Is the eClerx Services buyback at 25% premium lucrative?

eClerx Services, a global IT services company offering full-fledged digital transformation solutions, announced a buyback at a premium of around 25% this week.

This move is justified as IT stocks have fallen big time this year and so have their valuations.

Hoping to instill confidence in investors and return value to them while still making prudent use of funds, eClerx’s management has chosen buyback.

Let’s take a look at all the details.

Mode of Buyback

The buyback is a tender offer.

There are two ways in which companies can execute buybacks – the tender offer route and the open market offer.

In a tender offer, the company makes an offer to buy back shares at a particular price.

Here, the price will be fixed most probably at a premium and the investors having shares of the company on record date can part with their shares by filling out respective forms over a given period of time.

In an open market offer however, investors don’t get much excited. In the open market offer, everything is routed through the stock exchange, and the price isn’t fixed. It can vary.

Take the recent example of Infosys. It’s going down the open market route and will buy shares not exceeding ₹1,850 per share.

Last week on Wednesday, Infosys revealed that the company bought back 25,000 shares on BSE and 1.22 m shares on NSE at an average price of ₹1,615.54 apiece.

So you see, even though the company has decided to buy back shares not exceeding ₹1,850, many investors are willing to sell their shares at a much lower rate.

The market regulator wants to put an end to the open market offer route by April 2025. Proposals and discussions are ongoing, and it wants all companies to go through the tender route in the coming years.

Coming back to eClerx’s buyback…

1) The board has fixed 27 December 2022 as record date for buyback of shares.

2) The IT company will buy back shares at a price of ₹1,750 per share. This is around 25% higher than its current market price of ₹1,380.

3) The aggregate amount of buyback is up toRs 3 billion (bn).

4) The total number of shares to be bought back shall be up to 1,714,285 shares representing 3.38% of the total equity.

5) Last year, the company carried out a share buyback worth ₹3 bn when and its price was pegged at ₹2,850 per share at that time.

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Initially, when the company announced to buyback shares a month ago, the price was fixed at ₹1,900 per share. The revised price is now ₹1,750.

Recent bonus issue

Apart from buyback, the company has been in spotlight ever since it declared bonus shares in August this year.

Shareholders received one bonus share for every two shares they held in eClerx.

What next?

The buyback price at a premium of 25% offers a good opportunity for shareholders of eClerx. The record date is set as 27 December which offers opportunity for other investors too who do not hold eClerx shares at present.

As the macro environment is uncertain and there are talks of a global recession, IT stocks have remained under pressure. eClerx Services is no exception.

Shares of the company have fallen 21% so far in 2022.

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The buyback will not significantly change the long-term fundamentals of the business. It instead offers existing shareholders a good price if they choose to tender their shares.

The company’s payout remains high as per its policy. Between 2018 and 2022, the company has paid out approximately 70% of its net profit and 70% of free cashflow to shareholders.

The company’s management in an interview said that they are confident of achieving double digit growth in financial year 2022-23.

In the Q3 earnings call, the company has guided for margins coming in at 28-32% for the next two quarters.

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About eClerx Services

eClerx Services was established in 2000 and is India’s first publicly listed company offering full-fledged Knowledge Process Outsourcing (KPO) services.

It provides its services primarily to financial institutions, sales and marketing divisions of retail companies, and cable and telecom companies.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com