Cash-rich Tata Consultancy Services (TCS) Ltd is walking the talk on its capital return commitment made to investors. It has announced a buyback of up to 4 crore shares with the IT company buying shares at ₹4,500 per share. This is nearly 17%, premium compared to its last traded price of the stock on the NSE when this buyback was announced.
According to analysts at Jefferies India Pvt. Ltd, the buyback size is 10% larger than the buybacks announced by TCS in previous years. Yet, they feel that while the buyback may be a near term catalyst, the stock’s rich valuations multiples offer limited scope for re-rating relative to its growth.
Shares of TCS trade at a one-year forward price-to-earnings multiple of around 31 times, showed Bloomberg data. As things stand, TCS is the most expensively valued Tier-I Indian IT stock. Analysts note that the stock’s FY23 valuation multiple is around 60% premium to its long-term average.
“The company is keeping its commitment of returning capital to investors, which is a good thing. But the buyback size of ₹18,000 crore works out to 1.08% of the total paid-up equity share capital. A buyback may lead to some earnings dilution but considering the size of TCS, this is too small to provide any significant upside trigger to the stock,” said an analyst with a domestic brokerage house requesting anonymity. It should be noted that TCS has also announced an interim dividend of ₹7 per share along with this buyback.
What this also means is that focus returns to fundamentals for the stock’s future performance and valuations. In Q3FY22, TCS reported a sequential constant currency revenue growth of 4%, beating consensus estimate of 2.1%. However, it lagged peer Infosys Ltd in this parameter, which reported a sequential constant currency revenue growth of 7%, much ahead of the consensus estimate of 3.7%. Further, TCS’ Ebit (earnings before interest and tax) margin performance has been a bit discouraging with the measure contracting 60 basis points sequentially to 25% in Q3. One basis point is one-hundredth of a percentage point. The company’s deal win momentum was healthy and demand outlook is expected to be strong.
Even so, TCS is likely to underperform Infosys on growth. “While TCS is set to record a 15%+ year-on-year constant currency growth for FY22, quite respectable on a standalone basis, it will underperform Infosys for the third year in a row that is rightly raising some concerns on relative underperformance and thereby valuation premium amongst Tier I techs,” said analysts from JM Financial Institutional Securities Ltd in a report on 12 January.
Post Q3 results, the TCS stock was trading marginally higher on NSE in early trading hours on Thursday.
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