Kaveri Seeds: New buy-back programme
Thinking about Kaveri's new buyback programme and its reach
Almost a year ago, I did an analysis of an Indian company that caught my attention: Kaveri Seeds. Not only because of its business model, but also because of its policy of repeated share buybacks over the years. The ultimate goal of buying such a company was to hope that the business would work and that over the years, the dividend would grow by reducing the number of shares issued. In this line, on 27 October, Kaveri announced another share buyback plan. I want to analyse what impact this programme will have, and whether it is likely to be fully implemented.
For those who haven't read it, here is the link to the first article about the company:
THE NEW BUY-BACK PROGRAMME
On 27 October, the board of Kaveri Seeds approved a new buyback programme, this time for ₹ 1,256,500,000. The maximum price to be paid is ₹ 700 per share (45% above the last close). The market capitalisation of Kaveri Seeds is currently ₹ 29,133,000,000. This means that at Kaveri's current price of ₹ 482, the volume of buybacks could reach up to 4.3% of the total issued shares. If all buybacks are made at the maximum price of ₹ 700 per share, the total buybacks would reach 3% of the total issued shares.
If we take into account the shareholding structure, the total buyback would be for up to 10% of the shares not held by the promoters, who will not be able to participate in the buyback by selling their shares. It should also be noted that the company must carry out at least 50% of the scheduled buybacks and will last up to 6 months.
SUSTAINABLE BUY-BACKS?
As we discussed in the first post on Kaveri, the company has been conducting buybacks for many years. Buybacks average between 1.7% and 4% depending on the year.
In these two graphs we can see how the number of issued shares is slowly decreasing year by year. The final idea of the investment thesis we presented was that this reduction of issued shares would, in the long run, lead to an increase in the dividend: the fewer shares issued, the higher the dividend per share for the same amount to be distributed.
What is the basis for this long-term plan? I believe that the strength of the business' competitive advantages will, with some ups and downs, keep Kaveri's revenues at an acceptable level. Let's look at the graph below to see the development of the company's revenues, the amount allocated to buybacks, and the net debt, which always remains negative: Kaveri always has more cash or cash equivalents than debt, in fact, the debt is zero.
THE LAST QUARTER
Kaveri has a significant seasonality component in earnings. Most of the net profit is realised in the quarter ended 30 June.
But more importantly, Kaveri ended the quarter with R5.59 billion in cash, and no debt. This means that Kaveri is spending only 22% of its available cash on buybacks. One wonders: Why don't they do a bigger buyback? It seems to me that the way Kaveri is doing buybacks is the best way. No rush, buying back cheaply. And in the meantime, the business continues to generate, with its competitive advantages and captive customers, profits that allow the buybacks to be made. Basically, it's a boring business, in which you just have to wait for it to pay off. And personally, if the stock were to go down a lot, for no clear reason, or for non-recurring reasons, I would buy more.
THE PAYOUT AND THE DIVIDEND
Consider the interim dividend paid in August. It was Rs 4. This means that the amount paid out was approximately R230 million, only 10% of Kaveri's net profit for the financial year ending March 2022, and only a small part of the cash on hand. This means that there is also plenty of room to increase the dividend. It is clear that the amount for buybacks is much larger than the amount distributed in dividends. It is therefore clear that while at some point buybacks will be capped, as non-promoter shareholders have to hold a minimum of 25% of the total shares, there will be plenty of room for an increase in the amount of the dividend....