First, the Mico stock trades at a price earning multiples of 20 times, and second, the stock is already very illiquid and a buy-back would make it only even more so. Further, the terms of the buyback are very restrictive, since it is on a proportionate basis as well as subject to a maximum of 200 shares per holder. Therefore, the bigger shareholders will be constrained by the limit of 200 shares, while small shareholders will see a maximum of 10 per cent of their holdings being liquidated (assuming that all the minority shareholders participate). Mico has a history of high profitability and huge cash generation, but at the same time, if one goes by the dividend payout and illiquidity in the stock, shareholdershave not really benefitted much in the past.

The company has consistently followed a policy of writing off assets very quickly (it depreciates assets at the rate of 33 per cent WDV) this has tended to depress earnings and consequently, the dividend payouts. The average payout ratio in the recent past has been between 10-12 per cent. In the past, Mico has grown organically, ploughing its cash accruals back into new manufacturing capacities, thus sustaining its growth rate. The fact that the company has chosen to repay a maximum of Rs 98 crore back to shareholders could be interpreted as cessation of expansion opportunities in its business, in which case it could be taken as an additional negative point.

Late in 1998, the company announced a Rs 500 crore expansion plan, of which Rs 200 crore was to go into its fuel injection business. The present status of these projects is not clear. The management had warned shareholders in the 1997 annual report that growth would slow down as its customers in the autoindustry had cut down on production. Right enough, in 1998, the topline growth has fallen by 5.5 per cent, while the profit after tax fell by 26 per cent.

But, if the company does not anticipate any growth in the immediate future, then it makes sense to return surplus cash to the shareholders. But in this case, a significantly higher dividend payout would have been the better thing to do as opposed to a buyback. The only beneficiary from this exercise will be Robert Bosch Gmbh, the German parent company, whose stake will rise to a maximum of 54.5 per cent.

But if Bosch was keen on hiking its stake, it should have taken the preferential offer route, which would have also expanded the equity capital. Since Mico has chosen to follow the buyback route, it will involve a hike in the parent company's stake without any outflow of cash on their part. Shareholders have little to gain from this exercise except for the repurchase price being above the market price. The buyback option should be exercised by all.