MOSL: TCS (Neutral)-Announces buyback: To return ~40% of cash to shareholders

TCS: Announces buyback: To return ~40% of cash to shareholders

(TCS IN, Mkt Cap USD104b, CMP INR1792, TP INR1750, 2% Downside, Neutral)

• TCS Board approved the buyback of 1.99% of paid-up equity (~76m shares) at INR2,100, implying total return of INR160b (following a special resolution through a postal ballot). The buyback is proposed to be made under the tender offer route.
• This amounts to ~38% of the company’s INR426b cash balance and ~18% of net worth.
• This alone implies a payout of ~50% on our FY19 PAT estimate. Above this, the normal dividend payouts of TCS would only increase the ratio.

Buyback slightly negative on EPS; positive on return ratios

• The buyback should result in 2% accretion to EPS from a reduction in the share count. However, the cash reduction would result in a decline in other income, which is dominated by a yield of 8% on a pre-tax basis on the cash. Other income foregone would be to the tune of INR12-13b, which would result in an adverse EPS impact of ~2.5%, implying net EPS decline of ~50bp. However, given the reduction in networth, the RoE is likely to improve by 2pp.

75% payout maintained historically

• Over the last three years (FY15-18), TCS generated cumulative FCF of INR637b and paid out INR473b in the form of dividends and a buyback. This totals 75% of FCF generated.
• In FY18, the combination of dividend and buyback (INR160b) led to a payout of 115% of FCF. However, the company has been maintaining that it would pay back 75-80% of FCF on a sustainable basis.
• The INR160b buyback announcement should amount to ~60% of FCF for FY19E. The rest/more should be made up by dividends through the year.