Earlier known as DalalStreetBulls

SEBI (Research Analyst) Registration Number: INH200004471

13 July 2018

Buyback Review: HCL Technologies

The board of HCL Technologies Ltd. has approved a Rs 4,000 Crore buyback (Nearly 3.63 Crore shares at Rs 1,100). Is there any arbitrage opportunity in this buyback?

SEBI's 15% reservation in a buyback for retail shareholders (Less than Rs 2 Lakhs of holding on the record date) gives rise to arbitrage opportunities just like the one in Wipro last year where we earned 10% in 5 months. The buyback of HCL Technologies Ltd's shares last year had a ~ 67% acceptance ratio and we expect a lower acceptance ratio this year. So what is the return that a retail shareholder can expect in this buyback? While the WIPRO buyback was a very low risk one as the expected acceptance ratio was > 90%, the HCL Technologies buyback will have a < 65% acceptance ratio.

This makes it crucial to estimate where the share price will be 4 months from now because nearly 40% of your holdings will not be taken in the buyback and you will have to sell it in the market.

The alternate to the buyback is having your funds invested somewhere else. Liquid funds are the lowest risk asset class available for such a short duration and over 4 months, these funds give close to 2.2%. Considering the moderate risk in this buyback trade, investors might expect around 5% returns over 4 months.

We believe that the Buyback is worth taking the risk although the expected returns are ~ 5% over 4 months. The risks associated with the trade are:

i) HCL Technologies Ltd's share price falls > 4% over 4 months
ii) The acceptance ratio will be lower than our estimates

We have sent a clear communication to our investors explaining what they should expect from this buyback and also suggested the right allocation for their portfolios.

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