Part 1
For this part let us assume that today is 13th march 2020.
Case
Screening: While going through corporate announcements on 21st Jan 2020 we come to know that Granules India has initiated a buyback.
In the board meeting dated 21/01/2020, the board of directors have approved the buyback of 1,25,00,000 equity shares representing 4.92% of total paid equity share capital @200/- per share. The buyback would be subject to approval of shareholder by way of special resolution through postal ballot. The promoters have also expressed their intention to participate in the buyback.
“In Special resolution, the votes cast in favour of the resolution are not less than three times the number of the votes, if any, cast against the resolution by members.”
On 10th March 2020, the postal ballot result was declared. 97.54 percentage of votes cast were in the favour of special resolution and hence the resolution was approved by the shareholders.
The Company has fixed 20th March 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 17th to 18th of March 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 :- 5,43,71,544 ( 5.43 CR)
B) General Shareholder:- 19,98,26,618( 19.98 CR) including promoter holding of 10,90,83,201.
So total shareholding available for buyback ( Small + General) = 5.43+19.98 = 25.41 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) ((5.43/25.41) * 1.25) = 26.73 Lac shares.
B) Or, 15% of 1.25 CR shares to be bought back. It comes out to be 18.75 lac shares.
whichever is higher, so 26.73 lac shares are reserved for the small shareholders in the buyback and 98.27 lac shares (125-26.73) 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 = 26.73lac/5.43 cr = 4.92%
In our case Acceptance ratio for General shareholders = 98.27lac/19.98 lac = 4.92%
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 125-130.
B) Price to Book:Book value before the buyback was (I.e as on DEC 2019) 1760 cr and market cap at that time was in the range 3200-3300cr. As a result, price to book came in the range 1.80-1.90 Since 250 cr would be used for buyback.If we see PB for previous year was in the range 1.6-1.8 Applying the past year PB multiple the post buyback price will be in the range 100-110.
C) Price to Earning: PE was in the range 10.5-11 times.Previous year multiple was in the range 9-11. Applying the previous PE multiple, post buyback price come in the range of 110-130.
As per the above conservative guesstimate , the post buyback price would be in the range 110-130.
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 13th March 2020, price closed at 157.
Acceptance under both category are almost equal. The breakeven price is same under both category ie 155 approx.In the above, the profit would only be 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 110-130. As per our model, It would make no sense to participate at this price. However, you may have a different opinion on the same and we would love to know why you think so?
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, 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 