TCS Group - Management Call Following AGM Notices on Capital

TCS's management yesterday held a short-notice management call to discuss issues around capital that were raised by the AGM notices. > What are the key items? The AGM notices ask for approval to allow the board to authorize the issuance of up to 5% of issued capital (about 10 mln shares, worth roughly $1 bln) over the next three years. It also asks for board authority to issue up to 1.5% of share capital per year to fund an expanded equity-based MLTIP, of which 1.1% would relate to the existing MLTIP and the remaining 0.4% would be in the form of equity options or warrants for new managers (and hence less dilutive, as their issuance would be linked to certain share price levels). > What is the rationale for these requests? The management gave several reasons. Regarding the former item, this is to enable TCS to have the capital available to deploy if needed to fund strong (and stronger than expected) domestic growth opportunities, but also within a tightening regulatory environment. Additional capital may also be needed to fund international expansion. For example, around $60 mln is likely to be initially injected into the Philippines venture. For the latter item, an equity-based MLTIP was cited as standard practice by technology companies, and a necessary tool in an increasingly competitive environment for top IT and management talent. It would also better incentive existing staff. Moving to an equity-based scheme from a cash-based KERP plan is also more efficient from a regulatory capital perspective for Tinkoff Bank given that the cash-based compensation was previously funded from its balance sheet, whereas this will be equity issuance from the holding company, which will not impact the standalone bank's capital ratios. > Does this raise overhang risks? The management was at pains to point out that this is a technical step that coincides with the annual AGM cycle and that it was just asking for permission for the board (which has been expanded and strengthened) to be able to decide on this issue at any time over the next three years. As to whether this creates overhang risks, while it does to some extent, 5% is ultimately not a very material chunk of share capital in our view, and we see mild overhang risks. Overhang risks could equally come from a possible sell-down by Oleg Tinkov after his voluntary lock-up extension expires in December. At the end of the day, we think the market can digest such issues as long as the fundamentals of the business remain robust, as they currently are. > Bottom line - this step makes sense given the moving parts. It echoes 2019's capital raise to some degree (maybe this time the news is less surprising, and the timing is still of course unknown), with the potent combination of very strong customer acquisition and credit growth against a backdrop of tightening regulation, but with the additional layering of international expansion on top. The expanded equity-based MLTIP makes sense to us in an increasingly competitive battle for talent.