Recently on 2nd November 2020, NTPC came up with buyback at a price of Rs 115. On 3rd of November 2020, the board announced the record date to be 13th November 2020, leading to confirmation of early completion of buyback.
Overview of NTPC Buyback Case study
The buyback amount of NTPC turned out to be Rs 2,275 crores and number of shares for buyback is around 19.8 crores.
Out of this 15% is allocated to retail shareholder. To be in retail category one can purchase maximum of 2200 numbers of shares (considering the increase in share price).
With this our investment amount would turn out to be Rs 1,89,200.
With total 19.8 crores shares, numbers of shares which comes under retail category, i.e shares with less than 2 lacks of NTPC in their portfolio comes out to be around 14.5 crores.
Assuming there would be 10% increase in the retail shareholders, as this number has been taken from the Annual Report of 2020, on the basis of maximum diversification which was available.
Let’s dive in to the scenario approach of what could be the acceptance ratio. Current theoretical acceptance ratio of NTPC buyback case study is around 19%. But 100% tender application have been never seen in the market.
With 3 difference scenario of 50%, 70% and 90% of expected buyback application, the tender acceptance ratio turns out to be 37%, 26% and 21% respectively.
Tender Acceptance ratio is calculated with Expected Application of Buyback Shares / Number of Shares for Retail Category.
With these scenario, we would generate following cash flow from the company in terms of buyback. With the inflow the net value of the shares would then be turn out to be;
69 Rs in case of 50% application;
76 Rs in case of 70% application and;
78 Rs in case of 90% application.
Sales price of the remaining shares.
On the fundamental basis NTPC has pretty much hold on its sales which has been growing constantly at the rate of 9% CAGR since the past 10 year. While last 3 year sales CAGR is around 3%. Operating Profit Margin has been consistent over the period of 10 years in the range of 22 to 31%.
Net Profit Margins is declining since 2009 from 18% to around 11% in 2020, despite of Operating Margin being increase from 25% in 2009 to 31% in 2020.
This main constituents to this includes increase in interest expense and depreciation because of increase in borrowing and decreasing asset turnover respectively.
Source: Screener
However, market is consistently bending the share price of NTPC. Being a government company the share price has been pretty downward.
We don’t want to be the one to against the trend. While technicals can help here depicting the proper support price of the company.
Technical Support
Post COVID, the share price made a bottom of around Rs 75 making another down swing at Rs 78. Breaking the Triangle channel can be alert price and below Rs 75 can be caution part for us.
This gives us the worst price for our strategy to be Rs 75. Anything below this could be more worst for our buyback framework.
Source: Tradeview
The normal case price stand at around Rs 80 on the basis of the trend line of two bottom. While the best case price can be the top of triangle, which Rs 90. However, let’s consider the best case scenario to be around Rs 85.
Assuming the above discussed scenario prices for the selling price of the remaining shares we get the following returns from the NTPC buyback case study.
Out of the 9 possible scenario, we can make loss in case when the expected application of buyback remains at 80% and the sale price of the remaining share remains at Rs 75.
While 2 scenario out of 9 scenario will give positive returns but not more than our required rate of return from the market.
Rest of the 6 scenario remains profitable generating handsome return for investors like us.
This suggest a good deal to look out for, and on the basis of above scenario it seems good to allocate some of the portfolio in the market.