Buybacks fail to cheer sentiment

Share buybacks have failed to cheer the sentiment despite the huge premium being offered to investors. The share prices of the companies concerned have, in fact, corrected significantly after the buyback commenced.

Stocks such as Great Offshore and Goldiam International have slipped more than 30 per cent and are very close to their 52-week lows. Reliance Infrastructure has fallen 10.33 per cent to Rs 1067.85 since its buyback started on March 17. SRF is the only exception, moving up by 19 per cent.

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Buybacks in India have risen to $1,118.4 million from $207.1 million a year ago, registering a 440 per cent y-o-y growth

Stocks of Great Offshore & Goldiam International have slipped more than 30 per cent and are very close to their 52-week lows

Hitesh Agarwal, Head of Research at Angel Broking, said, “Logically, it should not happen. When the buyback price is at a discount to the current market price, there is a possibility that the stocks may correct. Post the announcement, stocks move up pretty sharply since buyback is an EPS accretive activity. There is lot of activity prior to a buyback and analysts tend to upgrade their earnings. Probably, the valuation gets re-aligned after the process begins.”

Companies resort to buybacks when they are sitting on a huge cash surplus and want to reduce public stake, thereby gaining greater control over their business. According to a recent report, excess cash in hand raises the cost of capital.

“Share buybacks can boost the share price of a company, particularly in the near term. However, at the end of the day, what matters is the company’s fundamentals. In case of ANG Auto, there is a negative stance on the sector as a whole.” said an investment banker.

Sometimes, firms try to unleash shareholder value by resorting to a buyback in case the shares are undervalued over time. DLF, one of the largest real estate developers, announced a buyback after its shares plummeted 70 per cent in the last six months.

Buybacks in India have risen to $1,118.4 million from $207.1 million a year ago, registering a 440 per cent y-o-y growth, according to Thomson Reuters. Reliance Energy plans to buy back shares worth $885.989 million in one of the largest buybacks this year.