Best Value For Your Money from RamaKrishnaVadlamudi: stock exchange mechanism

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Tuesday, 11 October 2022

Infosys Limited Buyback Offer 2022 - vrk100 - 11Oct2022

Infosys Limited Buyback Offer 2022

(Updates 18Mar2023, 15Feb2023, 14Feb2023, 06Dec2022 and 13Oct2022 are available below. Even though this blog was posted originally on 11Oct2022, I had continually updated this blog whenever new information was made available on the buyback offer.)

(This is for information purposes only. This should not be construed as a recommendation. Please consult your financial adviser before taking any plunge.)

1. Infosys Limited (Infosys hereinafter) on 10Oct2022 announced, through a BSE stock exchange filing, that its board of directors would meet on 13Oct2022 to consider a proposal to buy back the company's equity shares (fully paid-up). Its board is also considering the Jul-Sep2022 quarter results at its meeting on the same day.

(story continues below)

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Zydus Lifesciences Buyback Offer 2022

FDC Limited Buyback Offer 2022

GE Shipping Company Buyback Offer 2021

Kaveri Seed Company buyback offer 2021

Crompton Greaves Buyback Offer 2013

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2. The above BSE announcement was made after the closure of market hours on 10Oct2022, at which the price of Infosys was Rs 1,462.70 and the market cap was nearly Rs 615,500 crore.

3. In the recent past, Infosys had bought back its shares three times -- in 2017, 2019 and 2021. The details are presented in Table 1 below:

Table 1: Past Buyback Offers >

4. The 2017 offer was through 'tender offer' route and promoters participated in the buyback (Table 1 above). Both the 2019 and 2021 offers were through the 'open market via stock exchange' route. Under this route, promoters cannot participate in the buyback as per capital market regulator SEBI (Securities and Exchange Board of India) guidelines.

5. Let us see what percentage of paid-up equity shares were cancelled / extinguished through the three buyback offers in the past five years.

Table 2: Percentage of shares cancelled via buybacks >

6. As shown in Table 2 above, the percentage of shares extinguished are 4.92, 2.53 and 1.31 through the 2017, 2019 and 2021 buyback offers respectively. In all the three offers, the company was able to cancel 8.54 percent of paid-up equity shares in total. As the number of shares were reduced, the earnings per share (EPS) got a boost with the share buybacks.

7. It's important for investors to understand the intentions of the company's management for share buyback. Investors need to ask why to use the share buyback, instead of dividends, for cash distribution to shareholders. One of the important criteria to know management's intentions is whether the promoters are participating in the buyback. (Indian tax policies have some peculiar provisions, providing tax arbitrage for buyback offers as compared to dividend payments. See this blog for more on such tax distortions.)

8. The share buybacks or repurchases are beneficial for shareholders if and only the company is buying back the shares at attractive valuations. Investors need to assess whether the buyback price is below the intrinsic value of the shares. If the company is buying back shares at higher valuations, the company is destroying shareholder value.

(I'll be updating this blog as and when new developments take place in relation to the buyback offer)

Update 13Oct2022

9. As scheduled, Infosys' Board of Directors met on 13Oct2022 and announced quarterly results and brief details of buyback (the announcement was made after closure of market hours). As at close of 13Oct22, the market price of its stock is Rs 1,420 per share with a market cap of Rs 597,400 crore.

10. Limited details of buyback as announced on 13Oct2022:

11. Comparison of all four buybacks including the current one:

Update 06Dec2022

12. The company today made a public announcement giving full details of the buyback proposal.

13. The maximum buyback size (which is Rs 9,300 crore) represents 14.84% and 13.31% of the company's aggregate of the total paid-up capital and free reserves on a standalone and consolidated basis respectively as of 30Sep2022.

14. As the maximum buyback size is more than 10% of the total paid-up capital and free reserves based on both standalone and consolidated financial statements, shareholder approval by way of a special resolution is required for the buyback proposal as per SEBI buyback norms. And the same was approved on 02Dec2022.

15. The buyback will start on 07Dec2022 and the last date will be earlier of 06Jun2023 (that is, six months from the date of start) or when the company fully deploys the maximum buyback size.

16. As per buyback norms, the company has already deposited 2.5% of the maximum buyback size into an Escrow Account opened for this purpose.

