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
- 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.
- 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.
- 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.
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