40 m shares being bought back by TCS, 6 m shares will be earmarked for retail investors.If we look at the past 3
buybacks, in 2017 when TCS announced its buyback at Rs 1,425, the market price at the time was approximately Rs 1,250
This meant the company offered its shareholders a premium of 14% to the market price.Similarly, in 2018, TCS offered to buy back shares at
Rs 2,100 compared to the market price of Rs 1,850, i.e
a premium of 14%Again in 2020, when TCS announced a buy back at Rs 3,000 it, was at 10% premium to the market price.At the current market
price of Rs 3,735, the premium is the highest at 20% with the buyback price fixed at Rs 4,500.So does it simply mean that a retail investor
can just buy shares worth Rs 200,000 at Rs 3,735 and sell at Rs 4,500 and pocket the difference as a profit?Alas, it is not that simple!This
is where the entitlement ratio comes into play
Entitlement ratio gives an indication of the minimum number of shares that will definitely be accepted in the buyback
It's always calculated on the record date.In the past, we have seen retail investors get 100% acceptance when they tendered their shares
let us take a conservative approach and assume that the acceptance ratio this time could be lower as a majority of retail investors are
likely to participate.We look at 4 possible scenarios below using simple calculations to arrive at potential possibilities using a strategy
to make money in the short term with minimal risk.This could help you decide if it's prudent to take part in this short-term
With the cap of Rs 200,000 for retail investors, an investor can purchase a maximum 44 shares.Hence at the CMP of Rs 3,735, our investment
would be for an amount of Rs 164,340.The buyback process is usually completed within 2-3 months
For the sake of this calculation, we assume the period of completion at 90 days from start of trade.Profit calculation based on acceptance
of shares tenderedLet us begin by looking at the acceptance ratio of 40%.Assuming that an investor purchases shares at the current market
price, as per yesterday's BSE close of Rs 3,735 and only 40% of his shares get accepted, the investor would make a profit of Rs 13,464 on
The investor still continues to hold the balance 26 shares which were not accepted in the offer
So, what happens next?The price of TCS could go up further over the next few months in which case, the investor could sell the balance 26
shares in the open market and the overall return could be even higher.However, on the other hand, let us assume that the price of TCS drifts
lower during the period of buyback
In that case, as per our calculation the breakeven price, i.e
already earned of Rs 13,464 on the 18 shares tendered, the investor would not make any loss on the balance 26 shares until the price falls
up to Rs 3,225.Below that price, the investor would start incurring a loss on this entire trade and the strategy would have been a
failure.However, looking at the fundamentals of TCS, its dominant position in the IT industry and the management's confidence in their own
stock which is accentuated by the fact that the company is willing to buy back its shares at a high premium, indicates a low chance of the
41.5% in case of acceptance ratio of 50%
In this case, the breakeven price per share of TCS is Rs 2,970.It's 58.2% in case of acceptance ratio of 70%
Here, the breakeven price per share of TCS is Rs 1,950.The return is 83.1% in case of acceptance ratio of 100%
In this case, the breakeven price is not relevant as all shares are accepted by the company.Final ThoughtsShares of TCS bucked the market
trend yesterday as the stock climbed over 1% following the announcement of the record date for its buyback offer
This was in sharp contrast to the 3% fall in the BSE Sensex.Investors may have bought shares hoping to tender them during the buyback and
make a quick buck as seen above.The stock has already corrected significantly in the last month creating a favourable risk-reward
price on strong fundamentals of a company that has been consistently rewarding its shareholders.This could be a good opportunity for short
term investors willing to take a well calculated risk to make a good return on their investment.Disclaimer: This article is for information
been edited by TheIndianSubcontinent staff and is auto-generated from a syndicated feed.)
