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TCS rallies on news of a possible buyback; Morgan Stanley raises target price

India June 13(IM): Tata Consultancy Services (TCS) rallied nearly 2 percent in morning trade on Wednesday after India’s largest software exporter said that its board will meet on Friday to consider a proposal to buy back shares.

"... the Board of Directors will consider a proposal for buyback of equity shares of the Company, at its meeting to be held on June 15, 2018," TCS said in a filing late Tuesday.

Media sources peg the buyback to the extent of Rs 10,000 crore. TCS has said previously that it will pay out 100 percent of its free cash flows to shareholders. In the 2017-18 financial year, TCS made a 118 percent payout.

The stock has been in an uptrend so far in the year 2018, up 34 percent while on a 1-year basis, the stocks rose by nearly 50 percent. The stock is trading near its record high of Rs 1.837.

Last year, TCS announced a Rs 16,000-crore mega share buyback at Rs 2,850 apiece that closed on May 31. “For FY19, we have factored total payout of Rs 23,900 crore, in-line with TCS’s outlook for a payout of 80%-100% of FCF,” Urmil Shah, research analyst at IDBI Capital said.

“We see a high probability of the quantum of buyback in this year being at least at the same level as in FY18 or Rs 16,000 crore. If the buyback is done at Rs 1800 (near to CMP of Rs1,781), TCS would be able to buy back 2.32 percent of its outstanding shares,” he said.

IDBI Capital maintains a positive outlook on TCS as it forecasts to deliver the best YoY improvement in revenue growth in FY19 amongst large-caps. The brokerage firm maintains and ‘Accumulate’ rating on TCS with a target price of Rs1,731 based on 20x FY20E.

The latest buyback program from TCS is in line with management stated strategy of giving back 80-100 percent of free cash flows (FCF) to shareholders. In the last five years, TCS average FCF pay-out was around 80%.

“Last year, TCS had bought back 5.6 crore equity shares, representing around 2.85% of its total equity for around Rs 16,000 crore, which was around 118% of its FCF. We also expect Infosys, to come out with buyback program sometime in this year,” Sharekhan said in a note.

“As management has earlier indicated at return back to shareholders around $2 bn, and 70 percent of FCF (last year Infosys has also taken up the buyback program to the tune of Rs13000 crore.),” he said.

The global brokerage firm, Morgan Stanley maintains its overweight rating on TCS but raised its 12-month target price to Rs 2,010 from Rs 1,825 earlier which translates into an upside of 12 percent upside in the next 12 months.

There are many tailwinds which could take the stock higher such as strong global growth, US economy doing well, digital adoption and rupee depreciating.

Morgan Stanley expects margins can move toward 26-28 percent. The global investment bank raised EPS estimates by 4-5 percent to factor gains from rupee depreciation. The valuation should reflect superior profile, said the note.

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