Sun Pharma announced buyback of 7.5 million shares at a price of Rs 900 per share through the tender route with the promoters indicating their intention to participate in the buyback. The buyback is valued at Rs 6.75 billion ($100 million). This combination of promoter participation in the buyback and the small size of the buyback itself makes us believe that it is being used as an alternate tax-efficient distribution tool, and is not triggered by “attractive valuations”. Given our view on valuations, we would have been worried had SUNP announced a large buyback (over and above the dividend). However, given the size of the buyback, we believe it is being used as an alternate tool for cash distribution.
Promoters (54.97% shareholding) have indicated their intention of participating in the buyback and given the structure of the buyback (tender offer) and the substantial 20% premium, we do not see the buyback as suggestive of the company finding current valuations attractive.
SUNP has historically paid out 15% dividend with FY16 payout at Rs 7.2 billion. Following this buyback, we see a possibility of reduced annual dividend payout as the company could choose to use a combination of buyback and dividends as a recurring cash distribution policy. We do note that post this buyback, the company cannot announce another buyback for at least 12 months from the closure of the last buyback offer.