Cera Sanitaryware Buyback Offer 2024 - vrk100 - 30Jul20224

Cera Sanitaryware Buyback Offer 2024

 

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(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

 

 

(Updates 05Sep2024, 22Aug2024, 13Aug2024 and 05Aug2024 are available below. Even though this blog was posted originally on 30Jul2024, I'll be updating this blog whenever new information is made available on the buyback offer.) 

 

 

The blog is about Cera Sanitaryware Buyback Offer.

1. Cera Sanitaryware Limited on 26Jul2024 announced, through a BSE stock exchange filing, that its board of directors would consider a proposal to buy back the company's fully paid-up equity shares at its meeting on 05Aug2024. The details of the buyback proposal will be known after the board meeting.

 

The announcement was made after closure of market hours on 26Jul2024. Yesterday and today, the stock reacted positively to the buyback proposal announcement and rose by 3.6 percent and closed at Rs 9,081 per share, with a market cap of Rs 11,800 crore; compared to the closing prices of Rs 8,768.20 (market cap Rs 11,400 crore) on 26Jul2024.

 

 

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Schedule of activities

 

2. In general, buyback offers take three to six months to complete depending on which route the company takes for buyback (there are basically two routes companies take for share buybacks or repurchases -- one is 'tender offer' route and another is 'buyback in open market via stock exchanges). So, it's necessary for investors to follow activities related to the buyback offer throughout the process. 

 

A typical list of activities is given in table 1 below >

 

Stock valuation

 

3. The stock price-earnings (P/E) ratio is 49.4, its price-to-book value (P/B) ratio is 8.8 and the price-to-sales (P/S) ratio is 6.3. All data are as at close of 30Jul2024.

 

For more on this, please check the following two images >

 

 

Previous Buyback Offers

 

4. To the best of the author's knowledge, there has been no record of buyback offers prior to the current proposal.

 

Update 05Aug2024: Buyback details 

5.  As scheduled, the company's Board of Directors met on 05Aug2024 and announced brief details of buyback (the announcement was made during the market hours). As on 05Aug2024, the market price of its stock closed at Rs 9,444 per share with a market cap of Rs 12,280 crore.

 

6. Limited details of buyback as announced on 05Aug2024 >

 

 

7. As stated in the table above, the company will buy back its fully paid-up shares of Rs 5 each at a maximum buyback price of Rs 12,000 per share through a 'tender offer.'

 

8. The maximum buyback size is Rs 130 crore and promoters haven't yet expressed whether they wish to participate in the buyback proposal. As this is a 'tender offer,' investors who wish to participate in the buyback have to surrender their shares during the buyback process and the record date / ex-date for buyback is 16Aug2024.

 

9. The maximum buyback price of Rs 12,000 is at a premium of 27 per cent to the current market price of Rs 9,444 per share.

 

10. The buyback size of Rs 130 crore represents 9.68 per cent and 9.66 per cent of company's total paid-up equity capital and free reserves as per standalone and consolidated balance sheet respectively as on 31Mar2024. The number of shares proposed to be bought back are 108,333, representing up to 0.83 per cent of total number of company's equity shares. 

 

11. The promoters' current stake in the company is 54.48 per cent of the total.  

Update 13Aug2024: Public Announcement

12.  On 07Aug2024, the company made a public announcement giving details of the buyback offer. On the same day, the company published the Board resolution approving the buyback offer.

 

13. Key highlights from the above are:

 

The Company's Board or Buyback Committee may, till one working day prior to the Record Date, increase the Buyback Price and decrease the number of Equity Shares proposed to be bought back, such that there is no change in the Buyback Size.

The Board had not sought the approval of the shareholders of the Company since the Buyback Offer Size is less than 10 per cent of the total paid-up equity share capital and free reserves of the company.

14. As this is a buyback offer via tender offer route, promoters are eligible to participate in the buyback. In this regard, seven out of nine members of the Promoter Group have expressed their intention to participate in Buyback. This is interesting.

Two members of the promoter group, namely, Pooja Jain Somany (with 1.54 per cent stake) and Madhusudan Industries Ltd (0.14 per cent) do not want to participate in the buyback.

Promoters who want to participate in the buyback are >

 

15. Reasons for buyback as stated by the company are:

a) The buyback will help the company to return surplus cash to its shareholders holding Equity Shares, thereby, enhancing the overall return to shareholders

b) The buyback offer via tender route reserves 15 per cent of the number of Equity Shares to be bought back for the "small" shareholders -- giving benefit to a large number of small shareholders

c) The buyback may help in improving its return on equity, by reduction in the equity base, thereby leading to long term increase in shareholders’ value

d) The buyback gives the option to shareholders either to participate in the buyback and surrender their shares as per their eligibility or not to participate in the buyback

16. The buyback price has been arrived at after considering various factors including, but not limited to the trends in the volume weighted average prices and closing price of the Equity Shares on the Stock Exchanges where the Equity Shares of the company are listed.