17. Reasons cited by the company for buyback are:

i.) to return surplus cash to shareholders as per Capital Allocation Policy; and

ii.) to create long-term shareholder value through improvement in return on equity and earnings per share; and

18. The maximum buyback price (Rs 1,850 per share) represents:

i) Premium of 25.70% and 25.55% to the volume weighted average market price (VWAP) of the Equity Shares on BSE and NSE, respectively, during the three months period ending October 10, 2022, being the date of the intimation to the Indian Stock Exchanges regarding the proposal of buyback.

ii. Premium of 30.70% and 30.73% to the VWAP of the Equity Shares on BSE and NSE, respectively, during the two weeks period ending October 10, 2022

iii. Premium of 26.48% over the closing price of the Equity Shares on BSE as well as NSE as on October 10, 2022.

19. The indicative maximum number of Equity Shares at the Maximum Buyback Price and the Maximum Buyback Size bought back would be 502,70,270 Equity Shares (“Maximum Buyback Shares”), comprising approximately 1.19% of the total paid-up equity share capital of the Company as of September 30, 2022 (on a standalone basis).

The Company shall utilize at least 50% of the amount earmarked as the Maximum Buyback Size for the Buyback, that is, Rs 4,650 crore (“Minimum Buyback Size”).

20. Company's Capital Allocation Policy: As per company's policy approved in Jul2019, the company has to return approximately 85% of the free cash flow cumulatively over a five-year period through a combination of semi-annual dividends and / or share buybacks and / or special dividends.

Update 14Feb2023 - Closure of Buyback

21. After closure of market hours on 13Feb2023, Infosys Limited announced the closure of the buyback offer. Between 07Dec2022 and 10Feb2023, the company bought back 604,26,348 equity shares at an average price of Rs 1,539.06 per share (against the maximum buyback price of Rs 1,850) -- using Rs 9,300 crore (100 percent of the maximum buyback size).

Update 15Feb2023

22. Infosys Limited today published a post-buyback public announcement with regard to the closure of the buyback.

23. In the past five years between 2017 and now, the company was able to extinguish 9.72 percent of the net equity shares (after adjusting for addition of shares via employee stock options). Details are given in the table >

As you've seen in the past four months, I had continually provided information updates on the buyback offer. With this, there will be no more blog updates on the buyback offer.

Update 18Mar2023

24. Even though Infosys' buyback closed and there is nothing more to write about it, I made a small analysis on the price action one month after the closure of buyback. Interestingly, the current market cap at Rs 590,480 crore is 4.1 percent below the market cap on the date the company announced (i.e., 10Oct2022) its decision to hold a board meeting for considering a buyback.

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References:

2022 post-buyback announcement

2021 post-buyback announcement

2019 post-buyback announcement

2017 post-buyback announcement

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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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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

Tuesday, 17 May 2022

Zydus Lifesciences Limited – Buyback Offer 2022 – vrk100 – 17May2022

Zydus Lifesciences Limited – Buyback Offer 2022 – vrk100 – 17May2022

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(Updates dated 16Jul2022, 14Jun2022, 24May2022, 23May2022 and 20May2022 are available below)

(This is for information purpose only. This should not be construed as a recommendation. Please consult your financial adviser before taking any dive. Even though this blog was posted on 17May2022, I'll be updating this blog regularly with new information till the closure of this buyback offer, which may be some months away.)

1. Zydus Lifesciences Limited (ZLL hereinafter) on 17May2022 announced, through a BSE stock exchange filing, that its board of directors would meet on 20May2022 to consider a proposal to buy back the company's equity shares. The details of the buyback proposal will be known after the board’s meet on 20^th of this month.

The announcement was made after closure of market hours on 17May2022. The stock would react positively to the buyback news tomorrow. Zydus Lifesciences is earlier known as Cadila Healthcare. The name change was effected in Feb2022.

(story continues below)

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Read more on other buyback offers:

Great Eastern Shipping Company Ltd

Kaveri Seed Company Ltd

FDC Limited

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2. The buyback proposal is curious from a few angles. First, the promoters’ share in ZLL is already 74.88 per cent of total equity. As per rules, promoters cannot hold more than 75 per cent in a listed company. The maximum the company can undertake buyback is for 0.12 per cent—which amounts to nearly 12,72,500 shares. The paid-up share capital of the company as on 30Sep2021 is 102,37,42,600 equity shares of Re 1 each.

3. Second, the company’s debt-equity ratio is 0.29 with a gross debt of Rs 4,653 crore (data end-30Sep2021), after considerable debt reduction due to an exceptional gain of Rs 2,492 crore for the company in Jul-Sep2021 quarter after the sale of its Animal Health Established Markets Undertaking.

