Natco Pharma Buyback Offer 2023 - vrk100 - 04Mar2023

Natco Pharma Buyback Offer 2023

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(Updates 13May2023, 10Mar2023 and 09Mar2023 are available below. Even though this blog was posted originally on 04Mar2023, I will be continually updating this blog whenever new information is made available on the buyback offer.)

 

(This is for information purposes only. This should not be construed as a recommendation or investment advice. 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.)

 

Natco Pharma Limited on 02Mar2023 (after closure of market hours) announced, through a BSE stock exchange filing, that its board of directors would meet on 08Mar2023 to consider a proposal to buy back the company's fully paid-up equity shares. 

2. Reacting to the buyback proposal, the company's share price rose by 1.20 percent to end at Rs 559.85 per share (with a market cap of Rs 10,220 crore) on 03Mar2023.

 

(story continues below)

(I have, over the years, analysed a number of companies' buyback offers. You can check them in the related blogs section below)

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Related Blogs:

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Jagran Prakashan Buyback Offer 2022

Kaveri Seed Company Buyback Offer 2022

Infosys Limited Buyback Offer 2022

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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3. The trailing 12-month or TTM price-earning or P/E ratio of the stock is 26.40, its price-to-book or P/B ratio is 2.25 and its price-to-sales or P/S ratio is 4.27 (all as on 03Mar2023). See the following two screenshots for more on valuation and peer comparison > 

 

4. 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 through 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 >

5. To the best of my knowledge, the company has made two buyback offers in the past, once in 2006 and another in 2018. Both these offers were though 'open market via stock exchanges directly.' Details regarding the 2023 offer will be known after the scheduled board meeting on 08Mar2023.

 

The details of the buyback are given in table 2 below >

 

Update 09Mar2023

 

9. As scheduled, the company's board met on 08Mar2023 announced brief details of the buyback offer (the announcement was made during market hours). As at close of yesterday, the market price of the share is Rs 567.55, with a market cap of Rs 10,361 crore.

Limited details of buyback are in table 3 below >

10. Comparison of all three buybacks including the current one:

11. The company submitted a copy of the Board resolution, approving the buyback, to the stock exchanges today. Some of the highlights of the Board resolution are:

-- Minimum buyback size: the company shall use at least 75 percent of the maximum buyback size; so, the indicate minimum shares to be bought back by the company are 22.50 lakh shares (that is, 75 percent of 30 lakh)

-- at least 40 percent of the maximum buyback size shall be used within the initial half of the specified duration

-- after the Company has deployed an amount equivalent to the Minimum Buyback Size (even if the Maximum Buyback Size has not been reached or the Maximum Buyback Shares have not been bought back), the Board or the Buyback Committee has the full discretion to close the buyback by giving appropriate notice

Update 10Mar2023

 

12. The company today made a public announcement, giving more details of the proposed buyback offer. 

 

 

Update 13May2023

13. The company on 12May2023 made a stock exchange filing announcing the closure of the buyback programme. Between 21Mar2023 and 12May2023, the company bought back a total of 34,47,295 shares at an average price of Rs 609.17 per share, totaling Rs 210 crore -- utilising 100 percent of the amount set aside for buyback. 

14. Curiously, the company bought back 73.6 percent of the shares in the last four days alone -- while the trading days between the opening date and closing date of buyback were 34 days. All of these shares were bought from only one exchange, that is, National Stock Exchange. Volumes on BSE are generally lower. 

Check the BSE demand schedule below > (please click on the image to view better)

15. Why did the company suddenly decide to buy back almost three-fourths of the shares bought back in the last four trading days, even though it had time, technically, till 20Sep2023 to undertake the buyback? What is the hurry? The maximum buyback price was Rs 700 per share.

16. The current market price is Rs 622.30 per share (end 12May2023) and the market cap is Rs 11,146 crore (after adjusting for extinguished shares in the current buyback programme).

17. In general, once the buyback programme is completed, share prices go into a period of lull without any significant movement in share price; unless some significant events take place.

 

18. The company has not yet declared its fourth quarter (Jan-Mar2023) results and it's not yet announced any date for declaring the results. Is the company expecting that once the fourth quarter results are announced, it would not have been able to buy back the shares within the maximum buyback price of Rs 700? Definitely, the company's management will have some inkling about its fourth quarter results, which are yet to be announced.

