CASE HIGHLIGHTS

ICI India Limited is a manufacturer and marketer of paints, specialty

chemicals, adhesives, fragrances, starch and flavors. • They have
announced a programme to buy back shares with following features:
The buyback to be effected with open market purchases through
stock exchanges, without any negotiated deals, and offloading of
promoters’ shares at the price prevailing in the market, but not
exceeding Rs. 350 per share, commencing on the 29th of the
September 2006 for a period of one year.
Maximum buyback amount should not exceed Rs. 131.23 crore
which is 25 percent of the capital and free reserve as on 31
Mar,2006.
Buyback would be funded through the surplus cash available with
the firm without resorting to any borrowing.
Imperial chemical company , promoter of ICI , with 50.83% of the
share capital, shall not tender any of its share in buyback.
Shares bought back are cancelled and could not be reissued for
next six months as per law.
Debt to equity ratio will remain within stipulated norms 2:1.
ICI management limits the buyback to the number of the shares that
would confine the promoters, holding to less than 55 % to avoid
takeover guidelines.
 The management of ICI has offered a buyback price at a premium of
about 20% over the closing prices of the share on the date of
announcement of the buyback.
Ques1. What is the advantage of share buyback ? Compare the two
scenario if ICI paid Rs.131.23 crore as dividend , instead of this
amount of buyback.
Answer. Share buyback have following advantages :
Increased Shareholder Value - There are many ways to value a
profitable company but the most common measurement is Earnings
Per Share (EPS). If earnings are flat but the number of outstanding
shares decreases, increase in period-to-period EPS will result.
Higher Stock Prices - An increase in EPS will often alert investors
that a stock is undervalued or has the potential for increasing in
value. The most common result is an increase in demand and an
upward movement in the price of a stock. Buyback of shares and
securities results in lower capital base, enhances post-buyback
earning per share and appreciates considerably the price-earnings
ratio.
Excess Cash - Companies usually buy back their stock with excess
cash. If a company has excess cash, then at a minimum you can bank
that it doesn't have a cash flow problem. More importantly, it signals
that executives feel that cash re-invested in the corporation will get
a better return than alternative investments.
Preventing Takeover- Buy back of shares and securities helps the
promoters to formulate an effective defensive strategy against
hostile takeover bids. • Higher Dividend Yield- After buyback of
shares the companies will have the advantage of servicing a reduced
capital base with higher dividend yield.
COMPARISON • Option 1 – If amount is paid as dividend • Total No.
of Shares = 2,07,76,213/50.83*100 = 4,08,73,919 DPS earlier =
27.96 cr/40873919= 6.84 DPS = 131.23 cr/4,08,73,919 = Rs. 32.10
Change in EPS = Rs 0 • Option 2- Buyback:- • No. of shares to be
bought back – 131.23Cr/420 = 3124524 Shares • EPS (Post
Buyback) – 50.15cr/(40873919-3124524) = Rs 13.28 Earlier EPS
was 12.27, Hence Change in EPS = Rs 1.01 (13.28-12.27) So
BUYBACK is better option because of increase in EPS .
Ques2 .What would be the impact of the other income of ICI be when
the buyback is complete?
Ans. There would be no change in the other income as only cash is
used for buyback ,other income remaining unchanged. The only
change could be if this cash was invested in some other investment
which could yield some interest i.e. other income to the company.
Ques3. What changes in the shareholding pattern did you perceive
consequent to the buyback programme?
• Ans. Share Holding (Before buyback)= 50.83% • New Imperial
Share Holding =2,07,76,213/(40873919-3124524) = 2,07,76,213/
37749395 =55.03% Shares of ICI will increase from 50.83 % to 55
% and management control would remain with them.
Ques4. What is the maximum number of shares ICI can repurchase
without Exceeding the limit of the pre set amount and Without
invoking the takeover guidelines?
Answer. Let x be the number of shares. Max repurchase limit= 55%
Imperial Holding = 2,07,76,213/(4,08,73,919- x)*100=55% x =
30,90,000 shares
Ques5.Post buyback, what impact do you see on the stock price,
assuming the same P/E ratio is maintained?
Ans. P/E Ratio= Market price of share/ EPS = 350/ 12.27 =28.52
New Stock Price = P/E Ratio*New EPS = 28.52*13.28 = Rs 378.8