TCS Buy Back: Scenario Analysis

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.

Jun 27, 2018 09:06 IST IIFL Derivative Desk Raushan Kumar |

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. 

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