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Stocks

Indo Asian Fusegear to Buyback from Market upto Rs. 130

In a board meeting, Indo Asian Fusegear has decided to buy back shares at a price upto Rs. 130 from the market, for a total amount of Rs. 23.19 crore.

This is a terribly disappointing strategy for multiple reasons.

  1. It’s inadequate. The current price is Rs. 80, and even at this price they will be able to buy back a maximum of 28 lakh shares. That’s just 10% of their outstanding shares, which is a limit by the companies act that can be done only by a board resolution (versus a special resolution with an General Body Meeting required for >10%) . Compared to the cash they hold (more than 250cr.) it’s woefully inadequate.
  2. Note: Even if they did take a special resolution, they can’t buy back more than 25%, which would have just taken them 60 cr. But that would have been a much better alternative.
  3. Other companies that do market buy backs often don’t seem to do so well. The Anil Ambani group has done it many times with group companies, SRF keeps doing it and a number of other companies continue to take this route. But what they buy back, they reissue as either a QIP or a promoter warrant or stock options – if there is no real dilution, what is the point?
  4. Other options were better. They could have given a big dividend alongside, of the order of Rs. 40 per share (that would cost the company only about 130 cr.)
  5. They could have gone in for a proportionate buy-back of, say 70 lakh shares at Rs. 130 per share. That would cost just Rs. 100 crore, reduce the share capital by 22%, and given current shareholders a reasonable exit.

I think this market buyback is a problem because it closes the door to a regular buy-back (that is, through a tender offer where every shareholder can have some of his shares bought back) for at least a year. Plus, it’s terribly opaque – while they do announce the shares bought back, there is no requirement to buy it back compulsorily. So on days that the shares do badly you would think the promoters would buy a lot of shares, but in reality, they don’t.

That they chose to do the market buyback, the least effective of such measures, leaves me with little to say other than that I am losing confidence in this company. I am now uncomfortable with the promoters in that they first tried to do a dirty merger with a promoter company (which they withdrew), and now they choose an option that stinks. I will look at the reports of buy-back, and if they are doing silly things like NOT buying back a ton of shares at the current price of Rs. 80, I shall sell my holding.

This company has a greater amount in the bank than the current market-cap. That’s why I liked it. The other two companies I’ve looked at, that have similar cash level comparisons, have taken different approaches. Smartlink offered Rs. 30 per share as dividend (I had bought at Rs. 76) and Piramal Healthcare went for both a buyback and a big dividend.