Companies tap lower valuations to launch buybacks

Buybacks aggregating Rs 7,800 crore announced since August, against Rs 1,000 crore during January-July

The number of companies that have announced share buyback proposals has risen sharply in the past six months. Of the 16 companies offering to buy back equity shares between August 2013 and January 2014, those for 10 have commenced.

Cairn India, NHPC, Jindal Steel and Power (JSPL), Great Eastern Shipping, eClerx Services, UPL, Claris Lifesciences and Jagaran Prakashan are among these. The board of directors of Mastek met on Wednesday to consider a buyback.

Experts attribute this trend to a sharp decline in share prices of these stocks. A share repurchase is usually an indication that the company's management thinks the shares are undervalued.

The JSPL stock has tanked 60 per cent from its 52-week high of Rs 460 and touched a low of Rs 182 on August 2, before the board approved a share buyback. The market price of Cairn India has declined five per cent in the past one year, compared to a four per cent rise in the benchmark S&P BSE Sensex.

However, companies such as Mastek, UPL and Great Eastern Shipping considered buybacks despite their stocks trading at multi-year highs on the BSE.

While a 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 get reduced. As a result, the earnings per share (EPS) goes up. Since a buyback reduces shares at large, it boosts EPS and, therefore, the share price.

Says Deven Choksey, managing director and chief executive officer, KR Choksey Shares and Securities: “One reason  companies are announcing buybacks is that the valuation is working in their favour, given the currency movement. The second reason – and the reason a lot of multi-nationals (MNCs) are going for buybacks – is to avoid Class-A suits. Such companies do not want public money and could continue to operate as unlisted entities.”

Since August, companies have announced buybacks aggregating about Rs 7,800 crore as against around Rs 1,000 crore between January and July. Only eight companies had announced share buybacks worth Rs 273 crore, between August 2012 and January 2013, according to Capitaline data.

Most of the companies announced buybacks via open market purchases through stock exchanges. NHPC, VLS Finance, Jagaran Prakashan, Circuit Systems, Frontline Securities and Sinclair’s Hotels will purchase via a tender offer.

Sonam Udasi, senior vice-president and head of research, IDBI Capital, also suggests that the promoters are looking to raise stakes in their companies as the valuations and the timing seem appropriate.

By doing this, they are also able to use the excess idle cash in their balance sheets in a meaningful way, he adds.