Mphasis- Buyback analysis

Mphasis – The company is engaged in IT services, application services outsourcing and Business process outsourcing , The company was formed in the year 2000 as Mphasis BFL. The company has announced a Buyback on 7th August at the board meeting, The promoters too have shown intentions to participate in the Buyback.

Buybacks : Buy backs are mode through which companies flush with cash buying back their own equity capital which has been issued. The purpose of Buybacks can be debatable and they are mostly for employing their cash in their own company when the valuations are attractive and when they do not find capital allocation opportunities outside. which is a prudent way to increase their skin in the game knowing their valuations are cheap and attractive and a good capital allocation measure.

Mphasis Buyback : The company has announced Buyback of 7320555 shares representing 3.79% of the total Paid up capital of the company . So ideally for every 100 shares you are having the company will buyback 3.79 shares from you. Buying back just 3.79 shares will not be a good bet for shareholders participating for a Buyback Special situation case.

As per SEBI mandate there is a reservation of 15% for the retail category ( Retail category qualifies if a person is holding shares below worth of 200000 as on record date) which means of the total shares being bought back retail share holders are entitled for a 15% reservation which is a good news for the retail share holders holding shares worth below 2 lakhs.

In case of Mphasis the retail portion – Persons who are holding shares under 2 lakhs as on latest Annual report is around 1,355,829 , Thus based on the retail reservation the retail share holders get an acceptance of 80% . Which means on the 166 shares being reserved for retail 133 would be accepted at 1350 and the remaining would have to  be sold at Market price – In my calculation i have taken the remaining to be sold at 1186 as on date 17th August.

Note : When the remaining shares to be sold in market price tends to drop based on market corrections etc then your profit ratio would be lower and on a Worst case scenario i have calculated the BEP ( Break Even Point ) where you can exit on a No profit/loss scenario.

The 168 shares for a person holding value of 2 lakhs is based on ( 200000/1186) =168.63, The value for retail share holders being 2 lakhs worth holding as on record date, Assuming the price is at 1186 on record date. If there is a big change in price (Ex: 1300 based on this persons holding shares worth (200000/1300 )153.85 would be eligible under retail and you would be required to sell or adjust your buying based on this.

Scenario 1 – On 80% acceptance ratio

NO of Equity shares being Bought back	7,320,555
Buy back price	1350
Value of Buy back ( Crores)	988.274925
15% reserved for the Retail category ( In crores)	148.24
Total shares reserved for Retail share holders	1098083.25
Shares held for value of 200000	168.63
Profit on the deal	22124
No of shares held under 200000	1,355,829
Profit % on 80% acceptance	11.06%
Theoretical Acceptance ratio	80.98980402

In a Buyback the number of share holders under retail category can increase based on the persons participating on the Buyback deal. Thus the theoretical acceptance ratio can tend to be lower. Thus i have worked on other scenarios where the acceptance ratio would be 50% and 30%.

Scenario 2 – On a 50% acceptance

Scenario 2 : Acceptance at 50%
Total Investment	200000
CMP	1186
Total investment for 2 lakhs	168.63406
Acceptance at 50%	84.317032
Buyback value	113827.99
50% Balance in Market price	99494.098
Break Even	1022
Total P/L	213322.09
% Profit on the deal	6.6%
Profit	13322.091

Scenario 3 – On a 30% Acceptance ratio

 

Scenario – Acceptance ratio at 30%
Total Investment	200000
CMP	1186
Total investment for 2 lakhs	168.63406
Acceptance at 30%	50.590219
Buyback value	68296.796
70% Balance in Current  Market price	140000
Break Even	1115.7143
Total P/L	208296.8
Profit on the deal	4.14%
Profit	8296.796
* Assuming Price as on record date at 1186 to calculate the
168 shares which are tendered for Buyback

 

The Break even points variation is evident that higher the acceptance and lower the volatility in the stock price higher will be the return when selling the Non- accepted shares in the market.

