eClerx Services has approved a buyback of 16,37,500 fully paid-up equity shares of face value Rs 10 each representing up to 4.24 percent of the total number of equity shares. The buyback price is fixed at Rs 1,600 per equity share, a 41 percent premium to its March 20 closing price of Rs 1,134 a share. The total buyback amount is Rs 262 crore, and the record date for the same is yet to be announced.
We have estimated the entitlement ratio to be 40-42 percent. However, the real acceptance ratio should be 30-40 percent higher as many shareholders do not take part in the buyback. We have estimated the acceptance ratio to be around 55-60 percent. Earlier too, the company had initiated a buyback twice with a reasonable acceptance ratio. Moreover, this buyback looks attractive as it is available at a 41 percent premium. The maximum tenure is estimated at 3-4 months.
We advise traders who want to participate in the buyback to purchase 150 shares at Rs 1,134 in the open market and offer them in the tender offer. Do note that the shareholding value should be less than Rs 2 lakh as on the record date to qualify for this buyback.
As per SEBI regulations, 15 percent of the offer size will be reserved for retail shareholders (holding shares worth less than Rs 2 lakh). Therefore, Rs 39.30 crore (15 percent of Rs 262 crore) is set for Retail Investors.
Expected returns and conclusion
The upside in eClerx is expected to be quite high, though the probability of alpha returns is expected. The company’s performance is in line with our estimates and has a strong order book. The estimated acceptance ratio as per our calculations turns out to be a reasonable 55 percent, which makes the buyback attractive.
Even if the stock trade sideways after the buyback, holders may gain up to 35,000-37,000, which translated to an expected absolute return of around 20 percent (estimated annualized return of 60 percent). A 20 percent movement on either side may provide a total return of 12-30 percent (estimated annualized return 36-90 percent). With downside expectations low, investors may opt for the buyback, and the remaining quantity (not been accepted in the repurchase) may be sold in the open market.