Shares of fintech major One 97 Communications, the parent company of Paytm, tumbled 3% in intraday trade on Wednesday even after the company announced a ₹850 crore share buyback scheme at a whopping premium of 50% as compared to Tuesday’s closing price of ₹540. The digital payment solution company proposed to buyback up to 1.05 crore shares via the open market at a price of up to ₹810 apiece, which is much higher than the ₹650 per share expected by the market. So, let’s decode why the buyback plan failed to impress investors.
Buyback size too small
Investors fear that the buyback size is too small compared with the overall market capitalisation of the company, which may lead to lower acceptance ratio for participants. Paytm has a market capitalisation (m-cap) of around ₹35,000 crore and a buyback offer of ₹850 crore will represent just 1.62% of the paid-up share capital of the company as of March 31, 2022.
“The D-Street is not induced as the size of the buyback is ₹850 crore as compared with m-cap of around ₹35,000 crore. Adding to it, the stock has corrected from the issue price of ₹2,150 to current level of ₹540, which eroded more than 70% of the market value. So, investors are not willing to take fresh positions as a result of high volatility,” Kranthi Bathini of Wealth Mills Securities told Fortune India.
Disappointment over open market route
The market participants were also disappointed over the route through which the company intended to buyback shares. The company has proposed to buyback shares through an open market route on the stock exchanges and not tender offer.
In an open market buyback, the company buys shares directly from the market at the then prevailing price, wherein tender offer, the shareholders get an opportunity to tender their shares at the fixed price set by the company.
Adding to it, in case of tender route, 15% of the share buyback is reserved for retail investors, where as no such reservation is applicable in the open market offer.
As per the shareholding pattern, nearly 93% of Paytm shares are owned by retail investors.
Historical stock performance
With 75% fall in share price since its listing on November 18 last year, Paytm is the worst first-year performer among large initial public offerings (IPOs) globally in the past one decade. The company, which raised ₹18,300 crore in the country’s second-largest IPO ever, saw its stock hit an all-time low of ₹439.60 on November 24, 2022, as investors raised concerns about its quarterly losses and lofty valuations. The largecap stock touched a record high of ₹1,961.05 on its listing day.
In the last one year, Paytm shares have delivered a negative return of 64% to its shareholders, while it has dropped 12% in the past six months and 16% in a month. It currently trades at around ₹540 against its issue price of ₹2,150.
Given the disappointing stock performance in the past, investors are less willing to take fresh positions.
What lies ahead?
According to global brokerages JP Morgan and Morgan Stanley, the buyback announcement will provide support to the stock price in the near term. Both the brokerage firms see up to 104% potential rally in the stock price to ₹1,100 per share, saying that buyback won’t hamper any growth plans.
JP Morgan remains upbeat on Paytm, saying in its note that "the buyback announcement at a 50% premium to provide support to the stock price in the near term". The brokerage kept its price target unchanged at ₹1,100 per share, and reiterated 'overweight' rating on the stock. It highlighted that the buyback won't hamper any growth plans as the company will generate excess cash after taking into account the investments required for growing the business.
Morgan Stanley has given 'equal weight' rating to the stock with an 'attractive' industry view. It has pegged a price target at ₹695 per share. The brokerage noted that the total outlay owing to the buyback would be around ₹1,050 crore and includes applicable buyback taxes. "Cash position has been strong at ₹9,180 crore as of September 22, and will remain strong post-buyback as well," it said.
“The Paytm board highlighted that the buyback is a sign of confidence that the company is on a clear path to delivering cash flow profitability, and stated that the buyback will not have any impact on its growth plans in the near future or its profitability plans,” the report noted.