Part 1
For this part let us assume that today is 12th November 2020.
Case
Screening: While going through corporate announcements we come to know that NMDC has initiated a buyback.
In the board meeting dated 10/11/2020, the board of directors had approved the buyback of 13,12,43,809 equity shares representing 5.05% of total paid capital @105/- per share. The Company has fixed 23th 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 20-21th of November to take decision about participating in the buyback.
Today through public announcement, the promoter expressed his intent to participate and to tender up to 13,12,43,809 equity shares.
(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:
- Either 15% of the total shares proposed to be buyback
- 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 ason record date
General shareholders: includes promoters and other than small shareholder}
Back to Case
Shareholding of Company:
- Small Shareholder :- 12,54,04 825 ( 12.54 CR)
- General Shareholder:- 293,64,44 834 ( 293.64 CR) including promoterholding of 213,24,53,593
So total shareholding available for buyback ( Small + General) = 12.54 + 293.64 =306.18 CR
Entitlement:
As per Sebi law, Small Shareholder will get:
- Either, their normal entitlement which is (Small shareholders/Total Shareholders * Shares to be bought back) ((12.54/306.18) * 13.12) = 53.67 Lac shares.
- Or, 15% of 13.12 CR shares to be bought back. It comes out to be 1.97 CR shares.
whichever is higher, so 1.97 CR shares are reserved for the small shareholders in the buyback and 11.15 CR shares (13.12-1.97) 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 ofminority that wants to participate in buyback.
In our case Acceptance ratio for General shareholders = 11.15/293.64 = 3.79%
In our case Acceptance ratio for Small shareholders = 1.97/12.54 = 15.7%
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 allminority and majority shareholders will participate in the buyback. However, based on our limited live experience and knowledge this is rarely the case.
Post Buyback Price
There can be only a probable guess of Post buyback Price. We can estimate it using these methods:
- Pre-announcement price was in the range of 80-85.
- Price to Book:Book value before the buyback was (i.e as on Sep 2020) 28885 cr and market cap at that time just was in the range 24160 cr. As a result, price to book came in the range .85-.90. Since 1378 cr will be used for buyback hence 27507 CR (28885-1378) will be left in the book after buyback. If we use the same PB multiple(.85-.90) then market cap comes in the range 23380cr -24556cr , Hence the post buyback price will be in the range 80-84
- Price to Earning: PE before the buyback was in the range of 8-9 times. Now after buyback Earning per share will increase as the some shares get extinguish. EPS will be approx 10.20 per share. Applying the same PE multiple, post buyback price come in the range of 82-86.
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 the guesstimate of post buyback price and acceptance ratio , we can calculate the breakeven point where there is no profit no loss.
As on 12th November 2020, price closed at 92,
The breakeven point for small shareholder comes at 90 approx. It means the remaining shares have to be unloaded in the market at minimum price of 90 to avoid the losses. But the post buyback price via model above comes in the range of 80-85. There are chances of 5-7 percent capital loss under small shareholder if all shareholders would tendered but that will rarely the case where the all shareholder get tendered. So with downside of 2-3% considering not all shareholders will tendered, we will participate under small shareholder category in
The hope of upside is in the range of 0-14%. We will not allocate as much as we did in NTPC case, considering the downside. You may have a different opinion and we would love to know why.
The breakeven point under General shareholder comes at 92 approximately same as entry point as there is not much acceptance. There are chances of 8-10 percent capital loss if all shareholder will tendered. The point where there will be no loss or no profit is when 85-90% shareholder will not tender, that in itself highly unlikely. So we will avoid participating under general category.
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?
Its better to pick parts of the case study, which you find useful and think at each instant using your own model what you would have done.
May we all Learn together
What Happened?
In order to see what happened please click on “2” on the bottom of page
Argha Investment Advisers 