For more details, please see the screenshot below >

 

Update 22Aug2024: Letter of Offer

 

17. On 20Aug2024, the company made a Letter of Offer to eligible shareholders under its buyback programme (web archive). The buyback offer under tender offer route opens on 22Aug2024 and closes on 28Aug2024. 

If you are eligible to participate in the buyback offer, you need to surrender the shares to the company during the buyback period provided you are willing to participate in the buyback. Indicative buyback entitlement ratio for reserved category (small shareholders) is 1 share out of every 22 shares held by them as on record date and the same is 1 share for every 135 shares held by the general category.

 

Tables 6 and 7 give details of calculation of Entitlement Ratio >

 

 

 

18. If you are eligible and participating in the buyback programme as mentioned in para 17 above, the cash consideration offered by the company in lieu of your eligible shares will be credited to your bank account on or before 04Sep2024. 

 

The company's stock price has slightly come down after the record date is over. The share is now quoting at Rs 9,797 per share with a market cap of Rs 12,700 crore as of today (intra-day 22Aug2024).

If you want to track the BSE Bid details and BSE demand schedule concerning the buyback offer, please check here and here. 

Updated Table 1 with Schedule of Activities >

 

Update 05Sep2024: Post-buyback announcement

 

19. The company today made a BSE filing with post-buyback public announcement (web archive) on 05Sep2024, giving details of bids accepted, post-buyback shareholding and others.

 

Accordingly, the tables relating to: details of bids accepted in tender offer, percentage of equity capital extinguished, promoter holding and schedule of activities are updated and are given below for future reference:

 

Table 8: The shareholder response to the buyback is quite good; with small shareholders bidding 14.93 times of their actual holding while general category bidding 94.65 times of the holding -- with total bids of 82.69 times.

 

 

 

Table 1:  The stock today (05Sep2024) closed at Rs 9,200 per share with a post-buyback market cap of Rs 11,866 crore. Between the date of announcement on 26Jul2024 and now, the stock provided a modest gain of 4.93 per cent -- though in between, the stock reached a level of Rs 10,420 (09Aug2024).

 

Table 4:  The percentage of shares cancelled in this buyback is just 0.83 per cent of total shares. This kind of small percentage of buyback seems to be an exercise in futility.

 

 

Tables 2 & 3:  The details of all buybacks so far. The company in its history has undertaken buyback only once.

 

20. Valuation ratios and peer comparison of the company as on 05Sep2024 as per Screener.in:

 

 

(As the buyback process is completed, there will no longer be any updates on this.)  

 

 

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Reference shelf:

 

Top image: Google Gemini AI image

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Read more:

 

Blog of Blogs Theme-wise 

 

Weblinks and Investing

 

India Fixed Income Data Bank

 

Indian Economy Data Bank 

India Forex Data Bank 

 

 

Arbitrage Funds and Avenues

JP Morgan Guide to Markets Jun2024

Rapid Growth is Assets of India's MF Industry

Mutual Fund Categories with Similar Returns

 

Side Pocketing Episode of Aditya Birla SL Dynamic Bond Fund

 

Crux of Kotak Debt Hybrid Fund

 

Global Market Data 30Jun2024

 

Brief History of India's 1991 Forex Crisis and Gold Pledge

 

You Can Boast About It!

 

Big Surge in Number of Shareholders in PSUs

 

Why RBI Won't Favour A Strong Rupee 

 

Currency Pairs: How to Calculate Depreciation or Appreciation

 

Sensex versus Gold Price

 

RBI's Record Surplus Transfer to Govt of India 

 

The Little Secret Behind Nifty Next 50 Index's Recent Success 

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Disclosure:  I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

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Arbitrage Funds and Avenues - vrk100 - 24Jul2024

Arbitrage Funds and Avenues

 

Follow @vrk100

 

 

 

(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

 

 

 

A popular perception among investors is arbitrage funds are risk-free. In actual practice, it is not so.

In an arbitrage, investors and money managers try to exploit mispricing in two different markets and make small amounts of money at very frequent intervals.

For example, if a stock is quoting at different prices in two exchanges, an investor in theory can buy where it is priced lower and simultaneously sell in another stock exchange where it is priced higher, making small profit with minimal risk in the process. 

