TCS Buyback Near-Term Positive, But Earnings Neutral: Analysts
TCS share buyback largely earnings neutral: Morgan Stanley
The buyback of shares by Tata Consultancy Services Ltd. (TCS) is a near-term positive for the stock, but will unlikely lift the software exporter’s bottom-line.
That’s the verdict coming in from some of the top brokerage houses on TCS’ plan to buy back shares worth up to Rs 16,000 crore announced on Monday.
Assuming about 7 percent yield on cash, we estimate a buyback will lead to lower net income of about 2.7 percent, which is similar to reduction in share, making a buyback largely earnings neutral.Morgan Stanley Report
The buyback price of Rs 2,850 per share is a 14 percent premium to the stock’s closing price on Monday. The price is also higher than the all-time-high for the stock.
Analysts at IDBI Capital forecast the share buyback to have an impact of 2 percent on TCS’ financial year 2017-18 earnings per share (EPS), whereas Kotak Institutional Research sees the buyback being largely EPS dilutive.
This buyback may be EPS dilutive as the post-tax yield on excess cash is higher than earnings yield.Kotak Institutional Equities Report
Positive For Stock?
TCS’ desire to return excess cash back to shareholders is a positive, analysts said even as they maintained their cautious stance on the stock.
Multiple portfolio-related headwinds and risks from protectionist measures, among others will impact TCS more than peers, Kotak Institutional Research said. IDBI Capital expects TCS to become more aggressive on mergers and acquisitions (M&A) than before.
Even after factoring the share buyback and dividend payout we forecast TCS to have surplus cash of Rs 449 billion (Rs 44,900 crore) by the end of fiscal 2018... We expect TCS to focus on healthcare vertical in the U.S., Europe and platforms for M&A.IDBI Capital Markets Report
Here’s a quick snapshot of analysts’ view on the TCS buyback:
IDBI Capital Markets & Securities Ltd.
- Verdict: Buyback provides near term support to the stock.
- Impact on earnings: Buyback to have a small impact on FY18E EPS and return on equity (RoE).
- Rating/target price: Maintains ‘Hold’ with target price of Rs 2,245 per share.
Kotak Institutional Equities
- Verdict: Return of excess cash back to shareholders is a positive.
- Outlook: Multiple portfolio-related headwinds, risks from protectionist measures weigh.
- Impact on earnings: EPS dilutive.
- Rating/target price: Maintains ‘Cautious’ stance, with unchanged target price of Rs 2,415.
Antique Stock Broking Ltd.
- Verdict: Buyback is a tax efficient way of returning cash to shareholders.
- Outlook: Expect company to announce a final dividend of Rs 30 to 35 in addition to the buyback.
- Impact on earnings: RoE and EPS accretive.
- Rating/target price: Maintain ‘Hold’ with target price of Rs 2,500.
Nirmal Bang Institutional Equities Research
- Verdict: Buyback was always on the cards.
- Outlook: Growth unlikely to accelerate beyond single-digit level on a sustainable basis.
- Rating/target price: Retains ‘Sell’ rating with a target price of Rs 1,983.