TCS, Wipro buyback: Should investors tender shares or is there more steam in bluechip IT stocks?

Information technology majors Tata Consultancy Services (TCS) and Wipro have announced plans to buy back shares from investors. While TCS will repurchase shares worth Rs 16,000 crore, Wipro’s offer size is of Rs 9,500 crore. Both TCS and Wipro are offering to buy back shares at a premium to their current market prices. Since the last week of March, TCS shares have gained 63% while Wipro stock has doubled in value. This stellar performance by the firms may make one wonder if they would miss out on further upside by participating in the buyback.

Wipro plans to buyback 23.75 crore shares or 4.16% of the paid up capital. Of this, 3.56 crore shares will be reserved for shareholders who own up to 500 shares of the firm. TCS, on the other hand, will buy back 5.33 crore shares or 1.42% of the paid-up capital.

Short-term gain

Analysts do see short-term opportunity for retail investors in both these buyback offers. “We believe that in case of TCS small shareholders should tender their shares to be benefitted from buy-back to grab the short-term gain,” Gaurav Garg, Head of Research, CapitalVia Global Research — a SEBI registered investment advisory told Financial Express Online. Even in the case of Wipro the buyback price is higher than the current market price, which may lure shareholders.

“Expect the Wipro buyback acceptance ratio to be in the range of 60% to 80% which will give potential return of 8.2% to 11%. We believe that it will be a lucrative trade for retail investors, from a buyback perspective. Any decline in current price before the record date could provide better opportunity,” Jitendra Upadhyay Senior Equity Research Analyst, told Financial Express Online.  For TCS, he believes the acceptance ratio will be in the range of 50%-75% which will potentially return just 5.4% to 8% to investors. Jitendra Upadhyay does not see any short-term opportunity for investors in the TCS buyback.

Calculations done by CapitalVia Global show that at a 33% acceptance ratio in the buyback, retail investors would make 2.87% in the TCS buyback offer. 100% acceptance ratio will yield a profit of 9.1%. In case of Wipro, 33% acceptance ratio would lead to a 2.2% profit margin, while 100% acceptance would result in 6.67% profit for retail shareholders.

The pandemic has shifted the world’s focus towards accelerating digitisation. “From the time of lockdown, all the major sectors got impacted like tourism, entertainment, FMCG, and manufacturing. However only IT and pharma sectors were the ones who emerged with new opportunities and hence forecasting a better performance in the future,” Gaurav Garg said. He sees most IT players growing by 15-20% over the next few years. “We expect Wipro buyback to be a good opportunity for small shareholders and TCS can be held for long-term considering the higher global presence supported by improvement in the overall economy going forward,” he added.