TCS on Monday announced that it will do a buyback of 5.61 crore shares (representing 2.8 per cent of the outstanding shares) at a price of ₹2,850 per share. On Monday’s close’ the buyback price is at a premium of 14 per cent.

It makes sense for investors who hold TCS shares to consider selling in this offer, as it comes at a valuation of 20.76 times the expected EPS of 2016-17. Sample this:

The company’s estimated earnings per share for 2016-17 is ₹133. Post the buyback as outstanding shares reduce, EPS will be ₹137. At the current market price of ₹2,500 per share, the price earnings ratio of the stock is 18.2 times, however, at the buyback price of ₹2850, the PE comes to 20.76 times. Infosys is trading at 16 times its estimated earnings for 2016-17. Retail investors however should note that the acceptance ratio is going to be very modest.

The total public holding in the stock is 52.5 crore shares, of which 5.6 crore shares will be bought back by the company through the offer. This means only one in ten shares can be sold to the company in the offer. Since, the acceptance ratio is modest, it doesn’t make sense to buy the shares now to benefit from the high price offered for the buyback.

Not sparred much cash

TCS’ buy back announcement comes after years of allegations over the company keeping a lot of cash idle. But, again, since it is only for ₹16,000 crore, there is not much cash the company is actually spending.

In 2015-16, for instance, TCS generated about ₹21,581 crore of cash from operations. The total of cash and investments amounted to ₹32,533 crore that year, up from ₹22,898 crore in 2014-15.

As of end-December 2016, the company’s surplus funds totalled ₹38,831 crore.

If you see in the accompanying table, the company has spent very little of its cash in acquisitions or capex activities in the last 10 years. Dividend pay outs have been 30-40 per cent of profits and the balance has been parked in investments.

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