7/28/2019 Buyback Offer From Crompton Greaves-VRK100-09Jul2013

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Rama Krishna Vadlamudi, HYDERABAD 09 July 2013

www.ramakrishnavadlamudi.blogspot.com

Crompton Greaves Ltd on 28 June 2013 announced a buyback (share repurchase) offer,which starts from 15

thof July 2013. It wants to buy back its own equity shares from the

open market for a total amount of Rs 265.70 crore. The details of the offer are as follows:

Buyback offer opens 15 July 2013 Offer closes 27 June 2014

Maximum no. of

shares to be bought

2.1256 crore (3.31%

of existing shares)

Total number of paid-

up equity shares 64.1492 crore

Minimum no. ofshares to be bought 0.55 crore

Maximum amount ofbuyback by company Rs 265.70 crore

Maximum buybackprice per share Rs 125

Market price when the

offer was announced Rs 87.40

Face value Rs 2 Paid-up capital Rs 128.30 crore

Conditions for Buyback:

The company has fulfilled the following regulatory conditions:

As per the Companies Act, the funds deployed for the buyback cannot exceed 10% of thetotal paid-up capital plusfree reserves of the company on a standalone basis (free reserves

exclude capital reserve, capital redemption reserve and revaluation reserve). As on31Mar2012, the companys paid up capital plus free reserves were at Rs 2,657.70 crore,

while the company has set the maximum amount of buyback at Rs 265.70 crore.

As per the Companies Act, the number of equity shares that can be bought back in anyfinancial year cannot exceed 25% of the total paid-up capital of the company

As per the Listing Agreement between the company and the Stock exchanges, the companyshall maintain a minimum public shareholding of 25% of the total paid-up equity share

capital of the company

What are the Reasons for Share Buyback?:

Share buybacks by listed companies are similar to dividends, in the sense that the companyreturns some amount of cash to the equity shareholders. They are done usually by companies with

strong balance sheet and cash in excess of business purposes.

7/28/2019 Buyback Offer From Crompton Greaves-VRK100-09Jul2013

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Rama Krishna Vadlamudi, Hyderabad 09 July 2013

www.ramakrishnavadlamudi.blogspot.com

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Buybacks are a signaling device by a companys management that the companys market price is

undervalued. In general, they help in propping up the companys share price. After the buyback,

the number of paid-up equity shares will come down shoring up the earnings per share (EPS),

while the available cash in the balance sheet will come down. They also increase the financialleverage of the company. As the stock of Crompton Greaves has fallen heavily in the last two

years, the company has now come out with a buyback to support the falling share price.

In India, share buybacks have tax advantage over cash dividends, which are subject to dividend

distribution tax (DDT). Piramal Healthcare of India in 2010 sold a big part of its pharmaceutical

business to Abbott for a huge sum. But, Piramal distributed the excess cash to its shareholdersthrough share buyback due to tax advantage.

Crompton Greaves: The Fallen Angel:

The stock of Crompton Greaves was a darling of the market till July 2011, when the stock lost

25% of its market value in just two days to reach Rs 182 per share. This was on account of 60%

drop in its quarterly profit, sale of entire personal shareholding by its ex-CEO SM Trehan and thecompany buying an aircraft for Rs 270 crore. Since July 2011, the stock lost another 50% of its

value and is now quoting at Rs 90 per share; and its 52-week low was Rs 71.70 on 25 June 2013.

Though the companys financials are strong, the business environment for the company continuesto be weak. Its consolidated EPS for financial year 2012-13 is negative ( Re 0.60) and as such

the price-earning ratio is irrelevant. The consolidated book value as on 31Mar2013 is Rs 55.5 and

it price-book value is 1.6. The return on net worth (RONW) has fallen from 34.3% in March 2008to 10.5% in March 2012 and the same is negative now. The consolidated debt-equity ratio has

increased from nil in March 2011 to 0.17 in March 2012; and to 0.45 in March 2013.

The cash in the balance sheet as on 31 March 2013 is Rs 583 crore, enough to take care of the

current buyback size of Rs 265.70 crore. The company has operations in India, Europe and theUS. It has some world-class products in power and industrial systems. The company is strong in

research and development (R&D). The promoters (Avantha Group) shareholding is 42% andthey have pledged 62% of their shares. The biggest non-promoter shareholders are HDFC mutual

fund, HSBC MF, Reliance MF and LIC of India. The FII holding is 15%.

Unless there are clear signs of improvement in the power sector and the global environment,

conservative investors need not accumulate any shares of the company. However, existing

investors may continue to hold their shares because the share buyback has helped the stock fromfalling further; and the stock has formed a base of around Rs 75 Rs 85 for the time being.

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Disclosure: The author holds a small number of equity shares in the company.Disclaimer: The author is an investment analyst and freelance writer. This write-up is for informationpurposes only and should not be taken as investment advice. Investors are advised to consult their financial

adviser before making any investment decisions. The authors articles on financial markets and Indian

economy can be reached at:

http://ramakrishnavadlamudi.blogspot.in/