TCS buyback price is unlikely to be at a huge premium: Madhu Babu, Prabhudas Lilladher

Madhu Babu, Research Analyst - Institutional Equities, Prabhudas Lilladher, says that unlike last year’s buyback, this time it is expected to benefit the promoters and institutions more than retail investors.

Edited excerpts:

It has been a year since the Rs 16,000-crore buyback by TCS. Some say it could perhaps be at a 6% premium to the current market price. Is that a possibility?

Last year was a different scenario. When they started the buyback, the sentiment on IT was very low and pre-split, the stock was around Rs 2200. They gave a buyback at almost Rs 2850-2900. So, there was a lot of participation for retail and retail investors made good money.

This year, the scenario is completely different. Already, this stock is at 37% and the valuations are very full. TCS at 22 PE on FY20 earnings, is one of the costliest stocks. Even compared with Accenture it is now almost trading at par with a billion dollar market cap. This time, I am expecting the premium to be very modest and the buyback could most likely help the promoters.


Net-netm there would not be any change in FY20 earnings which will be around Rs 80. So, ROE will improve because of net worth as due to buyback, the cash outflow will be there. Compared to last time, when there was a lot of euphoria and lot of retail could make a good amount of money, this time, the stock is already up with very high price tag. Thus, promoters and institutions are likely to gain more.

It is a toss-up between evaluating a buyback proposal versus higher dividend payout. Why do you think the management is now coming out with another buyback programme?

Buyback is more tax efficient. The dividend tax is quite high. Already the management has said that every year 100% of the free cash flows will be returned to shareholders.

TCS is generating around Rs 27,000 crore of free cash flow. If they do Rs 18,000-crore buyback, another Rs 10,000 crore will be given as dividend. Now it is more of a mix of buyback and dividend for most of tier-I IT companies. I expect, there will be a couple of other buybacks in January next year.

Yes but as you are pointing out, you do not see great participation in buyback.

It depends on the price but this time I am not expecting a huge premium like last year.