MOIL buyback offer can fetch 16.5% returns; should you opt for it?

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State-owned manganese ore mining company MOIL has announced a Rs 693.77 crore share buyback programme. The company in an exchange filing on November 10, 2021, said that it would buyback 3,38,42,668 equity shares at Rs 205 per share. The shares being bought represents 14.26% of the total paid-up equity capital. The buyback will be done through the “tender offer” route. This buyback size is ~1.7x the size of the last buyback announcement (in November 2019) of 2.03 crore shares at a price of Rs. 152.

As of November 10, the promoter and promoter groups held 64.35% of the total equity capital followed by foreign institutional investors that held 5.04% stake and mutual funds that owned 2.5% stake. A total of 14.88% equity is held by individuals.

The arbitrage opportunity

The buyback offer is at a 16% premium to the trading price of Rs 175.70 on November 16. A retail investor can benefit from this arbitration as the share are trading at a discount of Rs 29/- to the buyback offer price.

As per Securities and Exchange Board of India norms, 15% of the offer is reserved for retail investors with holdings up to Rs 2 lakh in the company. Hence to qualify as a retail investor one can buy a maximum of 975 shares (2,00,000/205 = 975).

But the acceptance ratio will change your returns. Acceptance ratio is the number of shares accepted in a buyback offer as compared to the total number of shares tendered. The below matrix will help you better understand the returns under different acceptance ratios.

Market experts are of the opinion that retail investors can participate in the buyback offer as the acceptance ratio could be around 50%.

Brokerage view

Sharekhan is bullish on the counter and has set a price target of Rs 210 per share. "MOIL is attractively valued at 4.1x its FY2023E EV/EBITDA, considering the expectation of a strong earnings recovery over FY2022E-FY2023E. Moreover, high cash & cash equivalents of Rs. 1,968 crore (Rs. 83/share or 47% of market capitalization) and a buyback price of Rs. 205 would support the stock’s price," stated the brokerage firm in a report.

(Disclaimer: The above is for informational purposes only. Money9.com advises market participants to check with certified experts before taking any buy, sell or hold decisions.)