Please consult us or some other Investment advisor for detailed advice regarding the same. This is in no way an investment advice or buy/sell recommendation. It is just a sample case study of a situation which we may do. It involves its own risk (In terms of allocation or loss). We may change our mind before you may know (Or sell). So please if you want to do such situations, please consult us or any investment advisor.It is just a case study for future learning. We may be wrong and make mistakes. It is ongoing.
Case Study
On the 2 November , 2020 the Board of Directors of NTPC gave a nod to Buyback, 2% of the total paid up capital of the company. 13/11/2020 was decided as the record date.(Meaning: The shareholders holding shares on 13/11/2020 will be eligible to be considered for buyback)
Shares to be bought:Total no. Of the equity shares to be bought back is around 19.78 cr. ( That represents the 2% of total paid up capital)
Law states:
There is a special provision in law (Sebi Buyback Regulations,2018) for the small shareholder ( i.e who holds less than 2 lac worth shares according to the close price as on the record dates). The provision states that the company needs to take approval:
A)Either 15% of the total shares proposed to be buyback
B) or the number of securities entitled by them (small shareholders) as per their shareholding.
whichever is higher.
This results in buyback situations profit or loss decided by the small shareholder viewpoint. Such laws results in special situations created with favourable odds.
Back to Case Assessment (Small Shareholder Calculation):
As the promoter (Government of India) is also participating in the buyback:
A) the normal entitlement comes to be 2% for the small shareholder (2% of 19.78 crore shares = 0.3916)
Or
B) 15% of 19.78 around 2.97 crore
As the law states, whichever is higher, around 2.97 crore shares is reserved for small shareholders in the buyback.
In that case, for the small shareholder buyback entitlement comes out to be approx 16% (shares to be bought back/ total shareholding of small shareholders) (2.97/18.50).
Case Analysis:
We will analyse the case on the basis of acceptance ratio of minority shareholders. What is acceptance ratio?
We have already discussed it above:
Acceptance ratio for minority = Shares to be bought back for minority/total shareholding of minority that wants to participate in buyback.
Since the shares reserved for minority to be bought back (Numerator) it is fixed, we will try and change the denominator, i.e the total shareholding of minority which will participate.
If all the minority shareholders participate then the acceptant ratio will be 16%. However, based on our past study and limited experience this is rarely the case.
Case 1: If acceptance ratio is 16% as thought (Though this is rare as some shareholders never tender their shares)
Current Market price :- 95
Price pre buyback :- 85 (We use this price as an approximation for where the price may become after the buyback is over)
Lets assume we will buy 100 shares:
So our total outflow will be 100* 95 = 9500 (Obviously some brokerage, commission, etc)
Since 16% is the acceptance ratio, then Expected Acceptance = no of our shares bought back * Buyback price announced by company( Rs115)
No of shares bought back = Shares we own * Acceptance ratio
In our case no of shares to be bought back = 100 * 16% = 16 shares
Expected Acceptance = 16 * 115 = Rs 1840
Now in order to us to breakeven what should be the share price after buyback, the lower it is the better it is, since margin of safety will be higher.
Breakeven point = (Cash outflow- Expected acceptance)/no of shares held after buyback
In this case it is, (9500-1840)/84, so our breakeven price comes to be 92. But we know the share price before buyback was 85, and after buyback many people will be selling.As there are very high chances price will not be 92 post buyback . It may be around 80-85 range in that case we could loose around 5-8 percent of the capital. But in this case we assumed all shareholders to have bought back which is rarely the case, so acceptance ratio which we assumed is less.
Case 2: Let us take the acceptance ratio as 30%
We will buy again 100 shares.
Cash Outflow: 100*95 = 9500
Expected Acceptance: 30*115 = 3450
Breakeven Point/Price = Rs 86 ((9500-3450)/70
Here we are near breakeven , in this case we can also loose if price falls below 85.
Case 3: Let us take the acceptance ratio as 50%
Cash Outflow: 100* 95 = Rs 9500
Expected Acceptance: 50 * 115 = 5750
Breakeven Point: = Rs 75 ((9500-5750)/50))
Though it Can be possibility , Even if we take as Rs 85 as the post buyback price, here the profit won’t be much as the profit falls in the range 3-5 % of the capital.
Case 4: Acceptance Ratio as 75%
Cash Outflow: 100*95 = 9500
Expected Acceptance: 75*115 = 8625
Breakeven Point = Rs 35 ((9500-8625)/25))
In this case ( very minute chance) we would earn around 10-12% percent of capital, if we assume the price to fall to Rs 85 after buyback.
Conclusion:
Now all matters is the risk/reward ratio. If @ around 30%-40% acceptance ratio we would have good return, and our thinking would have suggested that this is likely, then we may have considered this situation investable. At current price this does not make a good candidate for investment. Our thinking based on acceptance ratio is based on bayes odds (or the odds of similar situations) in the past.
Two main variables determine in this thinking model the success or failure of this kind of buyback special situation:
- Post buyback price
- Acceptance ratio
We have used this model. We may be wrong. This is ongoing live case study. However, we would Love to learn and get your views on this situation or this type of thinking model, with its flaws too.
May we all learn together.
The position if undertaken should have been on Nov,11 Lets use it as an ongoing case study to learn together.
Argha Investment Advisers 