With the equity markets going down so sharply, certain companies and promoters have opted to make the best use of the situation. Buyback announcements are on the rise and even marquee names, such as Sun Pharma, find this a lucrative way of lifting the mood around their stock prices. The latest to join the bandwagon are Dalmia Bharat, Motilal Oswal Financial Services and Ramkrishna Forgings, which announced their buyback plans on Saturday. Earlier in the week, Emami and Sterlite Technologies also disclosed their intention to buyback shares. Prior to these companies, names, such as Thomas Cook India and Granules India, announced buyback schemes.
Experts like Vikas Khattar, head of equity, Capital Markets and Financial Sponsors Group, Ambit Capital, say that buyback is a good capital allocation strategy, where the management feels that the stock price has corrected sharply, and is well below the intrinsic price of the business. "However, it should be executed only where businesses have a strong balance sheet and surplus cash, after providing for adequate cash to brace through challenging times in the near future," he adds.
Buyback proposals also send a positive signal to bump up the Street sentiment around the stock, as it results in a lower supply of shares in the market, as well as an increased return profile, mainly return on equity (ROE) which in turn helps bring stability to share prices, according to experts. Many a time, buybacks are prompted when promoters' stake in the company falls and the owners decide to utilise lower share prices and valuations to their benefit and raise their stake in the firm. Higher promoter holding and return ratios in the longer term will also mean firms can benefit from these moves when times turn good and when they (companies) approach investors for raising capital.
Certain experts say buybacks and the process of promoters increasing their stake in companies are features of a typical bear market. In such times, companies believe cash could be put to better use through buybacks rather than other activities. "It’s natural for companies to use the current situation to announce buybacks as it is the easiest way of improving their return profile," said U R Bhat, director and chief investment strategist, Dalton Capital Advisors.
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The equation, however, would be a bit different if promoters, too, proportionately participate in the buybacks, which may not necessarily be a positive signal. For now, as times remain tepid, many say there could be more buyback announcements. "However, much will depend on the government's willingness to relook the 20 per cent tax levied on buybacks" says Pankaj Bobade, head-Fundamental Research, Axis Securities. Looking at the higher expenses because of buyback tax, promoters may consider buying shares directly from the market, as has been the case in recent years.
From an investors' standpoint, while buyback indicates promoter’s confidence in their business and future prospects, it does not necessarily have to lure them in terms of buying stocks which have announced such buybacks. Also, for them, whether to participate in a buyback plan should depend on their requirement for cash. "Their equity exposure in overall portfolio and their own view on the company’s prospects will play an important role," explains Deepak Jasani, Head - Retail Research, HDFC Securities. Kartik Soral, senior fund manager-equity, YES Asset Management Company, says buybacks do provide investors money in the near term. "But, sometimes, they end up losing their shares in the company and chance on its future profits.”