TCS Buy Back: Scenario Analysis

TCS board on June 15 had announced a Rs16,000 crore buyback. The company announced that it will buyback 7.62 crore shares, or 1.99% of its equity, through a tender offer at a price of Rs2,100 per share. TCS is buying back the shares at a premium of 14% to the current price of Rs1,852 (as on June 26, 2018) per share. 

As per SEBI regulations, 15% of the offer size i.e. Rs2,400 crore will be reserved for small shareholders holding shares up to a value of Rs2 lakh as on the record date and the acceptance ratio for this category of investors normally works out higher. 
 
Scenario Analysis: Simple

Scenario 1: Acceptance Ratio at 60%, Assume CMP: 1800
	Number of Share	Price	Value
Tendered	95	1800	171,000	Sale Value
Accepted at Buy Back	57	2100	119700	188100
Sold in the Market	38	1800	68400	Return
				10.00%
Scenario 2: Acceptance Ratio at 80%, Assume CMP:1800
	Number of Share	Price	Value
Tendered	95	1800	171000	Sale Value
Accepted at Buy Back	76	2100	159600	193800
Sold in the Market	19	1800	34200	Return
				12-13%
Scenario 3 : Acceptance Ratio at 100%, Assume CMP: 1800
	Number of Share	Price	Value
Tendered	95	1800	17100	Sale Value
Accepted at Buy Back	95	2100	199500	1,03,800
Sold in the Market	0	1800		Return
				16-17%

 

TCS Strategy : Buy 95 Shares in 5 different Demat Account(25 shares in other) & Sell 1lot(500) of Future
Gain and Loss Metrics :TCS (Assuming Cash Price:1800 and Future Price: 1805), Acceptance Ratio :60
Stock Fall By %	Cash Price	P/L in Cash	P/L in Future		Profit from Buy back	Net Profit
3	1746	-10800	29,500		90,000	108,700
5	1710	-18000	47,500		90,000	119,500
10	1620	-36000	92,500		90,000	146,500
Gain and Loss Metrics :TCS
Stock up By %	Cash Price	P/L in Cash	P/L in Future		Profit from Buy back	Net Profit
3	1854	10,800	-24500		90,000	76300
5	1890	18,000	-42500		90,000	65500
10	1980	36,000	-87500		90,000	38500

Remarks :
The acceptance ratio also plays a crucial role. The acceptance ratio indicates how many shares the company will be able to accept in a buyback offer for every 100 shares tendered by shareholders. Simply put, it is the number of shares offered for buyback / total number of outstanding shares.  Whatever the ratio, it will reduce the effective acquisition price of the holding. The short-term capital gains tax of 15% and transaction cost, will reduce some profit, but, still it will not be a bad deal. And, if there’s a post-buyback slide in prices, the investor could use that as a second entry point. In fact, advance level of derivative strategy is available for HNI investor, but this unique strategy implementation has to be through "Derivative expert" only for their risk management.