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THE INDEX
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Buyback contagion
Manish Joshi
& Sachchidanand Shukla
Mico has approved a third buyback of two lakh shares at a price
of Rs 2,500 per share on a proportionate basis through the tender
route. The price offered is much lower than the previous two
buyback prices of Rs 4,200 and Rs 3,800 respectively.
Recently, several MNCs have paid out of their own pockets to
increase their stake in Indian subsidiaries to 90 per cent level
to get the company delisted. However, it seems that the Bosch
Group of Germany, the parent of MICO, is in no such hurry. Assuming
that the third buyback succeeds, the parent’s stake will go
up to 60.5 per cent from 51 per cent prior to the first buyback.
Thus, it may seem that the parent has been using MICO’s healthy
cash flow to its advantage.
Since 100 per cent FDI is allowed in automobiles and auto-ancillaries
sector, the German parent might think of having a 100 per cent
subsidiary in the near future.
It implies that there may be more buybacks or open offers in
the offing. The possibility can not be ruled out, as MICO is
a cash rich company with a very low debt-equity ratio. The company
can easily comply with the requirements of Section 77A of the
Companies Act, 1956 pertaining to buyback.
The third buyback price is around 15 per cent lower than the
current market price of MICO stock. But, the company’s shareholders
may do well to consider certain factors before submitting their
shares for buyback.
The fortunes of automobile companies have been gradually improving
since the last quarter of the current fiscal. MICO also caters
for the replacement market, which is largely unaffected by the
slowdown in the sales of new automobiles. While auto sales (especially
those of passenger cars) have been looking up recently, MICO
stands to gain the most, as it has a near monopoly in its market.
So, it should not be difficult for the company to maintain its
previous year’s sales and net profit.
The second buyback during the current calendar year has already
reduced the equity capital by 5.5 per cent to Rs 34 crore. If
the previous year’s bottomline of Rs 66 crore (excluding the
effect of change in stock valuation method) is maintained, the
company could end up with higher EPS and return on equity (ROE).
This may improve valuation of the MICO stock.
Automobile industry
It has been a dream run for auto scrips since the last two months
and all the major auto scrips have notched substantial gains
as a result of re-rating of these stocks by the market. However,
TVS Motor, M&M and Bajaj Auto scrips stand out as they have
risen by a whopping 83 per cent, 64 per cent and 55 per cent
respectively.
It must be recalled that even fiscal incentives such as a cut
in excise duty on two wheelers and cars besides the hike in
customs duty so as to extended protection from second hand import
threat early during the year, could not reverse the downward
trend for the beleagured automobile industry.
Latest SIAM data reveals a spurt in sales and production across
the industry segments and butresses the performance of the auto
scrips.
Firstly, normal monsoons and rekindling of rural demand besides
‘replacement demand’ seems to have ameliorated the inventory
pile up problem lately, thus relieving the pressure on toplines
and bottomlines of the industry players.
Secondly, the downtrend in the sector has left companies wiser
on the virtues of cost cutting, outsourcing and boosting of
operational efficiencies.
Further, there has been a slew of launches accross the segments.
The aggressive overtures coupled with operational efficiencies
would defintely help the margins and return on investments of
these companies.
Yet, despite the good show at the bourses, the price-to-book
value ratio of all the major players in the industry across
all segments reveals that barring a select few majority of the
companies are still trading below their book values. Bajaj Auto,
thanks to the recent rally lately that reversed its earlier
trend, has now joined Hero Honda Motors in the two wheeler segment
having a higher market price than its book value. Similarly,
Punjab Tractors and Swaraj Mazda in the tractor and HCV/LCV
segment respectively are the only other exceptions.
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