Wipro’s board will consider a share buyback on 20 April (date of FY16 results). This is a direct fallout of the 10% additional tax that the government has levied on dividend income above R1m in the recent budget. Two things remain unknown: (i) the quantum of the buyback, which could be limited by the 73.4% promoter holding; and (ii) if it is in lieu of or in addition to the dividend payout, where company has been fairly consistent over the past few years.
Tax implications for shareholders, why buyback: Dividend distribution in India can be inefficient from a tax perspective due to the 20.4% dividend distribution tax. In addition, the government in the most recent budget announcement has enforced an additional 10% tax on all individuals (including undivided families) that receive a dividend income of more than R1m per annum. For an individual shareholder, a buyback is more tax efficient, as even long-term capital gains (holding of >1 year) is exempt from any tax.
Possible mechanisms for a buyback: Buyback in India can be done through two means: (i) open offer (market transaction) where the promoter is restricted from participating in the offer and hence leads to an increase in promoter holding; (ii) tendering where all shareholders (including the promoters) are allowed to participate in proportion to their shareholding in the company.
Promoter holding at 73.4%, a limiting factor for an open offer: The promoter group at Wipro currently owns 73.4% of company and open offer (market transaction) could trigger the breach of SEBI guidelines which mandate the promoter holding to mandatorily below the 75% threshold. We believe that a tender offer might be the buyback approach in this case.
Cash and cash flows remain robust, what could be the quantum of buyback? Wipro had net cash of Rs 208bn ($3.2 bn) at the end of Dec-15. While growth for the company has lagged peers in the large cap universe, its cash flows have been robust. Regulatory guidelines suggest that the company can buy up to 10% of its equity capital, which would imply a potential buyback to the extent of R44 bn (~3% equity at current price). Its total dividend related outgo in FY15 was Rs 35 bn.
Expectation for the quarter—acquisitions to boost visibility: USD revenue should grow +2.7% q-o-q (+3% in cc, +6.4% y-o-y), in line with its guidance of 2-4% q-o-q growth. Of this, 120-150bps would have been contributed by inorganic growth. Margins are likely to expand 50bps q-o-q on account of absence of costs related to Chennai floods in the previous quarter and INR depreciation. We expect Wipro to guide to 3.5-4.5% q-o-q growth in the Jun-16 quarter (c1-2% organic growth), dependent on the timing of HealthPlan Services acquisition. Commentary on progress of three acquisitions will be watched.
