IT major Wipro's much-awaited share buyback worth Rs 15,000 crore opens on Thursday, with analysts commenting on why retail investors should consider participating and how much profit they can make.
The share buyback is priced at Rs 250 per share, implying a 38% premium over Wipro’s previous closing price of nearly Rs 181.67 apiece on NSE, and will be open from June 10 to June 17. The company plans to buy back up to 60 crore shares, representing 5.7% of the total paid-up share capital, for an aggregate amount not exceeding Rs 15,000 crore.
Under Wipro's buyback offer, eligible shareholders in the reserved category for small shareholders are entitled to tender 11 equity shares for every 56 equity shares held as on the record date (June 5). For shareholders falling under the general category, the buyback entitlement has been fixed at 10 equity shares for every 197 equity shares held on the record date.
How much profit can you make from Wipro buyback?
For example, let's consider an investor who bought 1,008 shares of Wipro at Rs 198 apiece before the record date and is planning to tender shares in the buyback. The total value of her shares as on the record date stood at Rs 1,99,584, making her eligible for Wipro's reserved category for small shareholders (less than Rs 2 lakh).
As per the entitlement ratio, she will be entitled to tender 198 shares out of her 1,008 stock holding (11 equity shares for every 56 equity shares held as on the record date). It is important to note that not all shares she tenders may be accepted in the buyback process.
However, for the shares accepted as part of the buyback, she will earn Rs 52 per share at the buyback price of Rs 250 per share, much higher than what she would have made if she sold the shares at the current market price of nearly Rs 181.
Should retail investors participate in Wipro buyback?
Sunny Agrawal, Head of Fundamental Research at SBI Securities, said that any retail investor holding shares within the small shareholder category (total value of shareholding below Rs 2 lakh as on the record date) should tender all his shares in the buyback.
“A retail investor holding up to 1,008 shares as on the record date will be eligible to tender around 212 shares (assuming an acceptance ratio of approximately 21% versus an entitlement ratio of 19.7%) at the buyback price of Rs 250, implying a gain of around Rs 70 per share over the current market price," the analyst explained.
Based on this calculation, the investor can earn a potential profit of nearly Rs 14,800, implying a 7.4% return on a total portfolio of Rs 2 lakh, Agrawal said. "While this is beneficial, the absolute return remains moderate rather than highly attractive," he added. This is a good option for investors who acquired shares at Rs 198 or higher (as per the buyback document, on the record date, the closing price on NSE was Rs 198.37), according to the analyst.
Harshal Dasani, Business Head at INVasset PMS, also said that existing eligible retail shareholders tendering shares in the buyback seem to be rational as the accepted portion can be sold back at a fixed premium.
If we assume Wipro’s market price at around Rs 181 apiece, the spread will roughly be Rs 69 per accepted share before tax and costs, Dasani explained, adding that on the entitlement alone, about 19 to 20 shares out of every 100 may get accepted, though the final acceptance can be higher depending on participation.
Narendra Solanki, Head of Fundamental Research of Investment Services at Anand Rathi Shares and Stock Brokers, calculated that retail or reserved category investors who are holding Wipro shares less than Rs 2 lakh as on the record date will likely have an acceptance ratio of 20%, and may earn a profit of approximately 7.7%.
What is the real risk?
The real risk is the unaccepted portion of shares, Dasani cautioned. If the stock weakens after the buyback, especially in a bearish IT and broader market setup, the residual holding can dilute the apparent arbitrage return, he explained.
“So this is a tactical buyback opportunity, not a reason to become structurally positive on Wipro or Nifty IT,” Dasani cautioned.
Would Wipro's dividend have been a better route?
While Agarwal from SBI Securities suggested retail investors to participate in the share buyback, he noted that in case Wipro had instead opted for a dividend route, distributing the same amount (around Rs 15,000 crore) would translate into roughly Rs 14 per share (yield of nearly 7%), which could have been a more efficient way of returning value to all shareholders.
“This may explain why the stock has underperformed both the Nifty and the BSE IT index since the buyback announcement on 20th April,” he added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
