IT services major Wipro on October 13 approved a plan to buy up to 23.75 crore shares from investors, a move that would cost the company up to Rs 9,500 crore.
The company will buy each share at a price of Rs 400, offering a 6.7 percent premium to shareholders as of the closing price of Rs 375.20 on October 13.
The buyback size is 4.16 percent of the total paid-up equity share capital of the company. The promoter group will also participate in the buyback, the company has said in a regulatory filing.
Should you tender shares?
As per Wiproâ€™s annual report, there are about 5 lakh individual shareholders, with holdings of less than 5,000 shares who own a total of 8.22 crore shares, representing 1.44 percent of all the outstanding shares in the company.
Brokerage firm ICICI Direct recommends tendering shares, especially those who hold up to 500 shares (retail category).
The Securities and Exchange Board of India (SEBI) guidelines say 15 percent of the buyback amount should be reserved for small shareholders. Small shareholders are shareholders of a listed company whose market value, on the basis of the closing price of shares, as on record date, is not more than Rs 2 lakh.
Considering the closing value of Wipro on record date at Rs 400, a shareholder with up to 500 shares will be considered a small shareholder. At the current price of Rs 340, the tender of shares in an open offer can fetch a profit of Rs 60 per share on 50 percent of positions i.e. (250 shares * Rs 60 per share = Rs 15,000). The break-even price for the residual shares will be Rs 280, ICICI Direct said.
This is a high-risk trade in which acceptance ratio continuously varies. We have arrived at a breakeven price of Rs 280 per share base on the assumption of a 50 percent acceptance ratio. However, if the acceptance ratio changes to 25 percent the break-even would be at Rs 320 per share.
Brokerage firm Motilal Oswal Financial Services is of the view that retail investors, looking for a short-term opportunity, can buy the shares of Wipro (up to a value of Rs 2 lakh as on the record date) from the open market and tender them in the buyback offer.
Based on the last two buybacks of Wipro and very low retail shareholding, we expect the acceptance ratio to remain high in the range of 40-60 percent which could give a potential return of 7-11 percent (pre-tax) with a time frame of two-three months (assuming one is able to sell the remaining untendered shares at the current levels of about Rs 340), Motilal Oswal said.
Jyoti Roy-DVP-Equity Strategist, Angel Broking also recommends tendering shares in the buyback.
Of the total 23.75 crore shares, 3.56 crore shares would be reserved for small shareholders, Roy said. Thus, the acceptance ratio for small investors could be higher than 50 percent, as the number of investors holding less than 500 shares would be lower than 1.44 percent of the outstanding share capital.
From a fundamental perspective, Wipro has been growing at a much lower rate as compared to peers like TCS and Infosys and therefore trades at a lower P/E multiple. In Q2FY21 Wipro has posted a dollar revenue growth of 3.7 percent quarter-on-quarter (QoQ) as compared to 7.2 percent and 6.1 percent QoQ revenue growth posted by TCS and Infosys. Given the likely lower growth trajectory for the company and chances of a high acceptance ratio, we would recommend retail investors to tender their shares in the buyback, Roy said.
Ajit Mishra, VP Research, Religare Broking, also recommends retail investors to tender their share in buyback as they could earn returns of nearly 15 percent from the current levels.
Tepid growth prospects
One of the biggest reasons for analystsâ€™ recommending tendering of shares is because of Wipros tepid growth outlook.
The company has a weak growth profile among its peers and brokerages expect it to lose market share to its larger peers.
Rusmik Oza, Executive Vice President and Head of Fundamental Research-PCG at Kotak Securities, said Kotak Securities has a â€œreduceâ€ rating on the stock as Wipro lags the industry on most parameters.
Our price target is Rs 380, which is slightly below the buyback price of Rs 400. On quarterly numbers also, the growth rate of Wipro is way below its peers both on QoQ and YoY basis. In terms of EBIT margins also, Wipro lags its peers, Oza said.
Wipro posted a 3.2 percent sequential growth in consolidated profit for the quarter ended September 2020, while IT services segment earnings were ahead of analysts estimates.
Goldman Sachs maintained a sell call on the stock but raised the target price to Rs 277 from Rs 265 after the companys September quarter earnings.
Goldman Sachs said Wipros strategy for future business growth doesnâ€™t seem too different and the company continues to have the weakest growth profile among its peers.
Once the buyback support is behind, the stock should re-rate lower and the company is expected to continue to lose market share to its larger peers, Goldman Sachs said.
Global brokerage firm CLSA maintained an underperform rating on the stock but raised the target price to Rs 370 from Rs 320.
CLSA underscored that the companys growth has recovered but bridging the gap versus peers could take time.
Recovery appears more a consequence of macro demand drivers, CLSA said and added that it sees better plays elsewhere (HCL Tech and Tech Mahindra).
JPMorgan stayed underweight on the stocks but raised the target price to Rs 270 from Rs 250. JPMorgan said the stock has built-in a structural recovery but it is underweight on the stock due to high expectations.
Financial firm Citi downgraded Wipro to neutral after the companys September quarter earnings. Citi has a target price of Rs 400 on Wipro.
Disclaimer: The views expressed by experts and brokerages on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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