Zydus Lifesciences Buyback Offer 2024
(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 18Mar2024, 08Mar2024, 28Feb2024, 25Feb2024, 13Feb2024, 12Feb2024 and 11Feb2024 are available below. Even though this blog was posted originally on 06Feb2024, I'll be updating this blog whenever new information is made available on the buyback offer.)
The blog is about Zydus Lifesciences Buyback Offer.
1. Zydus
Lifesciences Limited on 05Feb2024 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 09Feb2024. The details of the
buyback proposal will be known after the board meeting on 9th of
this month. The board on the day will also consider the Oct-Dec2023 quarterly results.
The
announcement was made after closure of market hours on 05Feb2024. Today, the stock reacted positively to the buyback proposal announcement and rose by 5.1 percent and closed at Rs 800 per share (previous day Rs 758), with a market cap of Rs 80,960 crore (Rs 76,700 crore).
(story continues below)
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Schedule of activities
A typical list of activities is
given in table 1 below >
Previous Buyback Offer:
3. This is the second buyback offer the company is making in its listing history (to the best of my knowledge).
4. The previous buyback was completed in July 2022. It was done through 'tender offer' route. The 2022 buyback was announced when the stock's market price was Rs 349 (market cap Rs 35,700 crore). The company bought back 115.38 lakh fully paid-up equity shares and spent Rs 750 crore on the 2022 buyback. The percentage of shares extinguished in the buyback was 1.13 percent of total equity capital. The promoters of the company participated in the buyback.
Tables 2 & 3: Past Buyback Offers >
Table 4: Percentage of shares cancelled / stake changes >
5. After today's rise, the stock as at the end of 06Feb2024 is quoting at Rs 800 per share (market cap Rs 80,960 crore). Companies are supposed to use their surplus cash intelligently and efficiently. The 2022 buyback was definitely at a much lower valuation and the shareholders who remained invested in the stock benefited from the previous buyback.
6. Around the previous buyback, the stock price was languishing between Rs 360 - 370 range; and from then the stock has a spectacular return of 125 percent in less than 19 months. Obviously, the valuation ratios, like, price-earnings or PE ratio, price-to-book value or PB ratio and price-to-sales or PS ratio are way higher than during June-July 2022.
Which buyback route?
7. It would be interesting to watch what route the company's board of directors would choose, if at all the board approves the buyback proposal at its forthcoming meeting on 09Feb2024.
8. Already, the promoters' stake (table 4) increased to 74.98 percent during the previous buyback. If the board were to opt for 'tender offer' route this time, the wiggle room for promoters' stake is so low, it might cross the 75 percent threshold and the public shareholding might go below the mandatory 25 percent.
As such, the board of directors may not opt for 'tender offer' route and instead choose the alternative buyback route of 'purchasing via stock exchanges.'
Reasonable valuation?
9. As on date, the stock's trailing PE ratio is 25.8 and PB and PS ratio are 4.3. The stock delivered a return of 70 percent in the past one year versus 52 percent for Nifty Pharma index and the stock price is near its all-time high.
10. The company has been reducing its debt over the years and its debt-equity ratio is almost zero. And capital allocation via buyback looks like prudent, though the stock's valuation ratios are not in the comfort zone. Sales growth has been tepid in recent years, though growth has picked up in the past three to four quarters.
11. Companies use their cash flow in a variety of ways. For example, they can buy new fixed assets for business expansion, buy another company, make debt repayment, pay dividends or undertake share buybacks or repurchases. As mentioned above, Zydus Lifesciences has made debt repayments using its cash flow and regularly pays dividends also.
12. Its gross debt declined to Rs 150 crore as on 30Sep2023 from Rs 4,650 crore as on 30Sep2021. It has cash and cash equivalents of more than Rs 1,600 crore as on 30Sep2023. Its operating margins too have improved in the past three quarters.
13. In Jan2024, Crisil Ratings Limited upgraded the long term rating of the company from Crisil AA+ to Crisil AAA. The company enjoys a short term rating of A1+ for several years.
Update 11Feb2024: Buyback details
14. As scheduled, the company's Board of Directors met on 09Feb2024 and announced brief details of buyback (the announcement was made during the market hours). As on 09Feb2024, the market price of its stock closed at Rs 805 per share with a market cap of Rs 81,487 crore.
15. Limited details of buyback as announced on 09Feb2024 >
16. As stated in table 5 above, the company will buy back its fully paid-up shares of Re 1 each at a maximum buyback price of Rs 1,005 via a 'tender offer.' (My expectation, as stated in Section 8 above, the the buyback route would be 'open market via stock exchanges' went wrong).
17. The maximum buyback size is Rs 600 crore and promoters have expressed their intention 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 23Feb2024.
Comparison of two buyback offers
18.
These are updated tables 2, 3 and 4 for comparing the two buyback
offers the company has undertaken in the past two years >
19. As shown in table 3 above, the current maximum buyback price is Rs 1,005, almost 55 percent more than that of previous buyback offer in 2022 -- but the amount proposed for buyback is only Rs 600 crore versus Rs 750 crore in 2022. And the company will have extinguished only 0.59 percent (table 4 above) of the total paid-up capital (once the current buyback proposal is completed) as against 1.13 percent of capital extinguished in 2022.
