TCS again announces a BUYBACK of Shares – What it means to the investors?

TCS- a flagship  Software Company in the  Tata Group is one of  the largest corporate Companies  in terms of revenue and profits apart from Market capitalization in the recent past. TCS shares have always been the darling of investors for,  the company scales greater heights year after year despite being in a high-tech  area of operations and challenging competition from the peers and still rewards the investors seamlessly.

Last week, the Board of Directors of TCS approved a proposal to buy back up to 76 Mn Equity shares valuing to the tune  of Rs. 16,000/- cr. The  buyback price has been fixed at Rs 2100/- per share against a quote of Rs.1829/- per share today- a bog bonus for the  investors! The buy back will shrink the capital by just 2 %.  This is the second year in a row when TCS decided to go in for a buyback with an intent to return the excess cash it holds, to the shareholders. Last year the company bought back 56.1 Mn shares @ Rs 2850/- per share. During the last six months cash rich companies  numbering 34 have gone in for buyback of shares.

Why do companies go in for buyback?  When companies have surplus cash and liquidity is more than what they can perhaps deploy in expansion (read as organic growth) or  for inorganic growth by merger and acquisition they think of buyback.. Other modes of investments are also not profitable.  So idle cash is a ‘non-earning asset’  and hence needs to be refunded to the shareholders who have assisted the company when it was in dire need which of course  is a gain for the investors. This move by the company including TCS  does  send strong signals to the share market and their investors that the company is financially on a strong wicket and they are confident of their future  growth and performance even with  less capital outlay. Having excess capital is a liability at least in terms  of  dividend to many besides periodical servicing costs, taxes  etc., A buyback notice may trigger a rise in the share price but the aroma slowly dwindles down soon after the  date.  Actually the Company buys back  the shares and not the promoters, with the excess cash. The company will have better controlling stake in the company. Such shares are normally kept separately under the head ’Treasury Stock’ and may be used for ESOPs or resale later.

While there are two modes of doing it-1.through open tender from existing shareholders. 2. By book-building process or stock exchanges, the former is popular. Buybacks do improve the financial ratios such as EPS,PE, BV etc., There is also another side of the buyback-some unscrupulous  promoters use it-nay- abuse it – to boost the share price temporarily and get out with their selling of their own shares with premium in the market. So prudent investors may now avail the buyback scheme of TCS at a higher price and if need be, buy it later at a low rate in the market.

Wish you all a Happy and value investing!

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