Analysts say don't buy Majesco shares for the dividend

• Investors are buying the stock of Majesco since the time it declared a dividend of nearly 20,000% on December 15. But, it may not be a great idea, according to analysts.
• Business Insider spoke to a few analysts that track the stock and other smaller IT services companies to understand why now is a bad time to buy the stock.
• According to all of them, those who already owned the stock would benefit from the dividend but if you have bought the shares in the last few days then you have lost money.

There are people buying the stock of Majesco, the company that sells software and other services to insurance companies in India, since the time it declared a dividend of nearly 20,000% on December 15. And, it may not be a great idea to buy into Majesco just for the sake of dividend.

Business Insider spoke to a few analysts that track the stock and other smaller IT services companies to understand why now is a bad time to buy the stock.

According to all of them, those who already owned the stock would benefit from the dividend but if you have bought the shares in the last few days then you have lost money. It is a signal for investors to sell, rather than buy into the company, they said.

"There is not much left in the company"

Majesco made nearly ₹3,200 crore after selling its stake in its US subsidiary, Mastek. The majority of its dividend came from the stake sale and with the company's profit distributed as the dividend to the shareholders.

"There is nothing much left in the company," said one analyst on the condition of anonymity citing compliance issues.

Other than the software business, the company also has the real estate of 1,20,000 square feet at Mahape, Navi Mumbai, "and that value is nothing for the company," he added.

In a television interview after declaring the dividend, the managing director of Majesco, Farid Kazani, said that he is waiting for the price of real estate to improve before he can sell it and that money would also be distributed to shareholders.

"So now whatever value is the cash value and real estate value — so it will be brought down to ₹40-50 accordingly how the market perceives, but the cash value is ₹36," another analyst said.

Your dividend gains will be taxed at slab rate

Those who get the dividend will have to pay income tax and if you sell after that, there will be capital gains tax as well if there is a profit.

"If you buy the stock at a current price of ₹980 and get the dividend of ₹970 after the record date — it would simply expose you to dividend tax as per your tax slab and capital gain (if any) will be taxed at 15%," the second analyst explained.

The difference in the tax outgo can be quite stark. To make it simple, if an investor buys the stock at the current price and falls under the tax slab of 30%. They will have to pay 30% of the dividend as income tax and will be left with mere ₹679 — whereas the stock is currently priced at ₹964.

Two days ahead of the record date the stock would get readjusted automatically and the ₹964 that you initially invested in the company will be corrected to ₹50 (maximum). So an investor will be at a loss of nearly ₹230, if they buy the stock now.

Till last year, dividends were tax free, however, a new provision recently made it taxable under the head “income from other sources.”

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