Wipro Announces Rs 12,000 Crore Share Buyback: An Arbitrage opportunity?

Wipro, one of India's leading IT companies, has announced a Rs 12,000 crore share buyback. The buyback will be conducted through the tender offer route and will be open to all shareholders of Wipro. The buyback price has been set at Rs 445 per share, which is a premium of 19% over the closing price of Wipro shares on the NSE on April 27, 2023. The buyback will be for up to 269,662,921 equity shares, which is 4.91% of Wipro's total paid-up equity share capital. The buyback is expected to be completed by the end of July 2023. Currently, as per Sebi guidelines, 15% of buyback (Rs. 1800 crore in Wipro case) is to be reserved for retail category (up to Rs 2 lakh).

Source: ICICIdirect Research

Wipro Buyback: An Arbitrage Opportunity?

Wipro stock is currently trading at Rs. 386.80 which is at about 15% discount to the buyback price, which presents investors with a potential arbitrage opportunity to investors.  However, this is a high risk trade as the acceptance ratio for buyback continuously varies. Also, if shares fall sharply after the buyback, the shares not accepted in buyback can pull down the overall returns.

Assuming 60% acceptance ratio, breakeven price arrives at Rs.290 per share. However, if the acceptance ratio changes to 35% the breakeven would be at Rs. 350 per share. The last buyback from Wipro saw 100% participation from small investors in 2020.

Source: ICICIdirect Research

Wipro Buyback History:

Benefits of Share Buybacks

There are several benefits of share buybacks for companies.

• First, share buybacks can help to increase shareholder value. When a company buys back its own shares, it reduces the number of shares outstanding. This can lead to an increase in the earnings per share (EPS) for the remaining shareholders.
• Second, share buybacks can help to improve a company's balance sheet. When a company buys back its own shares, it uses cash to do so. This can reduce the company's debt levels and improve its financial position.
• Third, share buybacks can help to signal to investors that a company is confident in its future prospects. When a company buys back its own shares, it is essentially saying that it believes that its stock is undervalued. This can lead to an increase in demand for the company's stock and an increase in its share price.

What will be Acceptance Ratio and how does it matter? 

•  Acceptance ratio is the number of shares accepted in a buyback offer as compared to the total number of shares tendered. As per SEBI rules, regulations, circulars etc. 15 % of the total buyback size is reserved for small investors with holdings up to Rs 2 lakh in the company.
•  There are 2 Categories - Reserved Category and General Category
•  Reserved Category means those investors holding Upto ₹2,00,000 shares in DEMAT.

Few Important Points:

• If you have bought Wipro through MTF, you need to do CTD in such a way that on ex-date shares are available in your Demat A/C.
• If you have done SAM (Shares as Margin) in Wipro, you need to de-pledge them so that on ex-date shares are available in your Demat A/C.