The sale consideration is 128% of NIIT’s market capitalization. It implies a per-share ₹120 pre-tax realization, based on last week’s closing price. With the tax on the transaction being possibly offset against taxes in future, the stake sale could help rerating, say analysts at Elara Securities (India) Pvt. Ltd.
NIIT is expected to return a large part of the stake sale proceeds to investors through dividends and share buybacks, besides deploying some in the core business. But this could be time-consuming. Its low reserve base limits a large buyback unless reserves are re-evaluated or a special permission from the regulator is obtained, point out analysts at Elara and Emkay Global Financial Services Ltd.
Share buybacks are generally seen as a tax-efficient manner of returning money to shareholders. “Distribution may take at least 12 months (if approval is sought from the court for buyback of more than 25% of net worth) and can go up to 3-4 years if via shareholder approval as a usual buyback," Emkay said in a note.
NIIT Tech, for its part, would be able to access Baring Private Equity Asia’s portfolio companies resulting in potential business gains. Besides, PE firms’ focus on cash returns may well add heft to NIIT Tech’s valuations.
“Hexaware Technologies Ltd and Mphasis Ltd saw a price-to-earnings (multiple) re-rating after private equity buyouts," Antique Stock Broking Ltd said in a note. Hexaware raised its payout ratio from 24% in 2017 to 43% in 2018. Similarly, Mphasis completed two large buy-backs in the last two years, points out Antique.
The payout ratio at NIIT Tech is already about 30%, hence the upside in this stock could be capped. It has made tactical investments to gain a foothold in new technologies and geographies. PE firms in general are not forthcoming about such acquisitions, given their focus on cash returns. This is another check NIIT Tech’s investors have to monitor.