Arbitrage mutual funds in India try to encash differences between cash and derivatives market. 

They buy securities (long position) in cash market  and simultaneously sell them (short position) in derivatives market -- whenever there are differences in prices of securities in cash and derivatives (futures and options or F&O) market.

 

Put differently, the long position is hedged against the short position, with minimal risk. 

As they invest both in equity and debt, arbitrage funds are hybrid funds. 

Hybrid schemes invest in a blend of asset classes, like, equity, debt, commodities like gold and silver, REITs or real estate investment trusts.

  

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Related Blogs: 

 

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1. SEBI definition

 

India's capital market regulator SEBI or Securities and Exchange Board of India defines an arbitrage fund as:

Type   of   scheme:   an open-end scheme investing in arbitrage opportunities

 
Scheme Characteristics: scheme following arbitrage strategy, with a minimum investment of 65 per cent of total assets in equity and equity-related instruments

 

The above SEBI definition entails an arbitrage fund to invest at least 65 per cent of total assets in equity and equity-related instruments.

 

2. Arbitrage fund asset mix

 

Typically, the asset allocation of an arbitrage is as follows:

1. Equity and equity related instruments including derivatives: A minimum of 65 per cent and a maximum of 90 per cent of total assets.

2. Debt and money market instruments including margin money deployed in derivatives transactions: A minimum of 10 per cent and a maximum of 35 per cent of total assets.

 

 

3. Expense ratio

 

Expense ratios are an important consideration while selecting arbitrage funds, as they tend to provide lower returns compared to equity-oriented funds. 

The expense ratio range for direct plans of arbitrage funds is 0.21-0.44 per cent. There are a total of 27 arbitrage funds.

 

4. Exit load

 

Almost all the arbitrages have exit loads. The normal range is 0.10-1.00 per cent if redemeed within 15 to 30 days of investment, as per data from Value Research. 

It is better to check the scheme information document (SID) of respective arbitrage fund to know more about expense ratios, exit loads, risks and other details.

 

 

5. Benchmark index

 

Nifty 50 Arbitrage TRI is the benchmark index for all arbitrage funds. Factsheet and methodology document of the index can be accessed here and here. 

NSE Indices launched the index on 08Jul2016, with a based date of 01Apr2010. The weights of index constituents as on 30Jun2024 are:

Nifty 50 index futures (near month): 65%

1-month MIBOR: 30%

Cash: 5%

 

 

6. Category total assets

 

As on 30Jun2024, total assets of the mutual fund category of 'arbitrage' funds is Rs 1.80 lakh crore, with 27 schemes. The asset growth has been rapid and more pronounced since Mar2023, when Government of India withdrew indexation benefits on long term capital gains of debt mutual funds.

As the tax treatment is favourable to arbitrage funds, investors have been flocking to arbitrage funds in recent quarters. The absolute growth in AUM is 167 per cent between Mar2023 and Jun2024, while absolute growth in the past three years was just 90 per cent (AUM fell by 36 per cent between Sep2021 and Mar2023).

Table 1 showing quarterly growth of AUM in the past three years >

7. Calendar year returns and comparables

 

The following table 2 encapsulates calendar year-end AUM, calendar year returns of arbitrage funds (regular plans with growth option) and how the returns compare with call money rates and Nifty 50 returns.

 

Returns from arbitrage funds are closer to call money rates, rather than to Nifty 50 returns.

 

8. Quarterly returns and AUM

 

The following table 3 delineates quarter AUM and quarterly returns for the past three years from Jun2021 to Jun2024:

 

9.Tax treatment

 

Though they are treated as equity oriented funds for the purpose of short-term capital gain (STCG) and long-term capital gain (LTCG) taxation, their returns are not related to equity market returns. 

 

As per the changes made in Union Budget 2024-25 presented yesterday, the STCG tax on arbitrage funds is 20 per cent and LTCG tax is 12.5 per cent (excluding health & education cess of 4 per cent) -- both tax rates are effective from FY 2024-25 onwards. The proposals include increasing the exemption limit for LTCG on equities and equity mutual funds to Rs 125,000 from FY 2024-25 onwards (earlier exemption limit was Rs 100,000).

Prior to 23Jul2024, STCG was taxed at 15 per cent and LTCG at 10 per cent (excluding health & education cess of 4 per cent).

 

The author has no tax expertise, this is just educational purposes. Readers must consult their own tax / financial consultant before considering any investments. 

