TCS Buyback: How You can Make Potential Returns up to 83.1% Using this Strategy

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.

TCS is the largest IT company in India and also one of the world's largest providers of IT services.

Short term retail investors could potentially benefit from a trading opportunity by tendering their shares in the buyback and earn a return up to 83.1%.

Sounds interesting?

Read on to find out how...

TCS Buyback - A Short Term Opportunity for Retail Investors

At the onset, let us be clear. 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 in the TCS buybacks of 2017, 2018, and 2020.

Further, the stock price of TCS touched its buyback price before the tendering period.

However, 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 opportunity.

TCS Buyback Details

Buyback Price	4,500	4,500	4,500	4,500
Cost of Purchase (BSE Close Price on 14-02-2022)	3,735	3,735	3,735	3,735
Buy Quantity	44	44	44	44
Amount Invested	164,340	164,340	164,340	164,340
Profit per Share	765	765	765	765
Acceptance Ratio	40%	50%	70%	100%
No of Shares Accepted	18	22	31	44
No of Shares Not Accepted	26	22	13	0
Profit	13,464	16,830	23,562	33,660
% Return on Investment	8.19%	10.24%	14.34%	20.48%
Assumed Timeline of the Buyback Process (No of Days)	90	90	90	90
% ROI for an Investment Period of 120 Days	33.23%	41.53%	58.15%	83.07%
Breakeven Cushion	510	765	1,785
Breakeven Price (Balance Shares Not Accepted)	3,225	2,970	1,950

Source: Equitymaster, Company

Let us look at each scenario and determine the various outcomes.

We start off by assuming the price on record date is at Rs 4,500 per share. 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 tendered

Let 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 18 shares accepted by TCS.

This results in a return of 33.2% on his investment of Rs 164,340 over a 90-day period.

However, this is not the final return. 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. the price at which one would make no profit or loss on the entire transaction works out to Rs 3,225.

This simply means because of the profit 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 stock price falling that much over the next few months.

However, seasoned investors know there are no guarantees in the stock market. One has to make presumptions based on their own research and assessment.

Now, based on the same working, we can see potential returns of 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 Thoughts

Shares 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 opportunity for traders and investors.

Even if a retail investor doesn't tender his shares, he could potentially gain from the rise in share 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 purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...