Just Dial Share Buy Back: Just another 'wrong number'

By SP Tulsian & Geetanjali Kedia

The Board of Directors of Just Dial Ltd. has announced a share buy-back, in their meeting held on 4^th June, 2015, as under:

“The buy-back shall be up to 25% of the aggregate of paid up capital and free reserves of the company, at a maximum price of Rs. 1,550 per equity share, on a proportionate basis, through a tender offer.”

This buy-back news followed by several member queries has forced us to pen down this analysis for the benefit of the broader investor community. As the share’s current market price is around Rs. 1,130 per share, while buy-back is announced at a maximum of Rs. 1,550 per share, entailing a premium of upto 37%, some may find this very attractive, which in reality, is just an eye-wash, as there is more to it than meets the eye.

Let’s have a look at the shareholders’ funds of Just Dial, as at 31.03.2015:

Presently, issued/outstanding equity shares of Just Dial are 7.05 crore.

Hence, presuming an average buy-back rate at the lower level of Rs. 1,200 per share, the company may be able to buy-back not more than 14 lakh shares, as Rs. 168.33 crore is available for buy back, as stated above. If we presume the buy-back at Rs. 1,550 per share (the maximum price), company will not be able to buy-back more than 11 lakh shares. This works out to less than 2% and 1.60% of present issued share capital, respectively.

So, is this a great buy-back offer or a mere gimmick?

To put things differently, let’s peek into the shareholding pattern of Just Dial, as at 31.03.2015:

*includes 11 FIIs/ OCBs holding an aggregate of 44.34%.

Balance 4.59% is split as:

1. 16,921 Retail investors holding 1.62% stake
2. 539 HNIs and Bodies Corporate holding 1.61% stake
3. 1.36% stake held by MF, FIs and clearing members.

Thus, there is concentrated shareholding in the stock, which is the cause of high volatility in the share price, at frequent intervals. In such a situation, for whose benefits, is this buy-back being initiated?

If we presume that all non-promoter shareholders will tender their shares in the buy-back i.e. 67.22% holding, acceptance ratio will be less than 3% of the shares tendered. So, if a public shareholder holding 100 shares tenders it to the company in buy-back at Rs. 1,550 per share, in that case, less than 3 shares will get accepted, while 97 shares will be returned to the shareholder.

Climax

Now one needs to read this situation closely.

When buy-back will open, and presuming that majority of the non-promoter shareholders will participate in the share buy-back, the tendered shares will get blocked, for about three weeks time and will not be available for trading in the market.

In that case, it won't be surprising to see the share price move up by over Rs. 250 to Rs. 300 per share, from its then prevailing price, and may even cross the Rs. 1,550 per share mark as well.

Let us understand this by an example –

If the buy-back offer opens for 1 week, say from 01-08-2015 to 07-08-2015 and process is to get completed by 20-08-2015, including payment and return of unaccepted shares, a lot of volatility will be seen in the share price between 08-08-2015 to 18-08-2015.

Suppose if share rules at Rs. 1,200 on 08-08-2015, it can move to Rs. 1,500 and above by 18-08-2015, as there will be no float in the market available for trading (as tendered shares remain blocked). Share price will once again fall to around Rs. 1,200, once the unaccepted shares are returned to the non-promoter shareholders, who had participated in buy-back.

It may also happen that some shareholders, who could be few OCBs/FIIs will not tender the shares in the buy back and will sell them in this period of 08-08-2015 to 20-08-2015 in the open market at a higher price.

Stiff  Valuations

Also, if we see the financial performance of the company, for FY15, PAT was at Rs. 139 crore, with EPS of close to Rs. 20. It may be noted that PBT of Rs. 190 crore for FY15 came via Rs. 48 crore from treasury operations, which doesn’t deserve a PE multiple of 60 times, now enjoyed by the stock. So, with split of PAT at 75:25 between core business and treasury operations, core business is getting a multiple of about 75 times, if  treasury operations are assigned the conventional multiple of about 10 times.

Hence, this whole buy-back, though optically very attractive, is actually a ploy to create huge volatility in the stock price during the buy-back period, for the obvious reasons as explained hereinabove.

NOTE: We sincerely request members to take note of this and review what we have stated when the buy-back of the company actually opens.

Till then, we can simply advise both traders and investors to miss this wrong number!