scorecardresearchPaytm Share buyback: What should retail investors do? JP Morgan has this to say

Paytm Share buyback: What should retail investors do? JP Morgan has this to say

Updated: 14 Dec 2022, 11:39 AM IST
TL;DR.
On December 13, 2022, the board of directors of Paytm approved the proposal for the buyback of the company's shares at 810 per share, over a premium of 50.16% or 270.6 higher than Tuesday's closing price of 539.40 apiece.
Shareholders who do not wish to remain invested in the company may surrender their shares and exit, with the company offering a 50% premium over the market price of  <span class='webrupee'>₹</span>539 per share.

Shareholders who do not wish to remain invested in the company may surrender their shares and exit, with the company offering a 50% premium over the market price of 539 per share.

Shares of One 97 communications, Paytm's parent company, fell more than 2.50% to 525 apiece during Wednesday's intraday trade after the buyback plan fail to cheer investors' sentiment.

Earlier, analysts and Proxy advisory firm IiAS raised questions over whether loss-making Paytm should go in for a share buyback, Paytm said that it strongly disagrees with comments and speculations from renowned advisory firms regarding the company’s financial performance and proposed share buyback plan.

Proxy advisory firm IiAS on Tuesday said that Paytm share buyback proposal is primarily a return of equity capital to its shareholders as the company continues to report cash losses annually.

Meanwhile, here is the size and terms of the Paytm buyback are explained, along with suggestions for retail investors and rating updates from the major brokerage house.

Buyback Size

On December 13, 2022, the board of directors of Paytm approved the proposal for the buyback of the company's shares at 810 per share, over a premium of 50.16% or 270.6 higher than Tuesday's closing price of 539.40 apiece. The board also made it clear that Paytm's share buyback won't exceed 850 crore.

As per the approval, the company has cleared the proposal for the buyback of fully paid-up equity shares with a face value of 1 each.

Assuming a full buyback of 850 crore and applicable buyback taxes, the company expects the total outlay will be in excess of approximately 1,048 crore.

Buyback Route

Paytm has opted for the open market route through the stock exchange method for the buyback programme and expects the process to be completed within a maximum period of six months.

Meanwhile, in the open market method, the company buys the shares directly from the secondary market. In this case, the purchase is completed at the market price.

Minimum and Maximum buyback size

"At the maximum buyback price and the maximum buyback size, the indicative maximum number of equity shares bought back would be 10,493,827, which represent approximately 1.62% of the paid-up share capital of the company as of March 31, 2022."

"If the equity shares are bought back at a price below the maximum buyback price, the actual number of equity shares bought back could exceed the maximum buyback shares, but will always be subject to the maximum buyback size," Paytm said in an regu filing.

Based on the Minimum Buyback Size and Maximum Buyback Price, the Company would purchase a minimum of 5,246,913 equity shares.

Why did Paytm choose to buyback?

Since its listing, shares of Paytm have been in a downward trend. Investors who were anticipating huge gains from Paytm have incurred heavy losses from the very first day of Paytm's listing on the stock market.

Naturally, a company may choose to repurchase shares if it thinks that its stock is undervalued or has declined too much. In the Paytm case, the stock has fallen 74.91% from its issue price of 2,150.

If the company purchased some of the outstanding shares from the exchanges, the share price would rise due to demand and supply mismatches that arise when there are fewer shares available in the market for trade.

The other reason was that buybacks are the most tax-effective means of rewarding shareholders. Unlike dividends, there is no three-level tax on buybacks. So it is a better and tax-effective way for the company to reward the shareholders.

What should retail investors do?

Shareholders who do not wish to remain invested in the company may surrender their shares and exit, with the company offering a 50% premium over the market price of 539 per share.

However, even at the 810 buyback price, investors who purchased shares in the IPO for 2,150 each and remained invested are still in the red by 62.32%.

Brokerage views

Global brokerage firm J.P. Morgan has given an overweight rating to the stock with a target price of 1,100 per share.

The brokerage firm expects PAYTM to see strong revenue growth across all its business segments thanks to device monetization in payments, financial services cross-selling, ticketing recovery, and rising ad monetization.

"We see revenues growing more than 44% CAGR over FY22–26, to $2.7bn, and CMs rising to 48% by FY26. "We see PAYTM retaining the highest revenue and profit levels among local vertical and global horizontal peers," said J.P. Morgan in its equity research report.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 14 Dec 2022, 11:39 AM IST