Of course, the liquidity profile of the company is decent as the net debt is manageable (cash & cash equivalents are Rs 3,640 crore as on 30Sep2021). The full picture of the balance sheet and profit & loss account as on 31Mar2022 will be known once the quarterly results are announced on 20May2022.

4. Based on the half-yearly cash flows as of 30Sep2021, it can be surmised that the company’s annual cash flows will be more than Rs 2,800 crore, as such the current gross debt is not worrisome.

In 2018 / 2019, Zydus Wellness Ltd (a subsidiary of ZLL) and Zydus Lifesciences (then Cadila Healthcare) jointly acquired Heinz India consumer business (with brands, like, Glucon-D and Complan) for Rs 4,595 crore. To fund the deal, Zydus Wellness raised fresh equity shares (refer page 30 of annual report) through a private placement—in which ZLL participated (as promoter of Zydus Wellness) with a total amount of Rs 1,175 crore.

Which Buyack Route?

5. Of the two routes available for share buyback, the company is unlikely to do buyback through ‘tender offer’ route. Let me explain. There are two scenarios in the first route: the first is where promoters will participate in the buyback offer and the second is promoters will decide not to participate in the offer.

If the board decides to use the first scenario, they can’t buy more than 12,72,500 shares lest they breach the 75 per cent maximum promoter stake allowed by norms. If the buyback is Rs 450 or Rs 500 per share, they can’t use more than Rs 64 crore for the buyback. Why such a big company would resort to such a low buyback amount?

6. Assuming that the board uses the second scenario, they can use higher amount, say Rs 500 crore or Rs 800 crore (this is just a wild guess), without promoters’ participation in the offer (in which case, the promoters’ stake would remain constant at the current 74.88 per cent). My informed guess is the company may not use the second scenario also, as the cost of buyback is likely to be higher (entailing the company to buy back at a fixed price) versus the second route described below.

7. The company will be left with the second route for buyback, that is, through stock exchange mechanism. If ZLL’s board decides to undertake buyback through stock exchange mechanism, ZLL’s promoters cannot participate in the buyback offer as shares would be bought directly from stock exchange (in which case, promoters’ share would remain constant at 74.88 per cent).

8. My considered view is the board will choose the second route, that is, buyback through stock exchange mechanism. Given the above possibilities, the stock reaction tomorrow will be muted.

The actual reaction would be on 20May2022 when the board announces the buyback route, buyback price and buyback size and other details. If the details come after the market hours on 20May2022 (Friday), the stock would react next Monday, that is, 23May2022.

Current valuation reasonable?

9. The current market price is Rs 349 as at close of 17May2022, with a market cap of Rs 35,700 crore. The stock is down 48 per cent from its 52-week high. Obviously, the company management thinks the share price is attractive for a buyback.

The stock price-earnings ratio is 7.5, price to book ratio is 2.2 and price to sales ratio is 2.4 as at close of 17May2022 (on a consolidated basis). On a historical basis, the current valuation ratios are below normal.

10. Using moderate debt as part of prudent capital allocation allows a company to reduce taxes leading to higher tax efficiency and greater cash flows. From this perspective, spending some reasonable money on buyback is not a bad idea given the decent liquidity profile of the company and the current valuation levels of Zydus Lifesciences.

Update 20May2022

11. As scheduled, Zydus Lifesciences' board of directors met on 20May2022 and made a raft of announcements, among others, fourth quarter results, buyback size of Rs 750 crore, buyback price of Rs 650 per share, dividend of Rs 2.50 per share and others. The announcements were made during market hours. Initially, the stock reacted negatively to the fourth quarter (Jan-Mar2022) results, which were not good.

Later, the stock price bounced back and closed for the day with a gain of 5.5 per cent for the day. The closing price on 20May2022 is Rs 357 per share, with a market cap of Rs 36,560 crore.

12. On 17May2022, I opined (see para 8 above) the company's board would choose the buyback route of 'stock exchange mechanism via stock exchanges.' But contrary to my expectations, the board decided to buy back shares through 'tender offer.'

My opinion expressed in para 8 above went wrong for the following reasons: I missed the point that when promoters choose the option of surrendering all the eligible shares (proportionately) via 'tender offer' route, their total stake in company would remain stagnant at 74.88 per cent.