19. This is just my speculation, based on just connecting the dots available in the public domain. My theory is just based on the publicly available information. My suspicion is the company's results might be a positive surprise for the market when they are announced this month or early part of next month. (Disclosure: I don't have any position in the shares of Natco Pharma nor do I've any intention to create a position in the next one week).

20. Schedule / timetable of activities updated > Table 1 >

21. Details of all share buyback offers > Table 2 updated >

22. Table 4 containing details of extinguished shares and promoter stake >

 

Promoter stake pre-buyback was 48.8 percent which improved to 49.8 percent post-buyback. 

In 2023 buyback programme, the company was able to extinguish 1.89 percent of total paid-up equity capital. In all the three programmes since 2006, the company was able to cancel a total of around 5.3 percent of its total equity capital. 

23. Share price movement between the buyback consideration and closure of buyback >

 

23. Natco pharma share valuation and peer comparison as on 12May2023, which is closure date of buyback >

 

 

(I'll be updating this blog as and when new developments take place in relation to the buyback offer -- to comment on business model, profit, solvency, liquidity, shareholding pattern, MF holdings, whether buyback from debt, capital allocation optimal, etc.)  

 

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References:

post buyback announcement 15May2023

BSE weblink for buyback offer 2023

BSE weblink for cumulative share bought back (BSE demand schedule) in buyback offer 2023

post buyback announcement 16May2019

public announcement 06Nov2018

post buyback announcement 02Aug2007

public announcement 02Sep2006

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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. 

CFA Charter credentials  - CFA Member Profile

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100 

When Will Federal Reserve Stop Hiking Interest Rates? - vrk100 - 25Feb2023

When Will Federal Reserve Stop Hiking Interest Rates?

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(Updated charts from Aug2024 onwards are available in India Forex Data Bank blog)

 

(Updates 02May2024, 21Mar2024, 02Nov2023 12Aug2023, 27Jul2023, 04May2023 and 23Mar2023 with new information are available at the end of the article)

 

 

The big question for global financial markets now is when will the US Federal Reserve (Fed) stop raising interest rates. Before we try to answer the question, let us understand what the Fed has done in the past two decades.

Table 1 below shows the hiking / easing cycles of the Fed:

What does one make of the above table? The question is answered in Table 2 below:

As shown above, we have seen four hiking cycles, three easing cycles and one neutral cycle when the Fed had kept the Federal Funds rate unchanged for seven long years. 

 

(story continues below)

 

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Related Blogs: 

When Will Fed Raise Interest Rates?

Global Bond Yields, Negative Real Interest Rates and Soft Landing

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It is important to understand another key aspect of a central bank's monetary policy. In addition to the tool of raising (tightening policy) or decreasing (easing policy) interest rates, other key tools used by central banks to rein in inflationary expectations are quantitative easing (QE) and quantitative tightening (QT).

Table 3 below shows how the size of the US Fed's balance sheet has expanded since September 2008 when the financial world was hit by Global Financial Crisis (GFC) and sub-prime crisis.

As delineated in Table 3, the Fed's balance sheet has increased by more than nine times since 2008, resulting in huge liquidity in markets. This massive liquidity has set off its own problems, leading to upsurge in asset prices, mainly those of equities, bonds, select commodities and collectibles.

 

One has to look at the combined picture of zero-bound interest rates (Table 1 and 2) and unconventional QE tool (Table 3) to understand their impact on financial markets globally. Easy money policies and massive purchase of bonds by the Fed (QE) had resulted in massive asset price rise the world over. 

In addition to the above easy monetary policies by the Fed, the US administrations (both under president Trump and president Biden) have provided fiscal stimulus to the US citizens to lessen the impact of COVID-19 Pandemic.

These measures had further boosted the asset prices globally till 2021. Afflicted by the supply chain bottlenecks, massive monetary and fiscal stimulus, Russian invasion of Ukraine, surge in commodity prices, wage pressures and many workers staying out of labour market post-COVID-19, inflation globally had gone up in 2022. 

Between 2000 and 2021, the consumer price inflation (CPI) for developed markets (DMs) was 1.5 percent annually, and if you include emerging markets (EMs), it was around 2.2 percent. 

