We have released 7th Nov’20: Special situation opportunity on the proposed buy-back of shares of NTPC Ltd (NSE Code – NTPC). The same has also been produced below. For details and other updates, please log into the website at the following link – http://katalystwealth.com/index.php/my-account/
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Date: 7th Nov’20
CMP – 87.35 (BSE); 87.25 (NSE)
Rating – Positive – 3% weightage; this is not an investment advice (refer rating interpretation)
NTPC’s buy-back offer
On 2nd Nov’20, NTCP approved a Buy-back of 19,78,91,146 shares at a price of Rs 115/- per share from all the existing shareholders of the Company as on the record date, on a proportionate basis through “Tender Offer” route.
The company has fixed 12th Nov’20 as the ex-date for the purpose of buy-back of shares. Thus, effectively one has to buy the shares on or before 11th Nov’20 to be eligible to participate in the buy-back.
Rationale behind this opportunity
It is important to note here that Buy-Back through tender offer route is similar to Open Offer in many aspects as against Buy-back through open market purchases.
In buy-back through tender offer route all the shareholders can participate (including the promoters) and the buy-back is on proportionate basis from all the shareholders of the company.
So, in the above case, theoretically only 2 shares out of 100 shares will get accepted at 115/- per share if all the shareholders participate in the tender offer and 98 shares will be returned back.
However, there are a few important regulations regarding buy-back through tender offer route which increases the acceptance ratio in the case of NTPC. They are:
- 15% of the number of Equity Shares which the Company proposes to buyback or number of Equity Shares entitled as per the shareholding of small shareholders, whichever is higher, shall be reserved for the small shareholders as part of this Buyback.
- Small Shareholder is a shareholder who holds equity shares having market value, on the basis of closing price on recognized exchanges as on Record Date of buy-back, of not more than Rs 200,000 (2 lakhs).
Based on the above regulations, out of 19.79 crore shares, around 2.97 crore shares will be reserved for the small shareholders.
In this case, Small shareholder will be the one with less 2,300 shares.
Source: NTPCs AR 2020
As can be noticed from the above, at the end of Mar’20, there were around 14.58 crore shares with the shareholders holding shares in the range of 1-5000.
Assuming the same figure of 14.58 crore shares in the small shareholder category, the theoretical acceptance ratio works out as follows:
2.97/14.58 = 20.37%
Another factor that could prop up the acceptance ratio is the buy-back pricing. The buy-back price is Rs 115/- per share, while prior to Feb’20 the stock mostly traded above the levels of 115.
At the same time, the valuations look quite reasonable with the book value being around Rs 124 per share and the stock offering dividend yield of more than 3%.
Thus, while arbitrageurs may jump on the opportunity, a lot of old-time investors may give a pass to the buy-back offer.
As mentioned above, theoretical acceptance ratio is around 20%, while the actual could be somewhat higher (in the small shareholder category) considering very low buy-back price.
Let’s work with some conservative estimates:
Cost of 1000 shares – 87.35 * 1000 = 87,350
Cost of residual shares based on various acceptance scenarios:
We believe 20% acceptance is quite probable. So, in case of 20% acceptance, one starts losing money only when the stock starts falling below 80 odd levels.
In the Covid-19 led March 2020 correction, the stock recorded a low of 76 and has been hovering in the range of 80-100 since then.
Further, on the ex-date, if the stock doesn’t fall below 80 odd levels, one can consider selling 50% of the quantity and reduce the risk further.
The actual ratio will be known only once the entire process is over and in case of lower acceptance ratio our returns will diminish.
The time line for this opportunity is around 3-4 months and therefore in the interim if the market corrects in a major way the exit price for the unaccepted shares will get impacted.
Buy-backs are widely tracked these days and therefore our assumption of minimum 20% acceptance may not hold true.
Disclosure: I do not have any holding in NTPC Ltd.
Positive – Expected return of ~15% + on annualized basis in medium to long term for investment recommendations and in short term for Special situations
Neutral – Expected Absolute return in the range of +/- 15%
Negative – Expected Absolute return of over -15%
Coverage closure – No further update on the stock
% weightage – allocation in the subject stock with respect to equity investments
Short term – Less than 1 year
Medium term – Greater than 1 year and less than 3 years
Long term – Greater than 3 years
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