IndiaMART InterMESH (Indiamart) Micro Buyback started on 31st August and will run till 6th September till Wednesday. The buyback was by way of a tender offer with a record date of August 25 – investors who held shares in their demat accounts prior to August 25 were eligible to participate. Promoters will also participate in the buyback.
The size of the repurchase is Rs 500 crore and the repurchase price is Rs 4,000, a premium of 28.5% over Friday’s close. However, it’s important for investors to note that while the repurchase is priced at a substantial premium to the current price, it by no means means the stock is undervalued (instead it looks quite expensive). So, given that the buyback is at an expensive valuation of 76.4x trailing P/E, EPS will be expected to is diluted. Only 1.3% (yield = 1/PE or 1/76.4).
Even assuming strong future growth (40% earnings CAGR for FY2023-25, according to Bloomberg consensus), buybacks are costly. Returning that money through dividends would have been an easier way to distribute cash to shareholders, though differential tax treatment may have played a role in the decision. Once complete, the repurchase will wipe out just 2% of outstanding shares.
We advise investors to bid on their shares as, in our assessment, this repurchase will not add any value to the shares. However, we would also like to draw investors’ attention to the possibility of a return based on the number of shares accepted at the time of tender.
Of the total buyback of Rs 500 crore, 15 per cent was reserved for minority shareholders, investors holding shares worth less than Rs 2 lakh on the record date. So, given the buyback size of Rs 500 crore at a price of Rs 4,000, the acceptance rate (assuming all shareholders bid) has to be around 2%. However, considering the reserved categories stipulated by SEBI, the proportion of minority shareholders will be 8.2%. The smaller the number of shareholders bidding, the higher the winning rate. The table below provides a matrix of theoretical returns, depending on the percentage of shares tendered by shareholders.
While the return matrix would look quite positive if the number of minority bids was low, the likelihood of more minority bids would be higher and the acceptance rate would be higher given the buyback premium is 28.5% higher than the current prevailing price Low. For example, when TCS launched a buyback in January 2022 at a premium of approximately 20% to the price on the date of the announcement and a premium of approximately 25% to the prevailing price prior to the start date of the buyback, many minority shareholders put in bids, with an acceptance rate of approximately 24% , resulting in only marginal returns from total holdings.
But we’d like to point out that no matter what the acceptance rate might be, investors would be better off bidding on their shares. The buyback is unlikely to add any meaningful value to those investors who did not bid on the shares assuming the shares were worth more than the buyback price of Rs 4,000 crore. Only when shares are bought back at a lower valuation and at a deep discount to intrinsic value will buybacks add value to shareholders who stand by. The buyback is priced at 76.4x trailing P/E and 69x FY24 P/E, which by no means represents a low valuation. Investors must bid to pocket the cash that is theirs.
