Buyback, Special Dividend or Debt Prepayment at Suryoday Precision Components
Suryoday Precision Components Ltd machines EV drivetrain housings for two Indian OEMs. FY25 revenue was ₹4,200 crore at a 14% EBITDA margin, with net debt of ₹1,529 crore (2.6x EBITDA) against a cash balance of ₹780 crore. The company has just closed a ₹500 crore NCD issue whose covenant tests net debt/EBITDA at or below 3.25x every quarter on a trailing-twelve-month basis, and whose restricted-payments basket is capped at ₹150 crore a year. FY26 EBITDA is guided down to ₹540 crore because of a platform changeover at the larger customer. The board is debating three uses of ₹400 crore of surplus cash: a tender buyback at ₹950 (market price ₹880, 5 crore shares outstanding), a special dividend of ₹25 per share, or prepayment of 9.1% term debt. Promoters hold 58.4% and have pledged 22% of their stake; they have confirmed they will not tender. The CFO notes that buyback proceeds are now taxed as deemed dividend in shareholders' hands, and that roughly 40% of the register sits in the 30% slab.
1. Test the ₹400 crore buyback against the NCD covenant and the SEBI SAST creeping acquisition limit. Quantify both.
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Covenant test. Cash-funded buybacks reduce cash, so net debt rises rupee-for-rupee: ₹1,529 crore + ₹400 crore = ₹1,929 crore.
- On current TTM EBITDA of ₹588 crore: 1,929/588 = 3.28x, already above the 3.25x limit.
- On the FY26 guidance of ₹540 crore (the covenant uses TTM, which rolls into the weaker year): 1,929/540 = 3.57x.
- Separately, the restricted-payments basket is ₹150 crore, so a ₹400 crore payment breaches that limb before the ratio is even computed.
SAST test. Shares bought back = 400/950 = 4.21 crore? No - 0.421 crore shares (42.1 lakh), i.e. 8.42% of the 5 crore base. If promoters do not tender, their holding rises to 58.4/(1 − 0.0842) = 63.8%, a gain of 5.4 percentage points. The creeping acquisition window permits 5% per year, so the buyback mechanically pushes the promoter past the limit and triggers an open-offer obligation unless an exemption applies.
Conclusion. The buyback as drafted is unexecutable: it breaches the payment basket, breaches the leverage ratio on both current and guided EBITDA, and forces a mandatory open offer at a price that would be set on the 60-day VWAP - likely below the ₹950 tender price. Maximum buyback consistent with a 3.25x test on guided EBITDA is 3.25 × 540 − 1,529 = ₹226 crore, and only ₹150 crore is permitted by the basket; the binding constraint is therefore ₹150 crore, not ₹400 crore.
2. Compare the special dividend and the debt prepayment on after-tax shareholder value, signalling and financial flexibility.
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Special dividend. ₹25 × 5 crore shares = ₹125 crore, comfortably inside the ₹150 crore basket and with no impact on the leverage covenant. Since buyback proceeds are now taxed as deemed dividend, the tax treatment is broadly at par with a dividend: a 30%-slab holder receives ₹17.50 net per share. Dividend is a soft commitment - cutting it later carries far less market penalty than failing to complete an announced buyback.
Debt prepayment. Repaying ₹400 crore of 9.1% debt saves ₹36.4 crore of interest pre-tax, ₹27.3 crore post-tax at a 25% rate. That flow is permanent and accrues to equity holders without distribution tax friction. It also rebuilds exactly the headroom the covenant needs: net debt falls to ₹1,329 crore, giving 2.46x on guided EBITDA, restoring about ₹226 crore of future capacity.
Signalling. A buyback at a 12% premium signals undervaluation but is credibility-destroying if abandoned; a dividend signals cash discipline; a prepayment signals balance-sheet conservatism. With 22% of the promoter stake pledged and a platform changeover ahead, the market will read aggressive distributions as risk-taking, not confidence.
Judgement. Neither ₹400 crore option is affordable. A ₹125 crore special dividend preserves the covenant and the promoter holding; debt prepayment is value-accretive per rupee but does nothing for the shareholder-register objective. The better recommendation is a split: ₹150 crore prepayment plus a ₹100 crore buyback, keeping the promoter at 60.3% (inside the 5% window) and net debt at 2.9x guided EBITDA.
3. The promoter-director proposes using the full ₹400 crore but funding half of it with fresh debt so cash is preserved. Evaluate this structure.
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Funding a buyback with new debt is the worst of the three structures here, and the arithmetic shows why immediately.
If ₹200 crore is drawn at, say, 9.5% and ₹200 crore of cash is used, net debt rises by the full ₹400 crore anyway (gross debt up ₹200 crore, cash down ₹200 crore). The ratio is identical to the cash-funded case: 1,929/540 = 3.57x on guided EBITDA. The structure therefore buys no covenant relief at all, while adding ₹19 crore of annual interest and ₹14.3 crore of post-tax cost.
What it does change is the equity base and the rating. Leverage is unchanged, but interest cover falls and the AA- rating - which underpins the pricing on the ₹500 crore NCD - comes under review. A downgrade would reprice the entire ₹2,309 crore gross debt, not just the new tranche; one notch is typically 40-60 bps, or ₹9-14 crore a year on the existing book. That is a real, recurring cost incurred to finance a one-time distribution.
It also weakens the promoter credit profile: a promoter at 63.8% (post buyback, no tender) with 22% of a now-larger stake pledged, in a year when EBITDA is falling, is precisely the configuration lenders price as event risk.
The defensible alternative is to phase the programme: complete a ₹150 crore tender now, prepay ₹150 crore of term debt, and revisit a second tranche after the platform changeover once FY27 EBITDA is visible and the TTM test has rolled past the trough. Sequencing is the constraint that matters, not the source of funds.