Castrol To Return Part Of Equity Capital To Investors

There are certain companies that have always rewarded their investors either with dividends paid or by way of capital appreciation. Castrol India has been one such firm that has always created wealth for investors even in difficult economic cycles.

Now, the company has decided to reduce the equity capital (Rs 494.56 crore) in its books by half and returning it to the shareholders, giving Rs 5 for every share they own. This is quite an innovative move by an Indian listed entity. After the completion of offer, the share capital of Castrol will be reduced to Rs 247.28 crore. The best part about the offer is that shareholders will also be exempt from any tax liability.

As regards the payment capacity, as on December 31, 2012, Castrol had Rs 575 crore in cash and Rs 155 crore as reserves. For the year ended December 2012, the company posted a profit of Rs 153 crore on revenues of Rs 1360 crore.

As for the offer, the company’s management has commented saying, “Capital reduction would help individual members to invest the funds in other better yielding securities, there by maximising the returns there as against the company’s investment in treasury, which yielded a pre-tax return of only 9.17 per cent until December 31, 2012”.

While this route of paying back is been quite innovative in the Indian markets, there has recently been a host of such offers worldwide. Global companies with huge cash on their books and with no expansion plans are often under the radar of shareholders. Apple Inc., which had huge cash on its books, had to make an offer to buy back its shares.

The offer is undoubtedly good for the shareholders. However, many on the street feel that the promoters, who hold the large stake (71 per cent) in the company, will be the highest beneficiaries. Out of Rs 247 crore, a major chunk of Rs 176 crore will go to the promoters’ pocket. However, we feel that the offer is positive for the company. Investors can take exposure to the counter with a perspective of around one year.