Risks 

1. Buybacks recently have been over crowded – The Tip-toe parade model said by buffett , Ex: DB corp which had a high theoretical acceptance ratio but dropped substantially on record date due to crowded participants and finally landed around 30% which was way low then anticipated.
2. Buy backs cannot guarantee a profit, If there is a massive sell-offs which happened in Mid caps and Small caps recently in May-July 2018 you could lose money investing in those buybacks. Ex: Jagran Prakshan after Record date have been down by almost 30% leading to a loss for those who held through the Buyback period.
3. It attracts Short term capital gains thus adjusted for transactions costs, brokerage, tax etc should be added to the analysis which i have not done on above and thus the returns may look depressed then shown above.

A probabilistic approach is required 

Based on previous Buybacks by IT service companies there has been a good acceptance recorded and in some cases the acceptance being at 100% which happened in WIPRO’s Buyback. From the recent past buybacks like Jagran and DB Corp there is a higher likelihood that there will be higher participation as markets are marching north day by day and many find it difficult to find opportunities in the market.

As markets are heating up we will not be able to predict any scenario in the next 4 months as of holding the company, Thus likelihood of a market crash can be positive with higher probability , Thus considering the main likelihood of competition and assigning a high probability for more participants buying i would rather remain cautious and take a call near the record date if there is any more price corrections, The lower the buying rate the BEP ( Break even ) is pushed down further which provides a MOS

Another situation is the holding period of 4 months for a return of 6-8% ( excluding costs and tax ) , When there are other quality Mid caps and Small caps at attractive valuations one should decide based upon their Opportunity Cost

Disclaimer : I am a SEBI-REGISTERED analyst, The stock discussed above is not a recommendation. I or our clients may have vested interest in the Buyback or the stock discussed above. Please consult your investment adviser.

 

Sherlock Holmes 🎩 and the investors mind – 1

Are you curious to know what Sherlock Holmes has to do with investing and business ? Well I had the same thought until I read this wonderful book by Peter Bevelin . After reading my learning curve has been geometrically expanded exponentially – Well I didn’t guess to acquire so much wisdom in a 80 Page Book.

But let’s unfold and see how Sherlock Homes helps you to think like you have never done before (A London based fictional character in the Fiction Sherlock Holmes ) by Arthur Conan Doyle – A Scottish physician and writer of Sherlock Holmes

The character of Sherlock Holmes is that of a detective who is analytical and who is also a deep thinker . When I first started reading the book I started connecting the book from a business perspective That’s how things get cleared in your mind . When I read something that’s outside my reading zone I try connecting everything to what I’m doing which then stands in my mind .

Let’s see how Sherlock Holmes shapes our thinking as a investor, business person or a student or for the fact any professional.

So this is the 1st thing to learn from Sherlock Holmes , Know where to look and what to ask ? Asking the correct question is a great skill you should develop ! I liked the book A MORE BEAUTIFUL QUESTION by Warren Berger which contains how questions shape a person’s thought process.

Pay attention to only that matters ( use our inversion Rule here ) and exclude all other things ! As a investor we need to look only where we get facts rather than looking at everything and trying to match with our theories ! – A case of Confirmation Bias where we tend to only look at informations that confirms our theories and stories and rejecting the other facts ( which may be important or different from previous facts )

1. To know what to do and what not , we need to genuinely understand reality , how things and people are and what works and what not “

“ I have a lot of special knowledge which I apply to the problem , and which facilitates matters wonderfully ( Holmes : A study in scarlet )

With the above what do you need as a thinker ? You need special knowledge which is important to apply to a problem to understand what works and what doesn’t !

2. But only what is useful – it can be dangerous to know too much

His ignorance was remarkable as his knowledge .. he said that he would acquire no knowledge which did not bear upon his object therefore all the knowledge which he possessed was such as would be useful to him ( DR WATSON : a study in scarlet )

Dr Watson gives a glimpse of Sherlock Holmes knowledge he possessed , all which he had was that which was useful – Relating this to our daily lives we are bombarded daily with so much information and facts we read them all along and our brain gets so engaged and tired that it doesn’t know which are facts and which is trivial ! And as an investor what I learn from here is that I will need and posses knowledge only that’s required for me to analyse companies and business , putting rest all to junk box .

