Sun Pharma is buying back Rs 675 crores of stock at Rs 900/share - over 15% premium to current prices.
That's a great indication of the confidence the promoters have in the prospects of the company, and a great way to enhance returns to all shareholders. That decreases shares outstanding by 0.3%, and therefore increases earnings yield by the same amount.
But more importantly, this open offer transcends the F&O expiry in September - because it is open from Sep 22 to Oct 5. The expiry is on Sep 29th, one week after the start of the open offer.
If you submit your shares into the open offer before the 29th, you won't have them available for sale - and this could actually boost share prices on expiry. Plus the typical positive sentiment associated with a share buyback. Plus anyone buying shares in the expiry can also submit those shares in open offer!
Unlike Coal India, this is a real buyback - with a 15% premium, so could be tempting to some shareholders - especially those who are sitting on Sun Pharma from higher levels, and therefore not concerned about the Capital Gains implications (Open offer doesn't suffer STT, therefore no benefit of Zero long term capital gains taxes).
Over the past two years, investors of Sun Pharmaceutical Industries have had little to cheer about apart from the dividend income they have received from the company. In August 2014, the company's stock price was around Rs 780, which happens to be the present price. Though the stock momentarily touched Rs 900, it has fallen back to Rs 780.
Probably realising the plight of its shareholders, Sun Pharma has now announced a buy-back of its share at a price of Rs 900 apiece on a proportionate basis through the tender process, using the stock exchange mechanism.
The buyback is for 7.5 million shares, which represents 3.79 per cent of the paid up capital. Assuming a 100 per cent response and acceptance, the offer will cost the company Rs 675 crore and help increase the promoter’s share in the company from 54.97 per cent to 55 per cent, as per Sun Pharma’s stock exchange notification.
As a current or prospective investor, what should one do?
Sun Pharma’s offer is at a 13 per cent premium to the current market price. The offer, open between September 22 and October, is indeed tempting, given the opportunity it presents to make a 13 per cent profit in less than a month. However, the stock price has not reacted much to the offer. The reason is the low probability of acceptance.
According to broking firm Sharekhan, the buyback ratio in the case of small shareholders (those who hold shares of market value not more than Rs 2 lakh) is 23 shares for every 505 shares held and for other sellers, it is 32 shares for every 11,957 shares.
In other words if one is a small shareholder, one share for every 22 held will be accepted by the company. In the case of big shareholders the acceptance ratio will be one in every 374 shares.
With such low levels of acceptance, there is not much interest in the stock despite the premium. In order to qualify as a small investor, one's holding must not exceed 256 shares (256 * Rs 780 ~= Rs 200,000). So at the most, about 10 shares of the 256 he holds will be accepted by the company, should he choose to participate in the buyback.
On the 10 shares that will be accepted, the small investor would earn approximately Rs 1,200 (Rs 900-Rs 780 = Rs 120 per share). Assuming that the share price remains at the current level even after the buyback offer has closed, the small investor will make a Rs 1,200 profit on an investment of Rs 2 lakh or a 0.6 per cent gain in a period of less than a month, which works out to roughly 7.2 per cent on an annualised basis. For bigger investors, the yield will be even lower, as acceptance ratio will be lower.
If one is an existing investor, it makes sense to offer his shares in the buyback, but fresh investments in the stock only to capitalise on the trade makes little sense. Having said that, historically, companies that have successfully closed their buybacks have done well in the markets. Buybacks are considered as a better way of rewarding shareholders, since the number of equity shares comes down. This translates into a higher share of the profit for each shareholder, in other words, a higher EPS. Also, a successful buyback indicates the financial health of the promoter.
Though no one doubts Sun Pharma's financial health, USFDA issues and Ranbaxy integration (some erstwhile Ranbaxy medical representatives are threatening a strike) there have been problems in the market. Analysts continue to remain positive on the company’s performance with a strong EPS growth in the near term. Most analysts have a price target in the range of Rs 875-900, a price that Sun Pharma’s management also feels is fair value.
For an investor, Sun Pharma is a good long term bet rather than the buyback arbitrage which offers a low yield on account of lower acceptance.
