What is Share Buyback? Explained with Wipro Rs 10,500 Crore Buyback plan
Wipro Announces Rs 10,500 Crore Share Buyback on 16th April, 2019
Wipro Limited, headquartered in Bengaluru, is a leading global information technology, consulting services company. The company harness the power of cognitive computing, hyper-automation, robotics, cloud, analytics and emerging technologies to help clients adapt to the digital world.
What is Buyback of Shares?
Buyback of Shares refers repurchasing of shares of the company that issued them; the company does this to restrict the amount of shares in the market. This can be both advantageous and disadvantageous depending upon the situation.
Objective behind the Buyback of Shares
- If a company thinks that the stock of the company is trading at a lower price, and according to them it should have a higher value, then at that time, the company and its board decide to issue a buyback of shares. Thus, by issuing a buyback, the company tries to tell the market the real price of their stock.
- Let’s see the case of Wipro:
- Currently the share price of Wipro is around Rs. 281. And Wipro has announced the buyback at Rs. 325. Here, the company thinks that their share price is definitely way more than Rs. 281. Which is why the company is ready to shell out a premium of close to 15% for their existing shareholders.
Market Reaction to Buyback of Shares
Announcing a buyback with above mentioned objective does not mean the market will react immediately and in the same way expected by the promoter and the board of the company. Sometimes the market doesn’t like the way promoter is thinking or behaving or is trying to manipulate the share price of their stock.
Types of Buyback of Shares
There are 2 types for this:
1.Participating Promoters :
- Here, even the promoter tenders his shares to be considered for the buyback.
- If this buyback type is chose, the market doesn’t react positively. The market thinks that the promoter rather than taking out dividends is more interested in taking the money through buyback.
- Why does the market think that way? When a company declares dividend, the company is had to also pay 20% dividend distribution tax (DDT). So, after paying the 33% corporate tax, an additional 20% DDT is to be paid on the dividend to be issued. Also, if this dividend amount is more than Rs. 10 lakhs annually, then it has to again pay additional tax of 10%. So, the promoter has to pay taxes 3 time, and the promoters which have high shareholding in the company tends to avoid the declaration of dividends.
- In the case of Wipro, the promoters have a holding of 74% in the company. So, here the promoters have very high holding and will have to pay huge taxes on the dividend declared. Thus, the promoters try to avoid paying 20% DDT and just prefer paying the 10% capital gain tax on the sale of their shares through this type of buyback.
2.Non-Participating Promoter :
- Here, the promoter does not take part in the buyback, that is his shares are not offered for the buyback.
- Generally, it can be considered better for the company if the promoter is participating in the buyback, as this showcases the confidence promoter has in the company and which is why it wants to increase its stake in the company.
Methods of Buyback of Shares :
There are 2 methods through which the company can issue buyback :
1.Open Market :
- In open market, a time frame is decided between which the company will buyback the shares from the open market.
- Also, a price is decided up to which the company buyback the share is the decided time frame.
2.Tender Offer :
- In tender offer, a date as well as a price of the buyback is fixed.
- Wipro has chosen this method. The tender price has been decided as Rs. 325. The date of buyback hasn’t been announced yet as the tender offer for buyback of shares has just been proposed by the board of the company.
- Voting through postal ballot will take place, and then things will happen according to the results of that.
Wipro Share Buyback Offer Details
- The company will repurchase 323.1 million shares, which represents 5.35% of total paid-up equity share capital, at Rs 325 apiece, as per its stock exchange filing. As the current market price on Tuesday,16th April, was around Rs. 281, the company is ready to pay a premium of 15%.
- Thus, the company proposes a buyback of shares from shareholders on a proportionate basis under the tender offer.
- Promoters are also going to be participating in the buyback. So most probably, promoters would be the major participator in the buyback. Currently, Promoters own 73.85% of Wipro as on March 31, 2019.
Effect of Wipro Share Buyback on Its Fundamentals
Buyback doesn’t affect the business prospects of the company, but it makes the fundamentals of the company look more attractive, Just like in the case of Wipro.
When the stocks are bought back their supply is reduced and in a way they get diluted. So, when the buyback of shares takes place, the EPS of the company goes up. This because the Net profit of the company is the same but the number of shares go down (earlier they had X shares, Y shares were offered in the buyback, so now X-Y shares left).
When the EPS of the company increases, the PE ratio of the company goes down. Thus, automatically, for an earning of Rs. 1 the amount to be paid now is lower than before the buyback.
- ROE = Net Profit / Equity of the Company
- Equity includes share capital and retained earnings. So after buyback, when the equity component of the company goes down and Net profit is as per the calculations, then automatically the ROE of the company can also go up.
- From the last 4-5 years the company is having a very sluggish growth.
- The company has an earnings growth of low single digit.
- In FY2018-19, the net profits of the company were reported as almost Rs. 9,000 Cr. In FY15-16, this net profit was at Rs. 8,900 Cr. So, in 3 years the net profit of the company is at the same level. This proves the sluggishness in the growth of the company.
- The stock of Wipro cannot be considered as a growth stock.
- The numbers that are used are approximate and have been rounded for presentation purposes.
- We are not in any way saying that this is a bad company, or the stock of this company is bad.
- We are also not suggesting anyone to immediately go and this stock or invest in the stock markets.
- Only an analysis has been presented here. No judgments or final statements are being made here.