NIIT Technologies share buyback offer opens; what should investors do?

"The company's promoter being Hulst BV, an investment holding company registered in the Netherlands, is a part of BPEA (Baring Private Equity Asia). Being an MNC it commands good corporate governance and thereby by returning the excess cash they generate wealth for shareholders at the right time. Thus, this buyback price of Rs 1,725 is fair and justified," Manali Bhatia, Senior Research Analyst at Rudra Shares and Stock Brokers told Moneycontrol.

Hence, she said, "Retail investors (individuals holding up to Rs 2 lakh equity share capital) who already hold shares as on March 12 (record date) may tender their shares in buyback."

She suggested two ways to participate in the buyback - one is hedging through futures. "If a shareholder already has 6 accounts with a minimum of 600 shares then hedging is possible. For example, a retail investor has 100 shares. Estimating the acceptance ratio at 38 percent, the remaining 62 percent shares would be hedged through futures. Thus, such amount needs to be tendered in 6 accounts to match the future lot size of NIIT Tech of 375 shares. Thus, by hedging his shares, an absolute gain of 5-6 percent can be achieved in one month." she explained.

In the second option, one can gain through a tender offer. "In this case, if a retail investor holds share upto Rs 2 lakh equity share capital, then he may tender shares and avail the arbitrage benefit. Already, buyback is at a premium of 17 percent to the current price of Rs 1,473. Assuming 38 percent of his shares being accepted in the buyback, the remaining quantity can be purchased from the open market. Hence, a good arbitrage opportunity exists. Given, the stock to perform well going ahead owing to increase in the order inflows & strong growth outlook, arbitrage benefit of 15-20 percent can be achieved easily in one month as on closing price (Rs 1,473)," Manali detailed.

Vineeta Sharma, Head of Research at Narnolia Financial Advisors also advised investors to opt for the buyback given the stock is fairly valued at current prices.

"We expect business to be under some stress in near to medium term as 27 percent of revenues for NIIT Tech come from transport and 14 percent of revenues come from airlines. Also, near term margins for the company will be under pressure as the company will pursue aggressive pricing in winning deals from other verticals. The company currently trades at PE of 18 times FY21 earnings estimates and we assume that the company is fairly valued at current prices. Though for the long term we advise investors to opt for the buyback," she reasoned.

The company currently has around Rs 800 crore in cash and current investments out of which Rs 337 crore will be utilised in the buyback. "This also hints, the company is not looking for any acquisitions in the near term. We assume NII Tech revenues/ PAT will grow at 10 percent CAGR for the next 2 years and hence the company at a current market price of Rs 1,473 is fairly priced," Vineeta said.

However, Prashanth Tapse, AVP Research at Mehta Equities feels leading global IT solutions player, NIIT Tech's share buyback offer failed to impress investors with offer price below market expectations and Rs 337.46 crore is assumed to be very small buyback representing 20.23 percent of the paid-up equity share capital and free reserves of the company.

He believes NIIT Tech has a strong business profile and the buyback offer's a decent premium to the market price, but the acceptance ratio stands very low at 13 percent — the number of shares accepted in the buyback for every 100 shares held by an investor, only if everyone applies and if everyone does not apply then ratio will increase. Hence, he is not so keen on advising investors on tendering shares at the current offer.

On the company's outlook front, all analysts are positive on the stock for long term given the strong order book and growth outlook.

Prashanth Tapse believes NIIT Tech's business profile remains strong, supported by its healthy cash accrual, strong networth, and negligible debt on books.

"NIIT Tech's business assumed to remain healthy, driven by its strong market position in information technology services, diversified presence across verticals and service lines, healthy operating efficiency, and cash-generating ability. We are positive on the counter post buyback offer," he said.

Manali Bhatia also said the overall outlook remains stable and attractive, though the company expects to decline single digit sequentially in Q1 FY21 due to COVID-19 crisis.

"NIIT Tech reported strongest ever quarter with a good set of numbers meeting estimates. Along with that, the positive management guidance for growing sequentially in Q2 FY21 bodes well for the company. Despite the COVID-19 situation company has the largest order intake at $180 million for the 4th quarter of FY20 and $468 million of firm business to be executable over the next 12 months," she reasoned.

"Moreover, eyeing on the company's promoter holding it is around 70.10 percent acquired by the Hulst BV, an investment holding company registered in the Netherlands, a part of BPEA making NIIT tech more lucrative as it would command higher P/E ratio being MNC having good corporate governance," she said.

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