There are 3 parts in this case study:
- Part 1 – Initial case discussion – 4th November, 2020
- Part 2 -Intermediate Decisions – 26th November and 7th December
- Part 3 – Final results – 29th Decemeber
Part 1
For this part let us assume that today is 4th November 2020.
Case
Screening: While going through corporate announcements we come to know that NTPC has initiated a buyback.
In the board meeting dated 2/11/2020, the board of directors had approved the buyback of 19,78,91,146 equity shares representing 2.01% of total paid capital @115/- per share. The Company has fixed 13th November 2020 as the record date for the purpose of determining the entitlement of shareholders who will be eligibile to participate in the proposed buyback offer. This means there is time till 10-11th of November to take decision about participating in the buyback.
On 4th November , 2020 through public announcement, the promoter expressed his intent to participate and to tender up to such an extent, that the minimum shareholding remains at least 51% of the post buyback equity share capital.
(Under the General obligation of Sebi law, the company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the board or public announcement of the offer to the buy-back is made)
Before, going to the case let us learn about what does the law states regarding buyback.
SEBI LAW
There is a special provision in law (Sebi Buyback Regulations,2018) for the small shareholder.The provision states that the company needs to take:
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.
{Small Shareholders: Shareholders with less than 2 lakh worth shares according to the close price as on record date
General shareholders: includes promoters and other than small shareholder}
Back To Case
Shareholding of Company:
A) Small Shareholder :- 18,52,90 041 ( 18.52 CR)
B) General Shareholder:- 970,92,67 239 ( 970.9 CR) including promoter holding of 504,80,97,508
So total shareholding available for buyback ( Small + General) = 18.52 + 970.9 = 989.42 CR
Entitlement:
As per Sebi law, Small Shareholder will get:
A) Either, their normal entitlement which is (Small shareholders/Total Shareholders * Shares to be bought back) ((18.52/989.42) * 19.78) = 37 Lac shares.
B) Or, 15% of 19.78 CR shares to be bought back. It comes out to be 2.96 CR shares.
whichever is higher, so 2.96 CR shares are reserved for the small shareholders in the buyback and 16.82 CR shares (19.78-2.96) are reserved for General ones.
Process
As per our model, There are two variables which decide payoff in any buyback process. One is acceptance ratio and other is post buyback price.
Acceptance Ratio
We will analyse the case on the basis of acceptance ratio. What is acceptance ratio?
Acceptance ratio for minority = Shares reserved for minority/total shareholding of minority that wants to participate in buyback.
In our case Acceptance ratio for General shareholders = 16.82/970.9 = 1.73%
In our case Acceptance ratio for Small shareholders = 2.96/18.52 = 16%
Since the numerator in the above calculations is fixed, calculated as per law, however the denominator part is unknown and we have done the above calculations assuming all minority and majority shareholders will participate in the buyback. However, based on our limited experience and knowledge this is rarely the case.
Post Buyback Price
There can be only a probable guess of the Post Buyback Price. We can estimate it using these methods:
A) Pre-announcement price was in the range of 80-85.
B) Price to Book: Book value before the buyback was (i.e as on Sep 2020) 122458 cr. and market cap at that time was in the range 82000-82500 cr . As a result the price to book came in the range .67-.70. Since 2275 cr would be used for buyback, 120183 CR (122458-2275) will be left in the book after buyback. If we use the same PB multiple (0.6) then market cap comes in the range 81000cr -84000cr , hence the post buyback price will be around 84-86.
C) Price to Earning: PE before the buyback was in the range of 7-8 times. Now after buyback Earning per share would increase as some shares get extinguished. As a result the EPS increases from 11.15 to 11.37 per share. Applying the same PE multiple, post buyback price comes in the range of 80-85.
As per above guesstimate the post-buyback price would be in the range of 80-85. (However if you think differently, we would love to know why?)
Breakeven Point (Expected payoff)
Definition: Now with guesstimate of post buyback price and acceptance ratio, we can calculate the breakeven point of acceptance ratio where there is no profit or no loss.
Calculations
For calculating breakeven point let us assume that we have 100 shares:
1. Small Shareholders
Acceptance ratio is 16% as per SEBI Law for small shareholders.
Current Market Price: 85.10
Price post buyback from above 80.
Total Cash Outflow = 85.10 * 100 = Rs 8,500 (ignoring brokerage and other expenses)
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 = 100 * 0.16 = 16 shares.
Expected Acceptance = 16 * 115 = 1,840
Cash Inflow = Expected Acceptance + (Shares left * Post buyback price)
= 1,840 + (84 * 80)
= 8560
Since , at the price of Rs 80, Cash inflow= Cash outflow, 80 is the breakeven price for small shareholders.
2. General Shareholders
Using the same process as above, the breakeven price for general shareholders is 85.
Both the breakeven price for small and general shareholders has been calculated assuming that all the shareholders will participate in the buyback, which is rarely the case in reality.
Small vs General: There seems to be not much difference of breakeven between small and general shareholders. However, in the case of General shareholders, the acceptance ratio is not favourable even if we consider the case where 50% shareholders will not tender.
In case of downside, both small and general shareholders category are protected, however, in case of upside, we are not sure of general shareholders. Hence, We will consider participating under small shareholder category. If you think differently, we would love to know why.
Conclusion
Under small shareholders, as it is among the rare cases where downside is protected and upside can be in the range of 15-20% depending upon the acceptance ratio, we can allocate more here.
Purpose:
The purpose of such case studies is to help all of us become better investors. Cases like these are practice before the main match. Thinking on these various steps can help us develop patterns for what do if these situations would have occurred with us. We would love to know what you would have done in this case?
May we all Learn together
What Happened?
PLEASE CLICK ON PAGE 2 MENTIONED TOWARDS THE LOWER END OF THE POST TO SEE WHAT HAPPENED)
Argha Investment Advisers 