Buyback of equity shares by companies has hit a six-year high in FY17

41 companies buy back shares worth Rs 27,783 crore in FY17

Buyback of equity shares by companies has hit a six-year high in financial year 2016-17 (FY17), with 41 companies announcing a share buyback offer in the last 11 months totalling Rs 27,783 crore, as against 16 firms doing so during the entire previous financial year 2016 (FY16). Of this, 10 companies still have the buyback offer open amounting to Rs 1,575 crore; and this excludes the proposed open offer by Tata Consultancy Services (TCS).

Most of these companies announced buyback through the tender route, under which repurchases were executed using a fixed price tender offer. While a share buyback does not impact a company's business, there is a financial impact to the extent that the cash and the number of shares in its books reduce. As a result, the EPS (earnings per share) goes up.

Since buyback reduces outstanding shares, it boosts earnings per share and, therefore, the share price. In tender offer, the company makes an offer to buy a certain number of shares at a specific price directly from shareholders.

"In most companies, the capex plans have been put on hold. As a result, there is idle / surplus cash in the balance sheet, which is dragging down the return ratios. There is pressure from shareholders as well as the stocks haven't performed well. Hence, it is better to return the cash to them. Secondly, post the changes to the dividend tax policy, buyback is a more lucrative way to return the money to shareholders than dividend. Thirdly, the promoters could also want to give a temporary support to the share price by initiating a buyback. All these reasons have seen the number of companies opting for this route in FY17," explains Deepak Jasani, head of retail research at HDFC Securities.

On Monday, TCS board approved a proposal to buyback up to 56.14 million equity shares of the company for an aggregate amount not exceeding Rs 16,000 crore, being 2.85 per cent of the total paid up equity share capital, at Rs 2,850 per equity share. The stock rallied nearly 4.1 per cent to close at Rs 2,506 levels on the Bombay Stock Exchange (BSE).

"For those who own TCS, it would be a sensible decision to tender the shares in the buyback offer. In the run up to the buyback, one can even think of exiting the holding fully, or partially, in the secondary market. For information technology (IT) stocks to rise sustainably, they need a trigger in terms of order flows, earnings visibility etc. All this is missing right now," Jasani of HDFC Securities advises.

A buyback proposal also signifies that the company believes that its shares are undervalued, analysts say. It is a definite sign of confidence from the management and will benefit the shareholders if approved. But it can never replace performance, and markets finally track that.

"Given the buyback offer from TCS has come at a time when the IT industry is facing challenging times, it is better that the shareholders make use of the offer, or exit via the secondary market route in case the stock moves up from here on," says G. Chokkalingam, founder & managing director of Equinomics Research & Advisory.