Given the number of small shareholders, HDFC Securities has calculated the acceptance ratio at 81 percent
The share buyback by Mphasis could offer short term retail investors absolute returns of 8 percent over the next 90 days, HDFC Securities said in a recent report. This could lead to an annualised return of 32 percent per annum, subject to capital gains tax.
The brokerage house said the IT services firm was buying back the shares at a 17.4 percent premium to the current price of Rs 1,150 per share. Given the number of small shareholders, it has calculated the acceptance ratio at 81 percent. "As per its FY18 annual report, 20,840 small shareholders held 13.56 lakh shares. Their reservation in the current buyback is 10.98 lakh shares. Assuming all these shares would be offered, then the theoretical acceptance ratio works out to 81 percent."
However, it was quick to add that this could change depending on new investors buying shares from now on with the aim of participating in the buyback.
Even if the acceptance ratio falls, investors stand to make such returns. Assuming a 60 percent acceptance ratio and market price not falling below Rs 1,080 per share after the payout, investors could stand to earn an absolute return of 8 percent over the next 90 days (maximum average time taken from board approval to payout in recent tender offers) leading to an annualised return of 32 percent.
Every 5 percent increase in acceptance ratio could improve annualised return by 4.7 percent, the report stated. Here are risks that the broking house sees for the acceptance ratio:
Additional shareholders: After March, if a lot of new shareholders have been added (holding less than 150 shares), then the acceptance ratio could be less than that stated above. Similarly, if a lot of new investors buy at the current price (from now on till the record date) with the objective of tendering the shares in a buyback, then the acceptance ratio is likely to drop.
Acceptance ratio drop: The exact number of eligible shareholders as on the record date will be available in the letter of offer which will be posted 1-2 weeks prior to the record date. The offer letter will also mention the entitled shares which a shareholder can offer. This is calculated based on proportion of quota for small shareholders to their total shareholding as on the record date. An investor can offer shares more than the entitlement and there are chances that some or all of these may be accepted.
Lower returns: Investors who buy the shares to benefit out of this opportunity will then have to sell the unaccepted shares in the open market which could result in lower returns based on the then prevailing market price.
If the share price of Mphasis rises by the record date, it could result in lower returns (if the new buyer postpones buying) or in a shareholder becoming ineligible to tender the shares if the value of his holding exceeds Rs 2 lakh as on the record date.Case file
The IT firm’s board approved a proposal to buyback shares worth up to Rs 988.27 crore at a maximum price of Rs 1,350 per equity share. "The resultant shares to be bought back at the maximum price is 7,320,555 equity shares. The buyback offer size of Rs 9,882.75 million is 25 percent of the total paid-up equity capital and free reserves of the company as per the audited financials as at June 30," it added.
The buyback, which will be subject to shareholder approval, by way of a special resolution and other statutory approvals will also see participation from the promoter who have 52.36 percent shareholding.Last year, Mphasis completed buyback of 17.4 million shares with a total outlay of Rs 1,103 crore.The Great Diwali Discount!
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