TCS BUYBACK OPPORTUNITY

TCS has announced the `18,000Cr buyback where it will be buying back 4 Cr shares at `4,500 per
share, at a premium of ~14% from the current close of `3,897.9. The buyback aggregates to 1.08% of
the current fully paid-up equity shares. The buyback is via tender offer route and the small
shareholder reservation, i.e., shareholders with value of holding less than `2 Lks based on closing
price as on specified date, is 15%. As the buyback price is kept at `4,500, one can buy up to 44
shares (2,00,000/4,500).
From a fundamental perspective, TCS has a proven track record of creating value for the
shareholders. It has been able to command a premium vs. other Large Cap IT peers on account of
consistent performance (historically vs. large peers) on the back of it being ahead in most areas like
capabilities/offerings, execution, entry and scaling up in new markets etc. Moreover, it has a best-in-
class capital allocation policy which will result in cash being continuously returned to shareholders.
15% reservation for retail shareholder mean 60 lakh shares out of 4 Cr shares. This implies that
0.16% of the retail shareholding will be taken up from the total outstanding shares. As of March 2021,
retail shareholders held 0.6% of the total paid up capital of the company. Hence, the entitlement ratio
comes to ~27%. Below is the historical retail acceptance ratio for the past two buybacks:

Historical Ratio 2020 2018

Retail Acceptance Ratio 100% 100%

Here is the payoff through different acceptance ratios when the client purchases in Cash.

Clients purchases 44 shares @CMP ₹3,900 Acceptance Ratio

Client Investment 1,71,600 1,71,600 1,71,600 1,71,600

Assuming Small Shareholder Acceptance 35% 50% 65% 80%

Shares held 44 44 44 44

Shares Tendered 15 22 28 35

Buyback Price 4,500 4,500 4,500 4,500

Pay-out received 67,500 99,000 1,26,000 1,57,500

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Profit 9,000 13,200 16,800 21,000

Return on Investment 5% 8% 10% 12%

 Below is a table showing the sensitivity analysis of the expected return on investment after
incorporating different acceptance ratio and stock price movement.
Sensitivity Stock price movement
Total Return --> 12% -15.0% -7.5% 0.0% 7.5% 15.0%
20% -9% -3% 3% 9% 15%
Acceptance

35% -5% 0% 5% 10% 15%

50% 0% 4% 8% 11% 15%
65% 5% 8% 10% 13% 15%
80% 9% 11% 12% 14% 15%
100% 15% 15% 15% 15% 15%

Hedging Strategy Using Futures w/ Multiple Accounts

If there is a possibility of having four accounts at family level then, one can buy 44 shares in each
account (total 176 shares) at approximately `3,900 per share (current level) on or before the
record date and then sell 1 lot (150 Qty) of March ‘22 futures at approximately `3,924 (current level)
in one account on/after the ex-date. In case of a moderate of 50% acceptance, we would need to
cover additional 62 shares as we would be left 88 shares after the acceptance to hedge the entire
short position and hence recommend to do so on/after the ex-date. In case of higher than
anticipated acceptance, the number of shares to be bought back will increase proportionately and
can be done upon finding out the outcome of the acceptance ratio (generally 7-14 days post
tendering). In case the buyback spills over to the ensuing month, the future position can be rolled
over.

Strategy Involving Futures

Buy 44 shares in 4 accounts 176
At (`) 3,900.00
Margin Requirement for future contract 1,25,000

Total Investment (`) 8,11,400

Assumption Shares Price (`) Value (`)

Initial Purchase 176 3,900.00 -6,86,400

Tendered in Buyback 50% -88 4,500.00 3,96,000
Sell 1 lot of March 22 Futures -150 3,924.00 5,88,600
Cover Balance Position w/ Price Impact 0.00% 62 3,900.00 -2,41,800
Total Profit/Loss 56,400

Return on investment 7.0%

`

Based on the past price action there has not been a significant move in price after the ex-date.
Once we have hedged the position, a mild up move of 2-3% would marginally reduce the profit for
this strategy. We have taken 50% acceptance and no change in price as the base case scenario.

Price movement -15% -7.5% 0% 7.5% 15%

Price 3,315 3,608 3,900 4,193 4,485

Profit 92,670 74,535 56,400 38,265 20,130
Profit % 11.4% 9.2% 7.0% 4.7% 2.5%

At the same time, any price correction will result in returns from this strategy moving towards ~10%
(50% acceptance assumption) and higher if the acceptance ratio is well above expectations.
In case the acceptance ratio is 80%, the return on investment would be ~11%. There is no need to
hedge if it is announced that the acceptance ratio is 100%. Hedging would be required only when
the acceptance ratio is less than 100%.

Risks
 With the run up to the record date, an increased buying by the retail shareholder can lead to
a sharp increase in their shareholding. This can lead to a smaller number of shares getting
accepted.
 Delay in approvals as has been seen in past transaction.
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