Update 12Feb2024: Board Resolution
> the company shall buy back Equity Shares from the Eligible Shareholders, on a proportionate basis, provided 15 percent of Equity Shares which the Company proposes to buy back or number of Equity Shares entitled as per the shareholding of small shareholders at the Record Date, whichever is higher, shall be reserved for small shareholders
> the Company shall not raise further capital for a period of one year from the expiry of the Buyback period, that is, the date on which the payment of cash consideration is made to the participating shareholders
> the Company shall not withdraw the Buyback after the Letter of Offer is filed with SEBI or Public Announcement of the offer to Buyback is made
> the total amount of the Buyback, that is, Rs 600 crore, does not exceed 10 percent of the aggregate of the fully paid-up equity share capital and free reserves of the Company as per the latest audited standalone and consolidated financial statements of the Company as at March 31, 2023
> the maximum number of Equity Shares proposed to be purchased under the Buyback does not exceed 25 percent of the total number of Equity Shares in the paid-up equity share capital of the Company as at March 31, 2023
> the Company shall not make any offer of buyback within a period of one year reckoned from the date of expiry of the Buyback period, that is, the date on which the payment of cash consideration is made to the participating shareholders
> the Buyback shall be completed within a period of one year from the date of passing of the Board resolution approving the Buyback
> as escrow account shall be opened with ICICI Bank for the purpose of buyback
Update 13Feb2024: Public Announcement
22. Basis for Arriving at the buyback price: this is a screenshot from the Public Announcement >
Update 25Feb2024: Record date over
Between the stock exchange announcement for Board meeting for buyback consideration and record date, traders and speculators try to make short-term profits based on news flow.
But on record date of buyback offers, their share prices tend to fall as traders who bought on the news of buyback offer attempt to bring down their stakes.
24. Zydus Lifesciences seems to be an exception here, because its price rose by 1.7 percent even on the record date (23Feb2024) with closing price of Rs 919.60 per share and market cap Rs 93,080 crore (check how Kaveri Seeds' share price behaved on its record date of buyback offer).
In theory and hindsight, one could have bought Zydus Lifesciences on 06Feb2024 (one day after Board meeting announcement) around Rs 790 or Rs 800 and made a decent profit of about 13 percent by selling it at around Rs 900 on 22Feb2024 (one day before record date), without participating in the buyback offer.
25. Not all buyback offers provide such short term profit opportunities -- these are the risks involved in exploiting such opportunities that arise out of corporate actions.
There are several cases where share prices either tend to fall or remain the same ever after buyback announcement -- depending on the general sentiment in the markets.
Updated list of Schedule of Activities to be tracked >
Share price movement versus Nifty 50 and Nifty Pharma since buyback offer announcement >
Update 28Feb2024: Letter of Offer
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 6 shares out of every 67 shares held by them as on record date and the same is 2 shares for every 395 shares held by the general category.
Tables 6 and 7 give details of calculation of Entitlement Ratio >
27. If you're eligible and participated in the buyback programme as mentioned in para 26 above, the cash consideration offered by the company in lieu of your eligible shares will be credited to your bank account on or before 14Mar2024.
The company's stock price has held very well even after the record date is over. The share closed at Rs 946 per share with a market cap of Rs 95,700 crore on 27Feb2024.
Updated Table 1 with Schedule of Activities >
Minimum Public Shareholding Likely to Breach
28. One interesting aspect of the buyback programme is the promoters' shareholding in the company is likely to increase, post-buyback, to 75.04 percent from the current (pre-buyback) 74.98 percent assuming response to the buyback is 100 percent (full acceptance) from all eligible shareholders.
As per capital market regulations, the minimum public shareholding (other than promoter group) is 25 percent; and in the instant case it is likely to fall below the 25 percent threshold post-buyback.
But the company says if the promoters' shareholding indeed goes above 75 percent, the promoters shall reduce their stake in the company to restore the minimum public shareholding within a period of 90 days from the date of expiry of the Buyback Period.
So, it is likely the promoters may have to sell nearly 402,500 fully paid-up equity shares (post-buyback) within 90 days from the expiry of the Buyback Period -- to restore the 25 percent minimum public shareholding limit.
29. The information relating to company's buyback offer (tender offer route) and the demand schedule for cumulative offers submitted by investors can be accessed here and here.
Update 08Mar2024
30. The buyback period closed on 06Mar2024. After the closure, the BSE demand schedule is as follows:
Update 18Mar2024: Post-buyback announcement
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:
32. The stock on 18Mar2024 closed at Rs 984, with a market cap of Rs 99,013 crore subject to extinguishing of shares bought back by the company.
33. Interestingly, Zydus Lifesciences on 05Feb24 announced that it would meet 09Feb24 to consider a buyback -- on that day its price was Rs 758.
Now, its price is Rs 984. So, in the meantime, the stock had given a return of almost 30 percent -- not including any capital gain on shares bought back --in a matter of just six weeks, which is quite impressive (see table 1 above for full details of share price on various dates / events).
(As the buyback process is completed, there will no longer be any updates on this.)
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References and Additional data:
Tweet dated 17May2022 - Zydus Lifesciences buyback 2022
Data as on 05Feb2024: valuation ratios, stock price, debt equity ratio, etc. >
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Disclosure: I've vested interested 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.
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