Tech Mahindra’s Rs 1,956-cr share buyback: Should you tender your shares?

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Vineeta Sharma of Narnolia Financial Advisors said investor with a short term, one-year horizon may tender shares for the buyback, while those having a long term horizon may continue holding the stock.

Tech Mahindra, the country’s fifth largest IT company by market capitalisation, is set to buy back from shareholders up to 2.05 crore shares worth Rs 1,956 crore at a price of Rs 950 apiece. Its peers TCS, Infosys and HCL Technologies also completed their buybacks earlier.

Generally, the cash-rich company buy back shares to support price as well as to distribute cash among shareholders. It is also seen that when the stock price falls sharply despite strong fundamentals, the company uses share buyback to increase trust among shareholders.

A share buyback is a corporate action wherein a company takes back shares from its shareholders at a price higher than the market price. In doing so, the number of outstanding shares in the market reduce. This allows companies to invest in themselves.

So should shareholders tender shares in the buyback?

Moneycontrol spoke to several analysts about what investors should do and they are mixed in their opinion for short term. Experts are though confident that one should hold the stock for long term.

“Minority shareholders, especially retail shareholders, should participate in the buyback and hold on to rest of the shares for long term,” Sameer Kalra, Founder & President (Research), Target Investing said.

This buyback is more like a replacement of dividend in more tax-efficient manner and the amount announced is 2.7 percent of market cap which is more like a dividend yield, he added. “If investors do not participate they forego the outgo.”

Vineeta Sharma, Head of Research, Narnolia Financial Advisors also said investor with a short term, one-year horizon may tender shares for the buyback, while those having a long-term horizon may continue holding the stock.

Assuming 10 percent of shareholders in retail segment tender shares in the buyback, the acceptance ratio is expected at 45 percent, according to Sharma, who said at CMP of Rs 825, this generates an expected tax-adjusted return of 6.1 percent assuming post buyback price to be Rs 841, valuing 17x FY20E EPS.

AUM Capital also advised participating in the share buyback.

On the other hand, Shubham Kakrania, Research Analyst at Stewart & Mackertich Wealth Management said one should hold the investment for the long term since the buyback size is small and he believes the strong growth visibility in the telecom vertical on the back of large deal wins in last few quarters fares well for Tech Mahindra in the longer term.

He believes with the pressure on telecom industry waning, and enterprise business showing good momentum on the back of manufacturing and public services, the growth trajectory looks much stronger for Tech Mahindra.

Astha Jain, Senior Research Analyst at Hem Securities also agreed with Shubham saying as the acceptance ratio is around 5-15 percent, one should be better to hold the stock for long term rather than tendering shares in buyback. She expects the stock to surpass Rs 1,000 levels in next one year.

Meanwhile, the outlook on the stock as well as entire sector is positive, experts said. Here are their comments:

Shubham Kakrania

We have a buy rating on Tech Mahindra with a target price of Rs 954 per share and it is one of our top pick among IT stocks.

Central to our investment rational is our view that Tech Mahindra is nicely putting in place the building blocks to win big in 5G. The industry expects 5G spending by the carriers to pick up in CY19, with the company getting its fair share of the network services piece from FY21 onwards. This holds the potential to drive double digit growth in telecom revenues.

Further, enterprise is likely to maintain good growth aided by higher digital revenue and strong total contract value. Margin can improve modestly from here, given the scope in profitability improvement among subsidiaries.

Sameer Kalra

We have buy rating on the company and it is one of top recommended IT stocks post Infosys & TCS.

Tech Mahindra has won big deals in past one year which have started showing into the revenue line and telecommunication segment which is biggest contributor to the revenue and margins is showing reversal since last two quarters. There has been improvement in cashflows of the company which should increase from hereon.

Vineeta Sharma

We expect Tech Mahindra’s EPS to grow at 14 percent CAGR for the next 2 years led by a strong revival in communication, continued deal wins ($440 million win during the current quarter) and improvement in the enterprise segment.

5G is expected to roll out late in FY20 should provide impetus to growth. Margins are expected to be bit lower level in FY20 as some pressure are expected due to addition in workforce and training and localization challenges which most of the IT companies are suffering from.

We have a positive view on the IT sector as digital opens up a new platform of growth. We expect return on equity to sustain around 21 percent.

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