Mphasis Ltd.

IT firm Mphasis buyback comprises buyback of equity shares worth up to Rs 988.27 crore from all existing shareholders at a maximum price of Rs 1,350 per equity share. Mphasis is a leading IT services company based in Bengaluru and incorporated in 1992. Mphasis (BSE: 526299; NSE: MPHASIS) serves marquee customers across the globe including six top global banks, eleven out of fifteen top mortgage lenders, and three top global insurance companies and has about 22,000 employees across sixteen countries. Mphasis with market cap of ~ Rs. 22000 crore stands at position 8 among Indian software companies. Blackstone, PE firm acquired Hewlett Packard Enterprise’s 60.5% stake in Mphasis in 2016. Mphasis Ltd. provides infrastructure technology and applications outsourcing services, as well as architecture guidance, application development and integration, and application management services. It serves financial services, telecom, logistics, and technology industries.

Latest Updates: Mphasis Buyback 2018

  • Entitlement Ratio 16.95 (10 out of 59 shares). Issue Date:  7-12-18 to 20-12-18
  • Sets 25 October 2018 as the Record Date to determine the shareholders eligible to participate in the buy-back.
  • Mphasis Limited  to consider and approve the audited financial results of Q2FY19 on 18 Oct 2018
  • 06/08/18: Shareholder voting on proposal for Buyback shall end on 27 Sept 2018. Expect Record Date to be happen in 2nd week of October 2018

Mphasis Share Buyback

Companies are increasing resorting to Buyback of their shares at a price higher than market price for reasons which may include:

  • As a Tax efficient way of rewarding the shareholders. While a section of shareholders may get cash, other shareholders also stand to benefit as company’s profits are now distributed across a smaller number of shares.
  • To shore up company’s’ stock that may be trading at a huge discount in the market. 
  • Company has huge cash reserve or windfall profits like sale of an asset or unit.

Apart from existing investors in company, buyback also presents opportunity to short time investors to cash in on the arbitrage opportunity by buying companies share from the market  before the buyback process with the expectation that the sum total of amount realized from tendering shares to the company at buy back price and selling remaining shares in the market subsequently  may add up to more than their initial investment.  This is illustrated with an example :
Take the case of an arbitrage investor who buys 100 shares of Mphasis Ltd. at Rs. 1150 and the acceptance ratio at the time of  buyback comes out to be 60% and share price after buyback is Rs. 1050/-.
The investor realization from buyback  will be Rs. 1350(buy Back price) X  60 (No of shares bought)  = Rs. 81000/-.
His realization on selling remaining shares in market shall be i.e. Rs. 1050 x 40=  Rs. 4200/-.
Thus his total Realization is Rs. 123000 against his investment of Rs. 115000.
This translates to return of 6.95% in the said period.

The entire buyback process takes 3-4 months and Arbitrage investors look for something like 4-10% return in 3-4 months. However there is no guarantee of positive returns and many recent Buybacks like Jagran Prakashan and earlier Eclerx have led to negative returns. Our focus in this post is on possibility of such Arbitrage opportunity in Buyback of Mphasis Limited shares.

Led by margin expansion and a strong Dollar, many IT companies have increasing resorted to Buybacks. This includes TCS, Infosys, Wipro, MindTree, Nucleus Software, Mphasis, HCL Tech, Eclerx etc. Mphasis which came out with a buyback in 2017, has again announced a Buyback on 07-08-2018. Promoters have intentions to participate in the buyback offer. On the first day of this buy back announcment and publication of Q1FY19 results, the share closed 1,148.50 INR, down by Rs. 41.80 (3.51%). The Company performance in last quarters has been good which has also seen its share price almost double in a year’s time. The quarterly performance and price movement has been covered in subsequent section

We have collated some basic data for this Buyback and previous Buyback by Mphasis Ltd. and this is solely for informative and educational purpose. Profit or Loss in this arbitrage opportunity is uncertain and will depend on final acceptance ratio of buy Back and price of Mphasis share ruling after the buy back

For a understanding of complete BuyBack Process & Terms, please see the link Buyback of Shares: A Primer for Retail Investors

Mphasis Sept Shareholding Pattern and Current View

A comparison of Sept 2018 and June 2018 is depicted for major categories of Shareholders

Shrs Sept 18% of TotalShrs June 18% Change 
(A) Promoter & Promoter Group10,12,30,85352.34%10,12,30,8530.00%
Mutual Funds1,61,06,0538.33%1,62,87,186-1.11%
Foreign Portfolio Investors5,62,35,33529.07%5,63,87,116-0.27%
Financial Institutions/ Banks7,09,8310.37%730081-2.77%
Individuals nomnal shr capital <=Rs. 2 Lacs62,30,4283.22%44,83,60138.96%
Individuals nomnal shr capital > Rs. 2 Lacs19,76,1351.02%22,24,443-11.16%
All others1,09,28,4735.65%1,19,69,871-8.70%
Total Shares19,34,17,108100.00%19,33,13,1510.05%
  • Mutual Funds which held more than 9% stake have sold at higher levels and their stake is down 1.11%. Non retail investors get very low % in buyback and hence it makes sense for them to exit some of their positions  on any hardening of prices after announcement of Buyback which in this case propelled the stock higher.
  • Some Foreign Portfolio investors have also exited the stock taking benefit of higher prices in the initial days after announcement of Buyback. However FPI %  share sold is low.
  • Shareholding of Individuals with nominal share capital  of less than 2 Lakhs has increased by 38%. Major addition would have have been to the category with shares with less than 2 Lac  market value.  Even if 100% increase in retail investor holding happens, it has been factored in our estimates earlier. Thus  earlier estimate of 45-55% acceptance holds based on Sept shareholding and trends.
  • Due to fresh calls by many brokerages to accumulate Mphasis for Buyback there could be additional new buyers. If such numbers are high, the acceptance ratio will be under pressure, Even under these circumstances it is my opinion that  35-40% acceptance ratio level will be difficult to breach even with a high buying at this stage & a equally good tendering ratio. However Iam more inclined towards my  initial estimates of 45-55%.
  • Mphasis share price & buyback shall  be considerably influenced by trends in Mid cap IT sector & results which are due on 18 oct 2018.
  • The present fall in Mphasis  stock was due tg general meltdown in midcap IT space and sale by Mutual funds at higher levels. It is felt that present price movement was also dictated by larger investors and has been decoupled from buyback for at least some period. As today price movement shows Mphasis may stand or inch up at  the RD approaches.
Mphasis Buyback: A Framework to Estimate Acceptance Ratio:

