Manali Bhatia
Aarti Drugs has approved buyback of 2,82,100 fully paid up equity shares of face value Rs 10 each representing up to 1.2 percent of the total number of equity shares. The buyback is fixed at a price of Rs 900 per equity share for an aggregate amount of up to Rs 25.39 crore via tender offer.
The record date for the said purpose is proposed on March 29, 2019. Aarti Drugs is buying back its shares at a premium of 37 percent to the current price of Rs 655.
Buyback Strategy
We have estimated that Entitlement ratio would be 3-5 percent. However, Real acceptance ratio should be higher by 60-100 percent as many shareholders do not take part in buyback. So, we have estimated acceptance ratio to be around 6-8 percent.
We advise that traders who wants to participate in buyback can buy 250 shares at CMP at Rs 655 in the open market and offer them in the tender offer. Also, one has to monitor that shareholders holding value should be less than the amount of Rs 2 lakh as on the record date to qualify for this buyback.
As per SEBI regulations, 15 percent of the offer size will be reserved for retail shareholders (holding amount less than Rs 2 lakh). Therefore, Rs 3.81 crore (15 percent of Rs 25.389 crore) is set for retail investors.
Expected returns and conclusion
Company is expected to complete the buyback process by April-end (2 months estimated on a higher side). We do not see much downside in the stock as market sentiments being elevated, besides, company's improved performance would provide upside to the stock.
But on the other end buyback is only 1.20 percent of the paid up share capital, being low. Hence, the estimated acceptance ratio is also quite low to only 6 percent. Therefore, if Aarti Drugs even rise from 10 percent to 20 percent, expected absolute return may cap up to 21.04 percent (Estimated annualized return 126 percent).
Investors may go for buyback and the remaining quantity (not been accepted in buyback) may be sold in the open market.
Returns under different situations are calculated under below table:
(The author is Senior Research Analyst at Rudra Shares & Stock Brokers Ltd.)
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