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Crompton Greaves buy back offer: Our view

Jul 19, 2013

Crompton Greaves has come out with an offer to buy back its equity shares. In this article, we take a look at the details of the offer and whether one should tender shares in the buy back process.

Details of the buy back

The buyback commenced on 16th July 2013 and will culminate on 15th January 2014. The company intends to buy back a maximum of 21.2 m equity shares. This is equivalent to 3.3% of the paid up capital outstanding as of 30th June 2013. The maximum buy back price is fixed at Rs 125 per share. This is at a premium of 41% to the yesterday's closing price of Rs 88.9. Taking into consideration the buyback price and number of shares intended to be bought back the total buy back size stands at Rs 2,650 m (Rs 125*21.2 m shares).

As of 31st March 2013, total cash in the company's balance sheet (consolidated) stood at Rs 5,833.6 m. Thus, the company is well placed to fund the buy back without resorting to any external source of financing.

Should you tender your shares?

At the outset the buyback price of Rs 125 looks appealing. However, this is the maximum price which the company is willing to pay for the buy back. At present, if any investor were to tender his shares the company will buy back the same at prevailing market price. In short, all the buyback will happen at prevailing market price but not exceeding Rs 125. Thus, if the company achieves its buy back target at a lesser price (the current price is around 90) it is not necessary that the investor will get 125 per share.

Also, for an investor who is holding the shares of Crompton Greaves tendering the shares in buy back offer is akin to selling the shares in the open market. This is because in either case he will get the prevailing market price. Hence, there is no incentive to participate in the buy back since there is no premium attached to it.

It should be noted that we recommended the stock on 22nd February 2013 with a hold rating and target price of Rs 130. Since then the stock has declined by about 10%. Hence, tendering now would result in a loss to investors.

Also, considering that management has fixed the maximum buy back price at Rs 125 there is more to intrinsic value then the current market price. We believe that in order to avert the current pessimism the management has opted for the buy back offer. All these factors signal that one can continue holding on to the shares for the long term. If the stock price rises in subsequent days one can always sell the shares in open market. As such, there is no opportunity cost lost for not tendering in the buy back.

Hence, we would suggest investors to HOLD on to the stock and not tender their shares in the buy back offer.

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