First four months of calendar year 2016 (CY2016) have seen as many as seven companies announce buyback plans aggregating nearly Rs 4,259 crore. Two companies – Bharti Airtel and Bharti Infratel – announced that their board will meet in current week to consider share buyback.
Of the seven that have announced buyback plans, four companies including Dr Reddy’s Laboratories and Wipro, are from the benchmark Nifty 50 index.
Excel Industries, Baba Arts, ECE Industries, Smartlink Network Systems and OnMobile Global are the other companies whose boards have approved shares buyback plans. Of these, Wipro, Baba Arts and Smartlink Network Systems will buy-back shares through tender offer, while the remaining four via open market purchase.
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Analysts say that the current wave of buybacks has been prompted by the proposal of dividend distribution tax (DDT) in the recently announced Union Budget in February.
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.
Wipro said the buyback is undertaken to return surplus funds to the equity shareholders, which are over and above its ordinary capital requirements and in excess of any current investment plans. The buyback would help in improving financial ratios like earnings per share (EPS) and return on equity, by reducing the equity base of the company.
A K Prabhakar, head of research, IDBI Capital, explains: “There is double taxation on dividend, and hence, buybacks will create more value for investors. For instance, in case of Dr Reddy’s that has corrected sharply, buyback will offer more stability going ahead at a time when the markets are volatile and the earnings visibility is not so great. By shrinking the capital, the return on equity (RoE) will improve. Going ahead, companies with cash are likely to take the buyback route instead of paying dividend.”
Adding: “As regards subscribing to these offers, say in case of Dr Reddy’s and Wipro, if someone holds a short-term view, it is advisable to take the exit route. Long-term investors, however, should stay invested.”
Boards of Bharti Group two companies – Bharti Airtel and Bharti Infratel – will meet later this week to consider the recommendations for distribution of profits of the company till the financial year ended March 2016, by way of dividend or buyback.
Deven Choksey, managing director and chief executive officer, K R Choksey Shares and Securities also echoes a similar sentiment that the double taxation of dividends has seen companies resort to buybacks to enhance shareholder value.
“In case of Wipro, the buyback mechanism is being used to pay back the investors without being taxed. As regards Dr Reddy’s and OnMobile Global, the stocks were victimised on the valuation side on the back of exit of some investors that resulted in a fall in the stock price. So the companies could have thought of a buyback plan to prevent the stock prices from going down further. Companies will large amount of cash in balance sheets will certainly opt for the buyback route going forward, but those who don’t have as much cash will continue to dole out dividends,” Choksey says.