But by the end of 2022, global inflation has surpassed 8 percent in most major nations, leading to a steep fall in stock and bond prices -- while some commodity prices, led by oil and gas, remained elevated. 

 

Current Monetary Tightening

The current monetary tightening started on two fronts in March of 2022. In the past 12 months, the Fed funds rate has gone up by 450 basis points to 4.50-4.75 percent range (Table 1 and 2); while the Fed's balance sheet has almost shrunk by USD 600 billion in the same period (Table 3).

The combined impact of higher interest rates and liquidity withdrawal on the global asset prices is severe in 2022. While stocks and bonds were negatively impacted, some commodities, like oil and gas, gained in 2022. 

The actual impact of these measures on the financial conditions is still in the pipeline. Monetary policy works with a lag of 12 to 15 months. Its impact is not yet fully reflecting in the earnings of US corporations.

 

 

Higher for Longer?

The US  CPI reached 41-year high of 9.1 percent in Jun2022, though it cooled off to 6.4 percent in Jan2023. The PCE inflation, the Fed's preferred metric of inflation, is 5.38 percent in Jan2023 -- much higher than the Fed's inflation target of 2 percent. 

Though US unemployment rate is at a 40-year low of 3.4 percent (Jan2023), the labour market continues to be tight in the US. 

 

Inverted yield curve: The 10-year US Treasury yield is 3.95 percent, but the 20-year yield is much higher at 4.81 percent -- with a negative spread of 86 percent. Such inverted yield curve phenomenon is considered as a harbinger of a recession.

 

The current speculation is the US will plunge into a recession in the next 12 months and may not experience a soft landing, according to market observers. However, these things are not predictable.  

 

Much will depend on incoming data as the Fed often says its future policies are 'data dependent.' 

 

Till two months ago, market was speculating that the Fed would stop hiking rates by mid-2023 and by end-2023, it would start decreasing interest rates (the so-called 'Fed pivot').

 

But the situation has changed in the past one month. As labour market conditions in the US continue to be tight and the US economic data is strong, the markets have stopped factoring in a Fed pivot at least in 2023. This has resulted in the US stocks losing their steam in the past four weeks. 

The current market buzzword is:'higher for longer.' Which means the Fed will keep raising rates to rein in persistent inflation and keep the rates higher longer than anticipated by the market.

This is an interesting dichotomy for the markets because: on the one hand, the Fed says it's data dependent; on the other hand, the markets currently believe the Fed's policies will remain hawkish.

The central banks are in the habit of not surprising markets in a nasty manner. They consider market reaction in tandem with the economic data and the prevailing financial conditions and set their policies accordingly. This has been the market experience at least in the past 25 to 30 years.

In my opinion, the stock and bond markets are too pessimistic about the Fed's policies. Let us see how the markets behave in the next two quarters.

 

Additional data from previous blog

 

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The following brief notes / images added after publishing the above article on 25Feb2023:

 

P.S. dated 02May2024: The US Fed on 01May2024 kept its federal funds rate unchanged at 5.25%-5.50%. 

 

Yesterday, the Fed said: "... FOMC will continue reducing its holdings of Treasury securities and MBS. Starting in June, FOMC will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from USD 60 bn to USD 25 billion."

 

As stated earlier, the slowing down of reduction in Fed balance sheet starting from Jun2024 is positive, in a big picture sense, for the markets. Simply put, with QE or Quantitative Easing, the Fed expanded its balance sheet by buying of Treasury securities and MBS.

 

With QT or quantitative tightening, the Fed is reducing its balance sheet via selling of Treasury Securities and agency MBS and most often allowing the bonds to run off on maturity of the bonds. What the Fed said yesterday was they would slow down the pace of the selling of securities -- which can be positive for bond prices, ceteris paribus.  

 

 

 

P.S. dated 21Mar2024: The US Fed on 20Mar2024 kept its federal funds rate unchanged at 5.25%-5.50%. The market sees Fed chair Powell's statement as bullish for both stocks, gold and silver.

 

S&P 500 index hit all time high y'day, after FOMC decision to hold interest rates steady. 

 

Market interpretation of Fed Chair Powell's press conference comments: the pace of QT (quantitative tightening) will slow 'fairly soon.' 