If the promoters decide to utilise the option of surrendering 100 per cent of their eligible shares, they would have the option of surrendering nearly 85,96,000 shares with them.

That means they would get Rs 558.74 crore (85.96 lakh shares times 650) of the total buyback size of Rs 750 crore. So the biggest beneficiary of the buyback proposal is none other than the promoters!

Curiously, the company is giving a dividend of Rs 2.50 per equity share, in addition to the buyback. Through dividend, the company will return nearly Rs 256 crore to all shareholders, including the promoters.

Tax Distortions

13. Due to the distortions created by PM Modi government regarding taxation of dividends and buyback taxation (Tweet dated 06Jul2019), companies in India have been increasingly choosing the option of share buyback rather than dividend to increase tax efficiency for the promoters.

The buyback tax to be paid by the company buying back its shares is 20 per cent (including surcharge and cess, it is 23.30 per cent Tweet dated 01Mar2020).

In most cases, the promoters of companies (in the highest tax bracket) will have to pay, as individuals, a marginal income tax of 42.74 per cent (Tweet dated 07Aug2019), including surcharge and cess.

As a result of the huge advantage of paying buyback tax versus marginal income tax, the promoters in most of the cases have been choosing the buyback route for distribution of cash to shareholders, rather than the tax-inefficient route of dividend payments.

14. There has been a lot of flip-flop by PM Modi government on the taxation of dividends and buybacks. Arun Jaitley as finance minister introduced, effective FY 2016-17, 10-per-cent dividend tax in excess of Rs 10 lakh dividend received in a financial year (Tweet dated 21Mar2019)--this was subsequently removed. As of now, all the dividend income is to be included, effective FY 2020-21, in one's income.

Dividend distribution tax (DDT) was abolished effective 01Apr2020 (Tweet dated 26May2020).

Sorry for the digression, let us come back to the current topic, that is, Zydus' buyback. The company, in my opinion, has tried to offset the effects of bad fourth quarter results on stock price (which has already been under severe knock this year) by trying to blend it with a buyback proposal. Going by the first day's positive reaction at least, the stock market shrugged off the bad results and reacted positively to the buyback proposal by the end of the market hours today.

15. Details of the buyback proposal:

i) Maximum buyback price: Rs 650 per share

ii) Total shares to be bought back: 115,38,461 shares representing 1.13 per cent of total equity share capital

iii) Total buyback size: Rs 750 crore

iv) Buyback route: 'tender offer' route

v) The record date for deciding the shareholders entitled for share buyback is 02Jun2022 (ex-date 01Jun2022)

vi) As the buyback route is through 'tender offer,' the promoters have the option to participate in the buyback as per Buyback norms. And promoters have expressed their intention to participate in the buyback.

vii) If the non-promoter shareholders surrender all the eligible shares in the buyback, the free float will come down from current 25,72,08,166 shares to 25,42,65,680 shares post-buyback; and the total shares will fall from 102,37,42,600 to 101,22,04,139 shares.

16. To the best of my knowledge, the company has never made a buyback of its equity shares before.

Update 23May2022

17. On 21May2022, Zydus submitted a copy of board resolution dated 20May202 approving the buyback offer.

Key highlight from the above:

- buyback size of Rs 750 crore represents 6.85% and 4.36% of the aggregate of the total paid-up capital and free reserves as per standalone and consolidated balance sheet as on 31Mar2022

Update 24May2022

18. On 24May2022, Zydus made a public announcement on the buyback of equity shares.

Key highlights from the above:

- 15% of total shares proposed to be bought back are reserved for small shareholders

- small shareholders are those with shares valued at not more than Rs 200,000; based on the closing market price of the share on BSE and NSE having the highest trading volume as on the record date (02Jun2022)

Update 30May2022

19. The company on 30May2022 filed, with stock exchanges, a draft letter of offer for the buyback programme.

Update 14Jun2022

20. Zydus Lifesciences on 13Jun2022 filed a Letter of Offer for buy back of its equity shares.

Brief details: The open offer (tender offer route) opens on 23Jun2022 and closes on 06Jul2022.

Update 16Jul2022

21. Zydus Lifesciences on 16Jul2022 filed a post-buyback public announcement declaring the closure of the buyback.

A total of 115,38,461 equity shares were bought back via tender offer route at a price of Rs 650 per share totaling Rs 750 crore.

The details of the pre-buyback and post-buyback shares are as follows >

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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.

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100