This is my favourite of this topic 2

Let’s consider our brain as an attic and see what you do with that ? Think for yourself is your brain a attic that stores all lumber or do you posses it for only that’s required ? By answering this question be clear to put inside the brain only that will be useful and required for you to be productive ! This is a great lesson – This is exactly what’s happening with news and media and social media channels which crowds us with almost lumber which we take it in daily which are not able to differentiate if its good or required for what we do. So taking in information only that is required is again a Skill now in this modern world . You have to have a specialised knowledge to understand what you need and what is not required .

To an investor this is so essential that he should be able to know what’s the information required and what’s not ! Bottom line : Don’t crowd yourself with too many information. Avoid social media, What’s app etc … Use it as a platform rather than a reliable source !

3. Ask . What is in their interest to do ?

” well yes of course the pay is good – too good . That is what makes me uneasy . Why should they give you a 120 £ a year , when they could have their pick for 40 £ ? There must be some strong reason behind ( Holmes : The adventure of the copper beeches )

Another very important lesson , Always ask what’s in the interest of the other person to do something ? Well an example would be If you’re offered a free product at a sales showroom or a public place – First stop and thin what’s in the other persons interest to give me something free !

In FACEBOOK – THE Data were sold out without our permission , but you were enjoying a free networking account ! Nobody cared to ask something why is something coming free to me ? I read somewhere that “ if some product is for free then you are the product ”

Wearing Sherlock Holmes hat as a investor when a stock is cheap what should I ask ? Why is this company available in the market at such cheap valuations then peers ? Well most of the time if problem is temporary you invest or you gather facts ( As Sherlock said you need only what’s required ) and trade off all others and arrive at a reasoned decision based on only facts .

This is a marvellous lesson – Always get the facts then first and then construct the theory rather than typical confirmation bias getting the theory and trying to fit in the facts .

As we usually do we as soon as we hear something we start creating a good story and a theory around it and than as facts come in we try to fit it in which is a big folly that I understood shouldn’t we be doing it in reverse (inversion ) this is a endowment bias where we are too wedded to our ideas where even after fresh facts are obtained we don’t change our previous theories ( you need a Bayes reasoning )

Another human folly

” Being nice is hardly the evidence of innocence ”

Dismiss from your mind that anything which the maid or her mistress may have said must necessarily be true . The lady’s charming personality must not be permitted to wrap our judgment ( Holmes : The abbey Grange)

The above also the liking bias – ( From Influence books by Robert Cialdini – Highly recommend to read and memorise) We tend to believe facts or things said by people we like .

Usually salesman do this trick to sell products to you , they behave and make you like them by their mild mannered talk and their charm and soon you start liking the salesman – then the salesman pushes the product on to you after you have started to like him . Not means all salesman are tricky but being nice is no conformity to innocence.

A well smooth talking Stock broker can make you like him and lull you to do sort of things what you have never thought of doing just because you like him – I’ve been fooled here ! I used to believe all that is said by people whom I like and without rechecking facts and without reconciliation tend to believe it !

I have seen politicians handle this weapon very well – They always make you like them by their Imperturbable manner and speech and never being tense for anything even when they are been treated awkwardly (Imperturbable is a Weapon which was used successfully by buffett when he encountered hearings against Berkshire ) Slowly you start liking them and tend to be biased to vote for them or fall for their words even though you have a strong dislike and aversion to like them.

Sherlock Holmes The learning machine

“Education never ends Mr Watson , it is a series of lessons with the greatest for the last ( Holmes ; The red circle )

I was hearing a podcast by Tim Ferris with Naval Ravikant and in which he mentioned that

“Learning has given me a great edge over others . If you’re reading a book you are in the top 0.0002% of the crowd because for the fact that most of the people don’t read and those who do don’t complete”

This is the quintessential quality of a good investor and a business person . Not only by reading but also by applying ( use it or lose it tendency ) you are sure to have a great edge over the others !

This is what Charlie Munger has to say about life long learning practice

( Thanks : Value Walk ) A good blog to read

Another remarkable one ! Even without correct knowledge of matters you can make judgements ( But not advisable ) on the contrary no knowledge without judgement ! When I was writing this had a great thought on how this principle applies to our daily live ! It’s a paradox How many time have we done judgements about someone or something without any knowledge about that ? Most of us do ! But without judgment there’s no knowledge !

In the next article I will write about how Sherlock Holmes helps you think about Observation , gathering facts and biases which blinds us from making correct analysis of a case !