 

10. Risks and opportunities

 

Arbitrage funds are not risk-free. Chances of negative returns though are minimal. Their returns are volatile from year to year and quarter to quarter. But their return volatility is much lower compared to returns of equity schemes. 

 

They made losses in the past, though in shorter periods of time - see Section 12 (F) below for Best and Worst fund returns.

Loss example: A noteworthy case for substantial losses is Sundaram Arbitrage fund, whose worst period returns are as follows:

 

One-week worst returns: minus 3.1 per cent (Sep2018)

One-month: minus 5.1 per cent (Aug-Sep2018)

Three-month: minus 4.5 per cent (Jul-Oct2018)

One-year: minus 1.1 per cent (Sep2018-Sep2019)

 

 

 

As per Morningstar India, Sundaram Arbitrage fund had been in the lowest quartile in terms performance between 2017 and 2022 -- a poor reflection on the fund.

Low liquidity: Arbitrage funds are negatively impacted by low liquidity in cash and futures markets.

 

When will arbitrage funds make money or under what circumstances market presents arbitrage opportunities for managers -- during bull market or bear market; or in volatile markets?

 

Whenever participation in F&O market by foreign investors, high-net worth individuals and retail investors increases, arbitrage opportunities in market tend to go up.

During times of higher volatility with prices going and up down intra-day, enhanced arbitrage opportunities exist for fund managers. 

It would be in the interest of potential investors to assess whether a particular arbitrage fund is exposed to credit risk -- meaning we need to check the debt and money market instruments held by the funds.

Also, we need to check the average maturity of the portfolio, so that the fund is not exposed to interest rate risk.

 

It is likely higher the AUM, the higher the opportunity for money mangers.

 

Arbitrage opportunities also depend on the number of stocks available in the F&O derivatives market in India. As of now, there are 181 individual stocks available in F&O as per National Stock Exchange of India Ltd data. 

These are in addition to derivatives contracts available on five Nifty indices, namely, Nifty 50, Nifty Bank, Nifty Financial Services, Nifty Midcap Select and Nifty Next 50.

There are cases when the the spread between cash and futures market may come down due to market conditions. 

For arbitrage funds, high liquidity is most important for selling stocks or buying them. Likewise, high liquidity is key for selling and buying futures contracts.

 

The nature of arbitrage funds is such that they need to trade a lot and tend to have high turnover of the portfolio. 

 

Many arbitrage funds hold liquid / debt mutual funds of their own fund house -- arbitrage funds have to pay expense ratio for investing in liquid and other debt mutual funds, thus reducing returns of the arbitrage fund.

 

11. Similar returns - arbitrage and liquid
 

As mentioned above, returns of arbitrage funds are more related to call money rates, liquid fund returns and Treasury Bill yields. Their returns tend to be similar to those of liquid funds.

 

The returns from arbitrage funds are not related to equity returns. 

For more on the similarity of returns between arbitrage and liquid funds, see blog dated 22Apr2024.

In some years, arbitrage funds' returns tend to be in line with those from liquid funds. 

Please see the following screenshots and observe the resemblance of returns between arbitrage and liquid funds >

 

Liquid funds tend to do well when short term interest rates are high in an economy and by extension one could say arbitrage funds tend to do well when short term interest rates are high.

Call money and Treasury bill yields are proxy for short-term interest rates in India. 

 

12. Portfolio / fund comparison

 

Arbitrage funds hold a minimum of 65 per cent or more in equity and equity-related instruments. And the remaining will be invested in debt and money market instruments, having maturity of up to one year. 

 

As mentioned above, arbitrage funds hold long position in stocks and simultaneous short position in derivatives market, keeping the net position neutral -- meaning the exposure to equities is practically nil (it may be added as the exposure to equities is zero, the returns from arbitrage funds are not related to stock market returns). 

 

Let us compare five arbitrage funds, direct plans with growth option, and analyse their portfolios as on 30Jun2024. The comparison weblinks can be accessed from here and here.

The five funds compared are:

Axis Arbitrage

Edelweiss Arbitrage

Invesco India Arbitrage

Kotak Equity Arbitrage

Tata Arbitrage

 

A). The standard deviation range for these five funds is 0.65-0.71 per cent, indicating low risk category of these funds.

B). The three-year Sharpe ratio range is 1.2-1.6.

C). Out of the debt portion, these arbitrage funds tend to hold 10 to 20 per cent total assets in their own debt mutual funds.

For example, Kotak Equity Arbitrage fund holds 20 per cent of its total assets in its own debt mutual funds, namely, Kotak Money Market fund, Kotak Savings Fund and Kotak Liquid fund. Among the five funds compared, this is having the highest exposure to its own mutual fund units.

