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 case study of a situation which we have done. 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. Even we do not know what will be the result of this particular situation, all we are doing is following a process (Which may or may not be successful).
Part 1
For this part let us assume today is 18th august 2021.
Case
Screening: While going through corporate announcements on 13th August 2021 we come to know that Star cement has initiated a buyback.
In the board meeting dated 13/8/2021, the board of directors have approved the buyback of 82,48,580 equity shares representing 2% of total paid equity share capital @150/- per share. The promoters have also expressed their intention to participate in the Buyback.
The Company has fixed 26th August 2021 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 23rd of August 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 :- 1,39,32,133( 1.39 cr)
B) General Shareholder:- 39,84,96,864( 39.84cr) including promoter holding of 27,30,84,937.
So total shareholding available for buyback ( Small + General) = 1.39 CR + 39.84 CR = 41.24 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) ((1.39/41.24) * .8248) = 278802 shares.
B) Or, 15% of .8248 cr shares to be bought back. It comes out to be 12,37,287 lac shares.
whichever is higher, so 12,37,287 lac shares are reserved for the small shareholders in the buyback and .7011 CR shares (.8248-.1237) CR 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 = .1237/1.39 cr = 8.88%
In our case Acceptance ratio for General shareholders = .7011/39.84cr = 1.75%
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 100-110.
B) Price to Book:Book value before the buyback was (I.e as on june 2021) 2070 cr and market cap at that time was in the range 4125-4525 cr. As a result, current price to book came in the range 2-2.20 Since 124 cr would be used for buyback. If we see the PB of last 4 quarter that was in the range of 1.9-2.1 , applying the current PB then market cap comes in the range 3800-4200cr , Hence the post buyback price will be in the range 90-100.
C) Price to Earning: PE was in the range 19.50-21.50 times.if we see the PE of last 4 quarters that was in the range of 16.5-17.5. Applying the same PE multiple, post buyback price come in the range of 85-90.
As per the above conservative guesstimate , the post buyback price comes in the range 90-100.
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 18th August 2021, price closed at 116.
Under General category the breakeven price is 116 approx and Under Small category the breakeven price is 113. 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 90-100. It would make no sense to participate at this price.
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? Though as the case is live we still don’t know what will happen in the same.
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 