Is TCS buyback aimed at pumping money into parent?

Mumbai: Share buybacks are usually a signal by company managements that its stock is undervalued.But after India’s largest software services exporter Tata Consultancy Services, one of the best-performing and richly-valued blue-chip in recent months, announced plans to repurchase shares, market participants are going beyond the traditional interpretation of the move.Analysts and investors are wondering whether the country’s second-largest company by market value is buying back shares at this juncture only to indicate a rosy outlook or to pump money into its parent, Tata Sons, in a more tax-efficient way.The timing of the buyback, coming as it does on the heels of the conflict between Tata Group and its biggest minority shareholder Shapoorji Pallonji (SP) Group, has triggered speculation that the move could be aimed at transferring money from the cash-rich TCS to Tata Sons, the group’s holding company, to bolster its money chest.With the Pallonji Mistry family offering to sell its 18.4 per cent stake in Tata Sons back to the group, a section of the market has been worried that the Tata Group might sell a portion of its stake in TCS — the conglomerate’s cash cow. After falling 5.5 per cent on September 24 after the SP Group’s announcement, TCS shares have remained almost flat since then till the announcement of the buyback on Monday when it rallied 7.3 per cent.TCS could announce a share buyback of as much as Rs 18,000-20,000 crore in its board meeting on Wednesday, said analysts. The company can repurchase shares worth up to Rs 22,000 crore with shareholders’ approval.“One of the reasons why TCS is doing a buyback is to ensure cash flows back to the promoters who at this point seem to be in need of funds because they want to invest in Tata Motors and a bunch of other things,” said Deepak Shenoy, founder, Capital Mind. As of June 30, TCS had net cash of Rs 51,100 crore. In 2017 and 2018, the company had carried out buybacks of Rs 16,000 crore through the tender process. Analysts said the share buyback price is likely to be around 15 per cent over the Tuesday closing price of Rs 2,718.Analysts said buyback through the tender route is essentially an alternative form of dividend distribution. But after the government announced taxes on dividends received, companies prefer buybacks over dividend payouts. “From Tata Sons’ standpoint, buyback has a lower tax incidence to the extent of 6 per cent as we assume that dividend tax incidence for Tata Sons will be about 25.2 per cent,” said Kawaljeet Saluja, analyst, Kotak Securities. “Buyback attracts a tax of 23.3 per cent in the hands of the company whereas dividend attracts tax in the hands of shareholders.”Some analysts are convinced that the buyback is just a tax-efficient way of transferring money to its parent rather than signalling strong prospects. TCS shares have rallied nearly 19 per cent in last one month compared to the 3 per cent advance in the Nifty. The stock has gained 64 per cent in the past six months compared to the 44 per cent surge in the Nifty during this period.The rally has, however, made its valuations rich. TCS is currently trading at a one-year estimated price-to-earnings (PE) ratio of 30.73 compared with its five-year average of 21.04. Infosys is trading at an estimated PE of 24.32 while HCL Tech, Tech Mahindra and Wipro are valued between 18.5 and 19.5 times their FY21 earnings.

from Economic Times https://ift.tt/3izldNH