On the lowest side among the five, Axis Arbitrage holds 8.6 per cent of total assets in its own debt fund (namely, Axis Money Market).

As such, these arbitrage funds are exposed to the risks carried by the underlying mutual funds.

D). The AUM (assets under management) range is Rs 5,200 crore-Rs 48,000 crore.

E). The expense ratio range is 0.29-0.43 per cent and exit loads are 0.10-0.50 per cent within 15 / 30 days. All these direct plans are in existence for more than five years.

F) Best and worst period returns for these five funds: On an yearly and quarterly, these funds have not provided negative returns. However, on a one-week and one-month basis, they provided small negative returns.

Worst one-week returns range is minus 0.47 to minus 0.54 per cent, and worst one-month returns range is minus 0.04 and minus 0.21 per cent. The period was between May2020 and Jun2020, when short-term interest rates (call money rate and Treasury bill rates) collapsed following the outbreak of COVID-19 Pandemic. 

The best one-year returns range is 8.0-8.4 per cent during Nov2022 to Nov2023 period. 

Readers can check these parameters from the individual arbitrage funds, for which weblinks are provided above.

 

These are randomly-selected and are used just for real-world illustration purposes. These should not be considered as recommendations and investors should do their own diligence before considering any of them for investment. 

 

Please see additional notes for screenshots of the five-fund comparison: returns, risk ratios, asset allocation, sector allocation and credit rating. 

 

13. Action button

 

Investors have to do a basic sanity check before investing in arbitrage funds. Understanding the portfolio composition, risks, expense ratios and exit loads is important. 

Prospective investors will be better off if they read the scheme documents, like, scheme information document (SID), key information memorandum (KIM), statement of additional information (SAI) and othere relevant documents, before taking investment decisions.

Arbitrage funds' returns tend to be in tandem with those of liquid funds, but they have one distinct advantage -- especially for investors who in higher tax brackets of 20 and / or 30 per cent and above. 

Arbitrage funds are treated like equity mutual funds for capital gains tax purpose, whereas liquid funds are not. The former are subject to favourable taxation compared to the later.

 

 

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Additional notes and screenshots:

 

Screenshots of the five-fund comparison: returns, risk ratios, asset allocation, sector allocation and credit rating >

 

 

 

 

Nifty 50 and other indices returns screenshot >

 

 

 

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Reference shelf:

 

Top image: Google Gemini AI image

 

Weblinks throughout the blog

 

SEBI Categorization and Rationalization of Mutual Funds 

A Template for Analysing a Debt Mutual Fund (see Additional Notes)

 

VR Arbitrage funds all

 

Value Research annual, quarterly and trailing returns 

 

VR Compare five arbitrage funds

 

MS Compare five arbitrage funds 

Mutual Fund Categories with Similar Returns

Mutual Fund Asset Class Returns (categories with Similar Returns)

 

SID of Kotak Equity Arbitrage fund

One-pager of Kotak Equity Arbitrage fund 

 

Arbitrage funds article 29Jun2007 

Tweet / X Post thread dt 27Jul2024 - tax rate increased proposed to LTCG and STCG - Section 111A, Section 112A and Section 112

 

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Read more:

 

Blog of Blogs Theme-wise 

 

Weblinks and Investing

 

India Fixed Income Data Bank

 

Indian Economy Data Bank 

India Forex Data Bank 

 

 

JP Morgan Guide to Markets Jun2024

Rapid Growth is Assets of India's MF Industry

Mutual Fund Categories with Similar Returns

 

Side Pocketing Episode of Aditya Birla SL Dynamic Bond Fund

 

Crux of Kotak Debt Hybrid Fund

 

Global Market Data 30Jun2024

 

Brief History of India's 1991 Forex Crisis and Gold Pledge

 

You Can Boast About It!

 

Big Surge in Number of Shareholders in PSUs

 

Why RBI Won't Favour A Strong Rupee 

 

Currency Pairs: How to Calculate Depreciation or Appreciation

 

Sensex versus Gold Price

 

RBI's Record Surplus Transfer to Govt of India 

 

The Little Secret Behind Nifty Next 50 Index's Recent Success

 

NSE Indices Calendar Year Returns: 2006 to 2024

 

Understanding Real Sensex and Currency Debasement

 

Select Gilt Funds Performance 

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Disclosure:  I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

CFA Badge

  

Viewing Options for this blog in different formats:

 

Classic

Flipcard

Magazine

Mosaic

Sidebar

Snapshot

Timeslide

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

X (Twitter) @vrk100