Wipro Buyback: Opportunity for Retail Investors

Wipro has announced a share buyback program amounting to Rs 12,000 crore. The good news for investors is that, unlike other buyback programs in the recent past, it will be through a tender route - which means investors can tender their shares at the buyback price.

The buyback presents an opportunity for investors to make money. We will explore the opportunity in Wipro buyback in this article.

The Buyback details

The Wipro board has approved a buyback of 26.96 crore shares which translates to 4.91% of total equity shares on a proportionate basis. The company will buy back shares at Rs 445 per share from investors.

As per SEBI guidelines, 15% of the buyback (in this case, Rs 1,800 crore) has to be reserved for retail investors. Investors holding Wipro shares with an investment below Rs 2 lakh will fall under the retail category.

The company has not announced the record date, timelines, and other offer details yet.

Promoters holdings and share performance

Wipro promoters hold 72.92%, and Foreign investors have a 9.78% stake in Wipro as of 31 March 2023. As per reports, promoters are also expected to participate in the buyback.

Like other IT giants, Wipro's share price has also struggled in the last one year - the stock price has fallen nearly 15% in the time frame. In 2023, the share is down 2.63%. On 18 May 2023, Wipro shares closed at Rs 383 per share.

The obvious - Buy Low, Tender High

We have shared two crucial numbers above - the current market price (CMP)* of Rs 383 and the tender price of Rs 445. It makes all the sense to buy at the current levels and tender at Rs 445 and make double-digit profits.

However, in the real world, the equations are never so simple. The equation gets complicated as there is another parameter called Acceptance Ratio. Let us understand this term in detail first.

The acceptance ratio in a share buyback process refers to the proportion of shares tendered or offered by shareholders that the company is willing to accept for repurchase. When a company announces a share buyback program, it sets certain parameters for the buyback, including the maximum number of shares it intends to repurchase and any conditions or restrictions associated with the process. The acceptance ratio is typically expressed as a percentage or a ratio indicating the percentage of tendered shares that will be accepted for repurchase.

For example, a company announces a buyback program, and the acceptance ratio is 50%. It means that for every share tendered by a shareholder, the company will accept and repurchase only 50% of those shares. The remaining 50% would be returned to the shareholder, who would retain ownership of those shares.

So if you think, you will buy 100 shares and sell - the problem is not all 100 will get accepted. Post the buyback (when balance shares are returned to you), the price of the shares you hold may fall, and you may suffer losses on them.

The likely scenario for Wipro buyback

As a retail investor, the maximum number of shares you can hold at the current CMP is 449 (445*449 < 2 lakh). Now look at the below table - we have highlighted different cases (the profits) based on the acceptance percentage.

Let us understand the above table by assuming the acceptance ratio comes to be 60%.

You buy shares at Rs 383, and your total investment would be 449*383 = 1,71,967
Acceptance ratio 60%, so no. of shares accepted = 269
The amount you will receive on shares accepted would be 269*445 = Rs 1,19,705
Shares returned back = 180
The cost of remaining shares is 1,71,967 - 1,19,883 = Rs 52,084
Effective per share price of a remaining share is 52,084/180 = Rs 290 (approx)

We have arrived at a breakeven price of Rs 290 per share based on the assumption of a 60% acceptance ratio. However, if the acceptance ratio changes to 35%, the breakeven comes at Rs 350 per share.

The final part of the equation is to understand the breakeven price. If you look at the amount you received from the tender offer and shares in your DEMAT account, if the shares price of Wipro falls to Rs 290, then you don't make any money in the trade (breakeven). Assuming the price is Rs 360 post buyback, you will make a profit of Rs (360-290)*180 = Rs 12,600

Trade summary

Let us sum up the trade for you with a 60% acceptance ratio:

Amount invested: Rs 1,71,967
The amount received from buyback: Rs 1,19,883
The amount received by selling the remaining 180@360 = Rs 64,800
Net profit: 1,19,883 + 64,800 - 1,71,705 = Rs 12,678 (slight diff from above as breakeven price is 289.35, 290 was taken for easy calculation.

Our expectation

We do believe that the acceptance ratio is likely to be north of 60%. In the last 4 buybacks, retail acceptance has been in the range of 50-100%, with 100% three times. Do note, it is a high-risk trade in which the acceptance ratio plays a crucial role.

*As on 18th May

Source: ICICIdirect Research