Outsourcing Cash

e-Clerx's buy-back could result in a bumper gain if the acceptance ratio turns out to be high

Post the additional 10% income tax levy introduced in the FY17 Union Budget on individuals and others who receive dividend in excess of Rs.10 lakh per annum, companies with large cash in their books are resorting to more tax efficient ways to utilise their cash.

eClerx Services where promoters hold over 50% and which has about Rs.600 crore in cash seems to  among them. Instead of spending it on dividend, it has chosen to buy-back shares worth 234 crore. eClerx, a knowledge process outsourcing firm has turnover of Rs.1,300 crore and paid a dividend of Rs.26 a share in FY15 compared with Rs.1 a share in FY16.

The buy-back is not only an opportunity for its promoters but for others as well as the buy-back price is Rs.2,000 against its current price of Rs.1,662 a share. While there is a 20% premium, compared to its current market price, one needs to read between the lines.

At a buy-back price of Rs.2,000 a share, the company will be buying back about 10.6 lakh shares, which is 2.6% of the total outstanding shares. If the same ratio is applied this essentially means someone holding 100 shares will be eligible for tendering 2.6 shares in the buyback, which is minuscule. On top of that, there is price risk for the remaining 98 shares.

"The possible acceptance ratio works out to be very low and I do not think there will be any interest in such a buy-back. This is largely meant for the promoters who are the majority shareholders and are looking to make effective use of the cash lying in the books," points out Deepak Purswani, analyst, ICICI Securities.

But the game could be different for someone holding shares equal to or less than Rs.2 lakh. Retail holding in the company is 4.21% stake compared to mutual funds and foreign investors holding close to 42%. "Generally 15% is reserved for retail investors. Due to lack of awareness and minuscule participation, retail portion is either undersubscribed or met with limited subscription, leading to much higher acceptance levels in this category ( even 100% sometimes)," says N Arunagiri, founder, TrustLine Holdings which run a arbitrage fund.

Our calculation (See: Easy Money) suggests that breakeven could be an acceptance ratio of as low as 15%. Anything above 15% could lead to a gain of 7-20% assuming a 50 to 100% acceptance. In terms of downside, there is a chance that the share price might fall once the buy-back window is closed. Assuming a 50% acceptance, the share price will have to fall below Rs.1,100 for the retail buyer to bleed. That seems some way off going by fair value estimates of analysts, which range from Rs.1,450-1,500.