This framework is based on an estimate of shareholding of investors with upto 150 shares of Mphasis Ltd. as on 31/03/2018. While in case of HCLTECH and TCS such figure was approximately known, the same has been estimated for Mphasis Ltd as we only have data for shareholding below 500 shares of Mphasis Ltd. as on 31/03/18. Further we have given some markup for addition by existing investors but the bulk of additions are likely to come from new category of arbitrage investors whose shareholding in all likelihood will surpass the existing shareholding of retail investors. The details are not being provided here as they are but lengthy. In this framework, we have taken good degree of safety by assuming generally on the higher side. Despite this Number of new investors who flock in to take advantage of arbitrage could vary greatly and have a sizable bearing on final acceptance ratio as Mphasis is not a very large buyback compared to TCS and HCL. If these assumptions do not turn out to be totally off the mark, Mphasis Ltd. Buyback could end up with 30-60% final Acceptance Ratio and a more closer range is estimated at 40-55%.

CrossTablualtion Indicating Estimated Returns(Just Possibilities)

The absolute returns/Loss that may accrue to an Investors/Arbitrage trader are a function of Percentage Acceptance Ratio and Price Post Buyback. instead of earlier rather clumsy way of depicting returns based on various combination of these two variables, we have depicted the same as a cross tabulation showing Absolute Returns as a function of various possible combinations of Acceptance Ratios and Price Post Buyback.

Shares Purchased
148
Nos.
Buyback Price 1350INR
Absolute Returns
MP when Posted1152
Investment170496
MP Aft Buyback
Acceptance Ratio 925950975
25%-10.48%-8.85%-7.23%
35%-6.79%-5.38%-3.97%
40%-4.95%-3.65%-2.34%
55%0.59%1.56%2.54%

Mphasis Buyback: Present and Previous Buyback
Particular / Year
Present Buy Back
Buyback(2017)
Board Meeting 07-08-1831-01-17
Buy Back Type Tender Offer Tender Offer
MP on announcment 1190560.05
Buy Back Price1350635
% Premium on Market Price13.45%13.38%
BuyBack in Rs. Crore988.271103.00
Buy Back ( Shares)7,320,55517,370,078
Equity Capital (cr)193.27
Face Value 1010
% Buyback3.79%8.26%
Voting on Resolution27-09-1812/03/17
Record Date25-10-1831/03/2017
Buy Back Issue date07-12: 20-12-1812/5/17 to 25/05/17
Shares for Retail 1,098,0832,605,5110
Retail shrholders-RD84,59431,281
R Shareholding on RD6,479,3383,499,448
Buyback entitlment Ratio16.95%74.45%
Shares Tendered Yet to Happen2,390,000
% Shares Tendered Yet to Happen
Actual Retail Aceeptance Yet to Happen100%
SEBI Guidelines on Buyback
  • At least 15 percent of the securities a company proposed to buy back should be reserved for small shareholders, while the maximum limit is capped at 25 percent of the paid-up capital.
  • Companies are allowed to buy back as much as 10 percent of shares outstanding without shareholders’ resolution.
Mphasis Ltd.: Quarterly Performance
Rs. In Crore    
ParticularsJun-18Mar-18Dec-17Sep-17
Gross Sales1820.221744.491660.691604.69
PBIDT365.3338.66309.51286.81
PBDT360.81334.34306.63283.07
Adjusted NP 258.31246.62214.94197.69
Equity193.32193.27193.2193.17
EPS 13.3612.311.1310.24
PBIDTM(%)20.0719.4118.6417.87
Mphasis Ltd.: Price Chart of 3 months
Mphasis price chart

Mphasis Ltd. stock price has almost doubled in last one year. Mphasis has demonstrated good quarterly performance and similar performance in coming quarters could provide a good support to its share price though it may more be a function of overall market sentiments. However since Mphasis is not in F&O, the share price after close of Buyback may turn volatile. The company paid a good dividend of Rs. 20/- per equity share of Rs. 10/- each for the financial year ended March 31, 2018. 

Disclosure
I hold a position in Mphasis Ltd. prior to this announcement and have added more quantity to participate in the buy back to a limited extent. I may add more quantity on dips in the price as there is considerable time left before a  buyback record date is announced.  Iam also participating in Buybacks of TCS and to some extent in  HCL Technology also.



Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.