InvestorQ : Wipro is buying back its shares for a price of Rs.325. That means, I can buy the shares at Rs.284 now and surrender the shares at buyback to make profit of Rs.41/share. Is that correct?
shrinidhi Rajan made post

Wipro is buying back its shares for a price of Rs.325. That means, I can buy the shares at Rs.284 now and surrender the shares at buyback to make profit of Rs.41/share. Is that correct?

Answer
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Riya Dwivedi answered.
1 year ago


On paper your analysis is correct. But before we get into the analysis, let us first look at the terms of the Wipro Buyback offer:

Terms of Wipro Buyback Offer

Buyback Type: Tender offer Buyback Offer Amount: Rs.10,500 Crore Date of Public Announcement: Apr 16 2019 Buyback Offer Size: 5.35% Buyback Number of Shares: 32,30,76,923 (32.31 crore shares) Face Value of the stock: Rs.2 Buyback Price: Rs.325 Per Equity Share

There are a few things we need to understand first:

Firstly, the effective record date for the buyback is not yet announced Secondly, the acceptance ratio is not know, but will be known after the offer The promoter group, which owns 73% state will also participate in the offer.

Should I opt for the offer?

Let us first make some assumptions on the acceptance ratio. Normally 33% acceptance ratio will be reasonable considering that the total buyback shares account for nearly 5.35% of the paid up capital of Wipro. As a shareholder can tender shares up to Rs.2 lakh in the buyback offer, the maximum shares you can buy will be 615 shares (Rs.2 lakh / 325 buyback price). If you assume a 33% buyback we are looking at 202 shares to be bought back. This is how the calculation will look like.

No. of shares applied in buyback – 615 shares Market price of the stock – Rs.284 (17th April 2019) Investment = Rs.174,660 (615 x 284) Shares accepted in the 33% acceptance ratio = 202 shares Profit on 202 shares = Rs.8,282 (202 x 41) Return on Investment = 4.74% (8,282 / 1,74,660)

Know the risks

A return of 4.74% even at 33% acceptance over 2-3 months period is a very good return. But the assumption is that you are able to sell the balance shares (413 shares) at the cost price. Quite often, the market price falls sharply after the buyback and that can reduce returns further. You must try this strategy only after understanding these points.