Beruflich Dokumente
Kultur Dokumente
By Group 1 Garvit Agarwal Gyan Prakash Karan Gupta Ranveer Desai Ravikumar Soni Sahil Singla 8/30/12
Introduction
Share buyback refers to the process of a company buying back its own shares from its shareholders Research in the US shows that the market does not value a company for its liquid cash balances and near cash investments Therefore Companies should look for maximizing share value through a build up of book value, earnings, dividends and return of surplus capital through share repurchases Share repurchases tend to keep a company from being over-capitalised
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Contd
Exit mechanism Buyback is an investor-friendly measure in times of depressed market as the investor gets a respectable exit from the shares.
Shareholder value management Buyback is required in times when company is not able to generate return on surplus capital to offset the opportunity cost to shareholders which leads to low shareholder value 8/30/12
Cant make public issue of same kind securities within six months Two buy back programmes separated by 365 days period Only direct company can purchase.
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Letter of Offer sent to shareholder containsAll material facts Audited financial information for the previous three years together with specified financial ratios pre and post buyback.
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Impact
of buy back on companies earning, shareholding pattern, management structure Auditors report The Declaration of Solvency
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Methods
Fixed price tender offer Book-building method Open market purchase
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Shareholders are invited to tender their share for re-purchase by the company at a fixed price arrived at by the company. This method may not realise the best price for the shareholders.
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Book-building method
For purchases from the open market Shareholders are invited to put in bids for re-purchase of their shares Company specifies the maximum price at which the securities shall be bought back by the company Company fixes the buy-back price based on the highest price bid received from the shareholders. Bidders who bid low, will also receive the highest price therefore being8/30/12 beneficial
Company buys back the shares directly from the secondary market Hence, company buys the shares at varying prices on prevailing market prices, and therefore buying at average price which maybe less than the maximum price approved This is a more transparent method This method is suitable when promoters wish to consolidate their stakes Drawback of this system is that promoters cannot sell their own shares and company may not enjoy a good free float therefore not getting sufficient 8/30/12 quantities for buy-back
Premium<= {(1/(ROE*(P/E)))-1} The Lower the ROE or P/E, higher the premium they can give and higher is the necessity for a buyback.
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Quantum of buyback
Buy back in value terms of shares shall not exceed 25% of total paid up capital and free reserves. Debt equity ratio shall not exceed 2:1 after buyback.
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Sellers of Horlicks, Boost, Crocin, Iodex and many others Made an open offer to buyback during March 2005 Offered to buy 3.3 Mn shares. At Rs 370/Share, not exceeding 123 Cr in value Represented 23.24% of free reserves
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Promoters holding would increase from 39.99% to 43.16% Had excess reserves with no major expansion plans Wanted to use its reserves instead of keeping it idle Felt share was undervalued FMCG industry in that period had limited growth plans Thus Britannia, Godrej and HUL all came with buyback plans
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Success of Buyback
Received more than double the required offers (7.8 Mn) Bought back using Proportional Acceptance Method. Pre Buy back Dec 04 Post Buy back Dec 05
59,935.17 13.82% 16.12 116.65 20.50 47,511.18 22.55% 25.48 96.62 24 8/30/12
Net Worth(Rs Lacs) Return on Equity Earning Per share(Rs) Book value Per share(Rs) P/E
Is into the garment business, it is an AV Birla Group Company Announced buyback in September 1999 Buyback of 25% equity share capital Price offered was in the range Rs 75-85 Intended cash outflow Rs 127-144 Cr
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To increase promoters stake from 21.5% to 28.7% Working at below capacity and no major Capex planned Wanted to add value to share holders by returning capital to them Their Cement business was hived off to Grasim Buyback would give investors an exit route
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Could purchase only 11% of its outstanding shares as against the 25% offered Hiked the price on offer to Rs. 85 The Market cap fell from 1397 Cr in 1999 to 455 Cr in 2004 The share price plunged from Rs. 207 to Rs. 67 Launched at wrong time
Company was not doing well and Markets were Crashing Market was not happy over the transfer of the Cement division of Indian Rayon to Grasim
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ROE OF KAMA
EPS OF KAMA
12 10 8 6 4 2 0 12 10 8 6 4 2 0
ROA OF KAMA
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Since the P/E multiple in 2005 reached a very high level of 28.68 compared to the industry average, the Company decided to buyback shares worth Rs. 3.39 crores at Rs. 21 in Dec 2006 This buyback resulted in increase in EPS, ROE, ROA and decrease in P/E in 2007 However the Company could not leverage on this benefit as in 2008 it reported loss due to increase in raw material and other manufacturing expenses In 2009, Company did extremely well as its EPS, ROE and ROA had increased significantly and also its P/E multiple was in check There was a major increase in promoters shareholding from 67% to around 74% 8/30/12 This buyback was successful
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As the P/E multiple of the company had increased significantly in 2004, the company went for Buyback This helped the Company in reducing its P/E ratio and increase its EPS, ROA and ROE There was a significant increase in the Promoters Shareholding from around 50% to 53% Thus the buyback was Successful
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Conclusion: Buybacks
Not all buybacks are successful Companies use buybacks to change the shareholding pattern, improve financial ratios or/and increase price of the share The timing of the buyback is very crucial. If company is not doing well then the buyback might not succeed It is a means of returning excess funds to the shareholders Gives the market a signal that promoters believe in the company
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Voluntary delisting (Listed at least 3 years prior to date of delisting) 8/30/12 Amalgamation
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If Cost of remaining listed outweighs the benefit sought to be received then delisting is a valid decision.
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Reverse followed
book
building
process
Public announcement for floor price Floor price determined as average of 26 weeks traded quotes No cap prices
The price at which the quantity offered is maximum is selected as 8/30/12 the final price.
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Governed by section 77A/77B Applicable for listed and respective guidelines by companies alone. Governed SEBI by de-listing guidelines of SEBI Pricing determined by the Price to be determined only company as Fixed Price/Book- through reverse book building Built Price/Open Market Price using Dutch Auction process Quantum of Buyback Quantum of shares bought
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