Shares of One 97 Communications, operator of Paytm, quickly gave up their opening gains on December 14 and traded lower despite the company’s board approving a Rs 850 crore share buyback plan on December 13.
The company said that it will buy back up to 10.5 million shares of the company at a price of up to Rs 810 per share, which was much higher than the Rs 650 per share expected by the market.
However, market participants expressed disappointment over the route through which the company will buyback shares. Paytm said that it will buy back its shares through the open market method instead of the much preferred tender route.
Under the open market method, a company buys back shares through the market and therefore, shares can be purchased at any price up to the cap provided by the company. This is different from the tender route, wherein shareholders can tender their shares for buyback at the fixed price set by the company.
Further, under the tender route 15 percent of the buyback of shares is reserved for retail investors whereas, no such exemption exists under the open market route. Several market participants chided the open market method chosen by Paytm will make the share buyback plan a “non-event”.
Morgan Stanley, which has an equal-weight rating on the counter, said that at the current price level, Paytm could potentially buyback up to 16 million shares.
The company’s buyback plan has left the market divided on the objective it will achieve. While some suspected the management of trying to manage stock price by effectively creating a floor on the share price, other questioned the wisdom of a loss-making company utilizing its cash to repurchase shares.
“We expect the buyback announcement at a 50 percent premium to provide support to the stock price in the near term,” brokerage firm JP Morgan India said in a note.
Paytm has argued that it is in a position to consider a share buyback plan because of its confidence that its future growth will generate enough cash to fund growth going ahead and that it is well on its path to deliver cash profitability.
The fintech major has also asserted that the utilization of its cash to buy back shares from investors will not impinge on its future performance while none of its key managerial personnel and founder will be participating in the buyback plan.
For the fintech giant, whose share price has nosedived over 70 percent since listing in November 2021, the share buyback plan will act as an anchor but recovery will still depend on the management delivering profitability ahead of its deadline of September quarter of 2023-24.
JP Morgan, which has an overweight rating on the stock, believes that cash burn at the company will average around $33 million in the coming quarters before the company turns profitable at operating level after adjusting for stock option costs.
At 9:40 am, shares of Paytm were down 1.1 percent at Rs 533.4 on the National Stock Exchange.
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