JustDial recently decided to buy back shares. They have a reasonable amount of cash on the books, and they will be using about Rs. 170 cr. of that money to buy back shares through a tender offer. See the conference call transcript.
(Also read: Demystifying Share Buybacks)
Just Dial will pay Rs. 1550 per share. At that price it can buy back just 11 lakh shares.
Their stock price is much lower – at 1096 as we write.
Should you tender your shares?
The company has 7.05 crore shares. That means the buy back will only reduce the company’s share capital by 1.5% or so. Promoters own 2.31 cr. shares, and everyone else owns 4.74 cr. shares.
That means, if everyone else submits their shares in the tender offer (other than promoters), only 2.3% of their shares will be accepted. That means, if you tend 1000 shares, they will buy back just 23 shares. For a 100 shares, it’ll probably mean 2 or 3 shares (since they can buy fractionals).
You’ll get the rest of your tendered shares back.
It does make sense to tender the shares, just in case some other people don’t, so that you get the higher price.
However, remember that these shares are not bought on the share market – so you will pay capital gains taxes on them, even if you hold then for over one year. (At 10% of the gains you make).
Will the Tender Offer Happen?
Shareholders will have to approve. Of the total number of shares out there, about 44% are held by foreign investors, including VCs like Sequoia and Tiger. They are very likely to submit their shares, in our opinion.
In fact, we think the buyback is great to provide some of these investors an exit. As Mauritius entities, they will pay no capital gains taxes so the Rs. 1550 price is very attractive. Even if they only book a small profit (of their total holdings) this is good money in the pocket without disrupting the market. (Selling 170 cr. worth JustDial shares will cause the price to fall more, especially if it’s known they are selling).
We’ll know “when” the offer happens in a month or so, we think.
Is this good for the company?
A buyback means the company can no longer issue more shares (for fresh fund raising) for another six months at least. This changes their story a little – as they were planning to move up into the e-commerce game. Their listing business is a regular cash cow, but it’s not a great growth story going forward, we think. In that, there’s probably a premium you pay for Justdial as an online play, but given that rapid expansion won’t happen we would temper down our growth expectations on the stock.
Reducing share capital by just 1.5% isn’t meaningful. We have no idea why they’d do that and give up about 20% of the cash they have. This doesn’t add up, unless it’s to give an exit to PE/VC shareholders at a high price. And that is a further negative.
It’s trading at a P/E of 55 or so. That could easily come down to 40 and still be reasonably priced (considering the scarcity of online listed players). So we think the buyback basically changes perception – it’s not a mad growth stock anymore.
