Wipro Demerger: The Best Option For Shareholders

IT major Wipro recently announced the demerger of Wipro Consumer Care & Lighting (including furniture business), Wipro Infrastructure Engineering (hydraulics and water businesses) and its medical diagnostic product and services business into a separate company to be named Wipro Enterprises Limited (WEL), which will be an unlisted company.

To carry out this restructuring, Wipro has suggested the following options for shareholders to choose from as per their investment objectives:

1. Receive one equity share with face value of Rs 10 in Wipro Enterprises Limited for every five equity shares with face value of Rs 2 each in Wipro Limited that they hold or
2. Receive one 7 per cent redeemable preference share (RPS) in Wipro Enterprises Limited with face value of Rs 50 for every five equity shares of Wipro Limited that they hold or
3. Exchange the equity shares of Wipro Enterprises Limited and receive as consideration equity shares of Wipro Limited held by the promoter. The exchange ratio will be one equity share in Wipro Limited for every 1.65 equity shares in Wipro Enterprises Limited.

A.        Go for option 1 and at the time of demerger convert every 1.65 equity shares of WEL into one equity share of Wipro (or one share of WEL to 0.6061 shares of Wipro).

B.        Go for option 2 and get a redeemed value of Rs 235.20 per share of WEL after one year post the demerger.

Assuming a shareholder owns five shares of Wipro with a current market price of Rs 360 per share, option A would result in the following:

Assuming a shareholder owns five shares of Wipro with the current market price of Rs 360 per share, option B would result in the following:

We think option A would be beneficial for investors considering the fact that they would get the conversion done at the time of demerger rather than waiting for a period of one year to garner returns. It would practically make more sense to receive shares of Wipro at an effective price of Rs 321.08 per share at the time of demerger rather than at Rs 316.04 per share after a year post the demerger.

Moreover, it would be beneficial to hold shares of Wipro after the demerger since the new entity would concentrate solely on the IT business. The non-IT business of Wipro contributed to 14 per cent of the revenues and 7 per cent of the operating income. Being the relatively lesser profitable bit of the consolidated business, the demerger would enable Wipro to command an upward revision of its PE multiple. Hence, we recommend shareholders to opt for option A to grab a better deal.