These days we are seeing companies coming with buyback offers. With investors seeing negative returns in the broader markets over the past 1.25 years, coupled with lower yield in fixed income funds these share buybacks seem like a prince charming riding the White Unicorn to redeem investors from the sin of equity investing; and providing the bailout. However, there is much more than the price that an investor sees in the buyback. This article covers the share buyback offer of Tech Mahindra.
Understanding Buybacks :
A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return. And because the company is bullish on its current operations, a buyback also boosts the proportion of earnings that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained. The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s EPS thus increases while the price-earnings ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles. (Source: Investopedia. )
Company Profile :
Tech Mahindra Ltd is an IT services and consulting company in India. It offers a variety of technology solutions and services in addition to business process services. The technology solutions include helping companies engage in cloud software, mobile solutions, network services, cybersecurity, and a variety of other options. The business process service is offered across various industries including telecom, financial services, retail, energy, hospitality, high-tech, agriculture, and food and beverage. The company’s approach includes cost reduction, process optimization, and ownership through automation and productivity improvements. Tech Mahindra generates approximately half of its revenue from the United States.
Competitor Comparison & Analysis :
Tech Mahindra is a Large Cap growth stock with an attractive P/E valuation at 16.33, along with the Price/Sales and Price/Book Value at 2.11 and 1.11 respectively. Its peers TCS and INFOSYS are overvalued at this point in time.
Price Vs Fair Value:
TechM is currently trading at an 8% premium at INR 799.30 over its fair price of INR 723.94, as of 15th March 2019. Between 2015 – 2017 it grossly under-performed the market and saw a good turnaround in 2018 & YTD with outperforming the market by 48.36% and 6.65% respectively.
Valuation & Operating Performance :
It has maintained the healthy Enterprise Value / EBITDA at 9.64 in 2018. Since 2017, TechM has steadily increased the RoA (Return on Assets) from 11.34% in 2017 to 14.28% on TTM (Trailing Twelve Months) basis. RoE (Return on Equity) saw improvement from 18.26% in 2017 to 22.81% TTM (Trailing Twelve Months) basis.
There has been an increase in a health dividend increase over the last 2 years, from DPS (Dividend Per Share) of INR 9 to INR 14. Trailing Dividend Yield and Dividend Payout Ratio has seen an increase from 1.15% to 1.94% and 21.74% to 30.26% from 2015 to 2018.
What turned good for TechM :
- Growth across segments – enterprise business, communications, digital, telecom.
- Multiple levers to trigger margin expansion.
- change in business mix
- yield management
- improvement in the performance of portfolio companies
- higher offshoring
- automation benefits and
- higher realization.
- The company’s valuations have nearly doubled in the past 18 months on the back of strong margin execution, and post the uptick from the announcement of the buyback
- There are some structural strengths in TechM’s business to drive much-improved growth over the medium-to-long term:
- Success in large deal wins and above-industry growth in the Enterprise segment is an encouraging indicator of improving competitive prowess.
- Network management services have potentially expanded the addressable market for TechM, with directly addressable spend standing at ~USD40b.
- TechM also has a sizeable scale in Engineering services, and the opportunity in the same can be leveraged, especially after the acquisition of Mahindra Engineering Services (MES).
What the future holds for TechM :
- Robust 5G opportunity to expand on.
- The Digital and Communication vertical would see enhanced momentum.
What does a Buy-Back Offer Mean :
As the company is having sound fundamentals and financials, the buyback would result in providing the boost to the company’s financial profile. Further, that, as the outstanding shares would reduce, the EPS (Earning Per Share) would increase, which would further reduce the PE ratio, which is good for the company.
What are Tax Implications on the Buyback Offer :
For buybacks that are not conducted through stock exchanges, that is, no securities transaction tax (STT) is paid, the long-term capital gains become taxable. The difference between buyback price and cost of acquisition is taxable as capital gains under section 46A of the Income Tax Act. Short-term capital gains are taxable according to slab rates, while long-term capital gains are taxed at 20% with indexation and at 10% without indexation benefit.