The country’s largest software services exporter announced a ₹17,000 crore share buyback, where it will acquire 40.9 million shares at ₹4,150 per share, at a premium of 17.5% to its Thursday closing price of ₹3,542. Investors can tender the shares in the buyback to benefit from an arbitrage opportunity.
Around 6.15 million shares or 15% of the buyback are reserved for small shareholders whose holding is worth below ₹2 lakh on the record date, which is yet to be announced.
Depending on the acceptance ratio – the proportion of shares accepted to the total number of shares tendered – investors could get between 5% and 17%, according to ET’s calculations. The higher the acceptance ratio, the better the return for the investors tendering the shares.
At a 25% acceptance ratio and a market price of ₹3,542.25 (closing price on October 12) after the payout, investors can earn an absolute return of nearly 5% over the next 90 days.
Typically, the buyback process spans nearly three months, as it requires shareholder approval through a postal ballot.
At a 50% acceptance ratio, investors can make ₹21,336 on an investment of ₹1.7 lakh – a return of 8.72%. At 100% acceptance ratio, investors can make a profit of ₹29,172 or 17%.”For retail investors, looking at the past instances of acceptance, tender buyback arbitrage is a lucrative opportunity,” said Sriram Velayudhan, vice president-alternative research at IIFL Securities. “Based on the most recent reported shareholding data, we have formulated a 25% acceptance expectation, but this may vary due to fluctuations in retail shareholding, and the figures considered will revolve around the record date of the buyback.”
The acceptance ratio in TCS’ previous buybacks in 2017, 2018 and 2020 was 100% for retail investors, while in 2022, it was around 20%. Small shareholders held 4.31% of the company’s total paid-up capital as of March 2023. The exact number of eligible shareholders as on the record date will be available in the letter of offer, which will be posted within two weeks after the record date.
Kotak Institutional Equities said TCS has had regular share buyback programmes through the tender route in the past six years. The previous buyback was larger (₹18,000 crore) and at a higher stock price (₹4,500/share), said the brokerage.
TCS shares have underperformed the Nifty over the last couple of years on concerns about its business prospects amid uncertainty over the health of the US and European economies. Its shares declined 4% in two years compared to Nifty’s 12% returns during this period.
“Regarding buyback acceptance, there has been a decline in acceptance ratio amid increased awareness and active participation by retail investors,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.
“From 2017 to 2020, retail acceptance was 100%, but in 2022, it dropped to 15-20%. Similar acceptance rates are anticipated in this round while the exiting holders should tender their shares with 20% acceptance in mind.”