HCL Technologies share price fell as much as 2 percent in morning Friday on account of profit booking after the company announced share buyback in a board meeting on Thursday.
The scrip price rallied 8.6 percent from Rs 925.40 to Rs 1,005.30 in previous six consecutive sessions, before the share buyback announcement.
Today’s correction suggested that the buyback news seems to have already priced in. The stock price was quoting at Rs 994.25, down Rs 11.05, or 1.10 percent at 09:50 hours IST.
On Thursday HCL Technologies said it would buyback fully paid up equity shares of the company, amounting to Rs 4,000 crore at Rs 1,100 per share
The buyback is for up to 3.63 crore fully paid up equity shares representing 2.61 percent of the total shares of the company and is at a premium of 9.4 percent to HCL Technologies’ closing price on Thursday.
India’s fourth-largest IT company on July 9 said it would consider a buyback, nearly a month after larger rival TCS announced a buyback of Rs 16,000 crore. Infosys had also announced a buyback worth Rs 13,000 crore in November last year.
The market will be keen to know if HCL’s promoters- Shiv Nadar and his family- will participate in the buyback. TCS had earlier said its promoters will participate in the latest buyback, while Infosys also declared last year that Sudha Gopalakrishnan (wife of co-founder S Gopalakrishnan) and Rohan Murty (son of co-founder NR Narayana Murthy) participated in the buyback.
Analysts were largely expecting HCL’s buyback to be nearly equal to the Rs 3,500 crore it announced last year. That time, at Rs 1,000 per share, the buyback was at a premium of 17 percent to HCL’s stock price.
Global brokerage houses remained positive on the stock but domestic research firms feel valuations are not attractive after recent rally. The stock rallied 21 percent since the start of 2017.
While maintaining Outperform rating on the stock with a target price at Rs 1,175 (implying 16.88 percent potential upside), Credit Suisse said HCL has been one of its preferred picks in the sector, citing combination of growth, stable margin & attractive return on equity.
Morgan Stanley also maintained its Overweight rating on the stock with a target price at Rs 1,060, implying 5.4 percent potential upside.
“Buyback will largely be neutral to FY19EPS and is in-line with company’s policy of returning 50 percent of net income to shareholders,” it said.
HCL Tech falls 2% after Rs 4,000cr share buyback; Credit Suisse, Morgan Stanley remain bullish
Axis Capital rated Hold to HCL Technologies with a target price at Rs 1,000, saying it expects promoter group to participate in the buyback but if promoters do not participate in the buyback, it could trigger positives.
It feels the share buyback will alleviate concerns over accelerated inorganic strategy. “Acceptance ratio is likely to be 2.3 percent for minority shareholders and buyback announcement is to support valuations while organic growth momentum holds key.”
The buyback should result in around 2 percent accretion to EPS from (i) a reduction in the share count and (ii) lower other income because of the cash outgo, the research house said while maintaining Neutral rating on the stock with a target price at Rs 1,040 per share.
Given the reduction in networth, it should also lead to betterment of the return ratios by 2 percentage point, it feels.
The research house said HCL’s payout ratio has consistently improved to around 53 percent in FY18 from around 20 percent in FY13. “In FY18, the combination of dividend and buyback (Rs 16,000 crore) led to a payout of 53 percent of PAT. While it paid out Rs 3,500 crore in the form of buyback, it also paid out a dividend of Rs 8 per share.”
In FY19, too, it is likely to keep the combined payout at around 50 percent, it said.
While the buyback would take the ratio to 40 percent on FY19 PAT estimate, Motilal Oswal expects a dividend of Rs 10 per share for the year. “This should also imply paying out of 75 percent of the free cash flow likely to be generated in FY19, in line with peers.”
While the research house believes the case for valuation uptick would depend on the positioning in digital and the financial performance, an upshift in dividend payout, and the consequent yield return and improved return ratios together bode well in keeping valuations buoyant.