The buyback of IndiaMART InterMESH (Indiamart) which opened on August 31, is open till September 6 – Wednesday. The buyback is via tender offer route, and record date is August 25 – ie investors who had the shares in their demat account by end of August 25 are eligible to participate. Promoters will also be participating in the buyback.
The buyback size is ₹500 crore and the buyback price is ₹4,000, which is at 28.5 per cent premium to its closing price last Friday. However the important thing for investors to note is this – although the buyback price is at a significant premium to current price, this in no way implies the stock is undervalued (rather it appears quite expensive). Thus, given the buyback is done at an expensive valuation of 76.4 times trailing PE, it will be EPS dilutive as higher yielding cash (current interest rate on cash/deposits) is being used to buy a stock with a very low earnings yield of a mere 1.3 per cent (earnings yield = 1/PE or 1/76.4).
Even assuming robust growth estimates for the future (FY23-25 earnings CAGR at 40 per cent as per Bloomberg consensus), the buyback is pricey. Returning this money via dividends would have been a simpler way to distribute the cash to shareholders, although differential tax treatments may have played a factor in decision-making. Once completed, the buyback will extinguish a mere 2 per cent of outstanding shares.
We recommend investors to tender their shares since this buyback, in our assessment, does not add any value to the shares. However, we would also like to bring investor attention to the probability of payoffs depending on how many shares are accepted upon tendering.
Out of the total buyback size of ₹500 crore, 15 per cent is reserved for small shareholders, ie investors holding less than ₹2 lakh worth of shares on the record date. Thus given the buyback size of ₹500 crore and price of ₹4,000, the acceptance ratio (assuming all shareholders tender) must be around 2 per cent. However, given the SEBI mandated reserved category, for small shareholders it will be 8.2 per cent. If less number of shareholders tender, the acceptance ratio will be higher. The table below provides a theoretical payoff matrix depending on what percentage of shareholders tender their shares.
While the payoff matrix looks quite rosy if less number of small shareholders tender, given the 28.5 per cent buyback premium over current prevailing price, the probability is higher that more small shareholders will be tendering and acceptance ratio will be lower. For example, when TCS did its January 2022 buyback at around 20 per cent premium to the price on date of announcement and around 25 per cent on prevailing price prior to buyback opening date, many small shareholders tendered and the acceptance ratio was around 24 per cent, resulting in only marginal gains on total holdings.
But we would like to note that irrespective of what is likely to be the acceptance ratio, investors are better off tendering their shares. This buyback is unlikely to add any meaningful value for investors who don’t tender their shares under assumption that the shares are worth more than the buyback price of ₹4,000. Buybacks add value to shareholders who sit out the process only when shares are bought back at lower valuations and at a good discount to intrinsic value. This buyback, priced at 76.4 times trailing PE and 69 times FY24 PE, in no way represents low valuation. Investors must pocket the cash that belongs to them by tendering.