Wipro
Reco: Hold
PT: Rs550
CMP: Rs488
Another round of buy-back in offing, maintain Hold
Key points
Plans to return 25-30% of cash to shareholders over next 2-3 years: As per recent media reports, Wipro is mulling another round of buy-back and plans to return 25-30% of its cash reserves to the shareholders over the next two to three years. At the end of December 2016 quarter, Wipro had cash and cash equivalents of Rs33,000 crore. Recently, Tata Consultancy Services (TCS) announced a mega plan to buy back shares worth Rs16,000 crore utilising 37% of its cash reserves. Infosys has also initiated the process to amend its Articles of Association to include the provision for a buy-back as mandated by the new Companies Act (the company has cash reserves of close to Rs38,000 crore). Wipro had earlier come out with a Rs2,500-crore buy-back plan in April 2016 to repurchase 1.62% of its shares at Rs625 per share.
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Systematic programme to return cash to shareholders a more transparent way of capital allocation: Unlike their global peers like Accenture and Cognizant, which have structured and systematic cash return programmes for their shareholders via the buy-back route, the Indian information technology (IT) companies are more comfortable returning cash from their existing reserves to shareholders. Thus, if Wipro changes its cash return policy for shareholders through a more structured and systematic buy-back route utilising not only the existing cash but also the future cash flows, it will be a big initiative for the Indian IT incumbents. A systematic buy-back programme is indicative of a more transparent capital allocation policy which also augurs well for investor sentiment and stock performance.
Without earnings performance, buy-back alone cannot drive stock performance: Buy-back programmes only inch up earnings per share and return on equity in the near term, but to accomplish a long-term sustainable operating efficiency, the overall earnings performance of a company needs to improve. Further, a buy-back programme alone cannot drive the stock performance over a longer time; though it may have a positive sentimental impact in the near term. Wipro’s stock performance after its buy-back announcement in April 2016 (at around a 12% premium) has been lacklustre, delivering a negative return of 13%.
Maintain Hold with price target of Rs550: According to the media, a more structured capital allocation policy is a welcome move from Wipro but in the absence of any earnings triggers, we do not see any major re-rating potential in Wipro. We remain cautious on Wipro’s growth trajectory and maintain our Hold rating with an unchanged price target of Rs550.
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