What should investors do now that TCS has released its third-quarter results and announced a buyback

The stock of TCS rose 2% in early trading on January 13 after India’s most important IT services business posted stronger results for the quarter ending December 2021 and announced an interim dividend and share repurchase. Tata Consultancy Services announced a consolidated net profit of Rs 9,769 crore for the quarter ending December 2021 on January 12, up 12.3% year over year.

Last year, the business declared a consolidated profit after tax of Rs 8,701 crore in the same quarter. PAT was Rs 9,624 crore in the September quarter. Its consolidated revenue for the September-December quarter was Rs 48,885 crore, up 16.4% from the previous quarter, with significant double-digit growth across all verticals, fueled by solid contract wins and increased corporate digital spending.

The quarter’s sales were USD 6,524 million, rising 14.4% year over year and 3% quarter over quarter. The company’s board of directors authorized a share repurchase of Rs 18,000 crore at Rs 4,500 per share. The business has announced an interim dividend of Rs 7.0 per share, payable on February 7, 2022, with a record date of January 7, 2022.

What is a stock repurchase and what does it signify for investors?

When a firm buys back its shares from investors or stakeholders, it is known as a share buyback or share repurchase. It may be seen as a tax-efficient alternative to returning money to shareholders. Even after accounting for the 10% tax on long-term capital gains, buybacks remain tax-efficient (LTCG). When a company wants to improve market demand, it usually opts for share repurchase. Share buybacks lower the number of shares in circulation, increasing the value of the stock and profits per share (EPS).

When a firm buys back shares, the number of outstanding shares and the capital base are reduced. To that degree, it boosts the company’s EPS and ROE. If the EPS rises, the stock price should rise as well, providing the P/E stays equal. Indian IT firms often have a lot of cash, but it comes at a cost. As a result, a repurchase is an excellent way to return capital to shareholders.

Angel One’s Outlook

TCS’ sales increased by 4% QoQ cc, above forecasts, and the rise was broad-based across verticals, which is a healthy sign. With a total value of US$7.6 billion, the transaction wins were particularly impressive. Client-led digital transformation projects will benefit the organization, and it will be better positioned against the competition to combat margin concerns. We have a favourable perspective on the sector and the stock due to the structural tailwinds in the Indian IT services industry and TCS’s good capital allocation strategy.

Further Key Takeaways

The transaction TCV of USD 7.6 billion is similar to the previous four-quarter average. The EPS forecasts for FY22-24 have been modified by 0-1 percent. It finds a high consensus margin projection of 26% for FY23, but buybacks may help in the short term.

TCS has the finest capacity to meet and seize growth opportunities, as they expect strong demand to continue in CY22. The revenue performance in Q3 exceeded the high end of the street’s estimates. The management discussion backed up predictions for significant growth in CY22, even though margins have underperformed but are not a cause for worry.

The revenue was more than expected, but the margin shortfall cancelled any profit gains. TCS is well positioned to take advantage of expected industry expansion, given its size, capabilities, and portfolio breadth. TCS has maintained its market leadership position and shown best-in-class performance continuously. This gives the corporation plenty of flexibility to maintain its industry-leading margins while still demonstrating exceptional return ratios.

As supply side constraints ease in FY23, margin expansion opportunities emerge, fueled by lower subcontracting costs, better pricing, pyramid optimization, a best-in-class supply side engine, and revenue growth leverage.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.