Part 1
For this part let us assume today is 25h November 2015.
Case
Screening: While going through corporate announcements on 4th june 2015 we come to know that Just Dial ltd has initiated a buyback.
In the board meeting dated 4/6/2015, the board of directors have approved the buyback of 10,61,499 equity shares representing 1.50% of total paid equity share capital @1550/- per share. The buyback would be subject to approval of shareholder by way of special resolution through postal ballot. On 24th August 2015, the promoters have expressed their attention to participate in the Buyback.
0n 21st November 2015, postal ballot result was declared. 99.32%of votes cast were in the favour of special resolution and hence the resolution was approved by the shareholders..
The Company has fixed 4th December 2015 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 1-2nd of December to take decision about participating in the buyback.
Yesterday,Public announcement regarding the same has been made by the company.
(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 :- 21,24,726 ( 21.24 lac)
B) General Shareholder:- 6,83,47,656( 6.83 cr) including promoter holding of 2,29,82,834.
So total shareholding available for buyback ( Small + General) = .2124+6.8347 = 7.05 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) ((.2124/7.05) * .1061) = 31845 shares.
B) Or, 15% of .1061 cr shares to be bought back. It comes out to be 1,59,225 lac shares.
whichever is higher, so 1,59,225 lac shares are reserved for the small shareholders in the buyback and 9.02 lac shares (10.61-1.59) lac are reserved for General ones.
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 Small shareholders = 1.59lac/21.24 lac = 7.48%
In our case Acceptance ratio for General shareholders = 9.02lac/6.83 cr = 1.32%
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 live experience and knowledge this is rarely the case.
Post Buyback Price
There can be only a probable guess of Post buyback Price.
A) Pre-announcement price was in the range of 750-800.
B) Price to Book:Book value before the buyback was (I.e as on sep 2015) 770 cr and market cap at that time was in the range 5300-5600cr. As a result, current price to book came in the range 6.9-7.2 Since 164 cr would be used for buyback. If we see the PB of last 4 quarter that was in the range of 10-11 , applying the current PB then market cap comes in the range 4400-4600cr , Hence the post buyback price will be in the range 625-650.
C) Price to Earning: PE was in the range 33-35 times. Applying the same PE multiple, post buyback price come in the range of 750-800.
As per the above conservative guesstimate , the post buyback price comes in the range 650-750.
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 26th November 2015, price closed at 962.
Under General category the breakeven price is 950 approx and Under Small category the breakeven price is 910. In the above, the profit would be only possible if the post buyback price is greater than breakeven price but the post buyback price via model used above is in the range of 650-750. As per our model, It would make no sense to participate at this price. However, you may have a different opinion and we would love to know the same.
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?
In order to see what happened, please click on 2 on the bottom of the page.
Argha Investment Advisers 