 

Slower pace of QT could be positive for markets.

 

P.S. dated 02Nov2023: The US Fed on 01Nov2023 kept its federal funds rate unchanged at 5.25%-5.50%. 

 

 

 

P.S. dated 12Aug2023: What is the impact of Fed's monetary tightening on the US economy?

 

The Fed's current upward rate cycle started in Mar2022 and still continuing. During the period (17 months), the Fed funds rate has gone up by 525 basis points from almost zero percent. Combined with rate hikes, the Fed started quantitative tightening (QT) in Apr2022. In the past 16 months, Fed's balance sheet size decreased from USD 8,965 billion to USD 8,208 billion now, a decrease of just 8.4 percent.

It may be mentioned, during the QE period of Feb2020 to Apr2o22, Fed balance sheet grew by 115 percent -- so the decrease of just 8.4 percent in QT period is piffling. The impact of QT on US economy thus can be characterised as psychological rather than real.

The US CPI inflation peaked in Jun2022 at 9.1 percent. Due mainly to interest rate hikes and QT, the inflation dropped to 3 percent by Jun2023, before increasing to 3.2 percent in Jul2023. From Jul2023, the base effect started and inflation print inched up a little. 

 

By Dec2022, US inflation number dropped to 6.5 percent. So, between now and the end of the Dec2023, one may not expect further steep drop in US inflation -- that too in the backdrop of crude oil prices reaching levels of USD 83 - 87 per barrel, the highest in nine months.

 

The US unemployment rate barely budged, from 3.6 percent in Mar2022 to 3.5 percent now, during the current monetary tightening cycle -- while labour force participation rate slightly increased from 62.4 percent to 62.6 percent in the same period. 

 

One area where the Fed's monetary tightening has impacted US public is the steep increase in 30-year average fixed mortgage rate -- an increase of 320 basis points from 3.76 percent in Mar2022 to 6.96 percent now. The steep increase has negatively impacted the demand for new houses.

As per media reports repeated incessantly in the past 18 months, the US economy was supposed to experience a recession -- but recession is nowhere to be seen with US GDP real growth growing between 1.5 and 2 percent in recent quarters -- though the recession may knock at the US at some point in future. 

There is some link, as seen in the past periods, between recessions and yield curve inversion, at least in the US. Since Jul2022, the US yield curve is in inversion (Fred graph below), meaning, for example, the 2-year Treasury note yield has been higher than the 10-year Treasury note yield continuously for the past 13 months. 

 

Now, the media have stopped talking about inverted yield curve, because their talk of US recession has failed to materialise even after 18 months.

Updated charts of Fed monetary tightening cycles in Table 1, 2 and 3 >

 

 

 

P.S. dated 27Jul2023: The US Fed on 26Jul2023 raised its federal funds rate by 25 basis points to 5.25%-5.50%. 

 

 

 

 

P.S. dated 04MAY2023: The US Fed on 03May2023 raised its federal funds rate by 25 basis points to 5.00%-5.25%. 

 

This is the 10th consecutive rate hike by the Fed since the upward rate cycle started in Mar2022. 

 

 

 

 

P.S. dated 23Mar2023: The US Fed on 22Mar2023 raised its federal funds rate by 25 basis points to 4.75%-5.00%.

 

 

 

References:

 

US Fed Balance Sheet Size historical data

 

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Read more:  

 

 Why Do Indian Equity Mutual Funds Always Disappoint Investors?

Adani Stocks Meltdown and Nifty Next 50 Index

Are Indian Stocks Immune to Adani stock Meltdown?

Meltdown in Adani group Listed Stocks

JP Morgan Guide to Markets

Why the Divergence Between Sensex and Nifty 50 in Today's Trade?

Indian Stock Market Moves Fully to T+1 Settlement

NSE Indices Comparison 31Dec2022

BSE 500 vs S&P 500 Indices Compare 31Dec2022

Nifty 50 Index Yearly Movement 31Dec2022

India Up the Ladder in MSCI EM Index 

New Rules on Ex-date and Record date

Crisil Report - Big Shift in Financialisation 

Weblinks and Investing

-------------------

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. 

CFA Charter credentials  - CFA Member Profile

CFA Badge

 

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100