So far this calendar year, nine companies announced they’d buy back their shares through open market purchase. These scrips have posted an average 18 per cent return since the buyback announcement, while the average Sensex return in that period has been 7 per cent.
The market prices of these companies had fallen 30 per cent in some cases from recent peaks. “Most of the companies that announced buyback offers had beaten down stocks and the promoters of these companies think they are undervalued,” said Jagannadham Thunuguntla, equity head, SMC Capitals.
This month, Reliance Infrastructure, HEG and SRF have commenced buyback offers. Those of Balrampur Chini and FDC are in progress. Four other companies — Infinite Computer Systems, Allied Digital, Rajkumar Forge and Zee Entertainment — have board approvals to go ahead with the buybacks. These nine would acquire a combined Rs 2,077 crore worth of shares from existing holders.
In year 2010, a dozen companies had announced buybacks worth Rs 969 crore via the open market. Seven of these could complete the exercise only in 2011. It is also worth noting that except for India Infoline and Crisil, the other five, including Hindustan Unilever, are underperforming the market after buyback.
AIM OF EXERCISE
“By buying their shares at a price higher than the market one, the company signals that its share valuation should be higher,” added Thunuguntla. Zee announced its buyback offer after the stock fell to a year’s low at Rs 116 on February 7. The stock has appreciated 15 per cent after the announcement and is currently trading at Rs 133, above its maximum buyback price of Rs 126.
“The share buyback is expected to reduce short-term volatility in the company’s share price and will send a strong signal to the capital markets on the perceived under-valuation of the share price. The buyback will reiterate the confidence of management in future growth prospects of the company,” said Reliance Infrastructure. The Anil Ambani-led company commenced its Rs 1,000-crore buyback from April 11, after the stock fell 60 per cent from its 52-week high of Rs 1,225. The stock is trading at Rs 696, and has recovered by 41 per cent from its low of Rs 493 on February 9, when the announcement was made. It has fixed a maximum buyback price of Rs 725 per share.
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. The stock price should go up as long as the stock commands the same price to earnings multiple as before, due to the higher EPS. Market experts say investors should evaluate buybacks on their individual merit.
| THE IMPACT | ||||||
| Buyback | Price (in Rs) as on | Sensex returns (%) | ||||
| Price | Amount (Rs cr) | DoA* | 21-Apr | chg (%) | ||
| Reliance Infra | 725.0 | 1000.0 | 549.8 | 696.0 | 26.6 | 11.4 |
| Allied Digital | 140.0 | 28.0 | 74.7 | 93.0 | 24.6 | 12.3 |
| HEG | 350.0 | 67.5 | 204.0 | 240.7 | 18.0 | 6.3 |
| Rajkumar Forge | 18.0 | 4.9 | 14.2 | 16.7 | 17.3 | 7.0 |
| Zee Entertainment | 126.0 | 700.0 | 115.8 | 133.3 | 15.1 | 8.7 |
| Balrampur Chini | 85.0 | 110.0 | 67.9 | 75.7 | 11.5 | 7.7 |
| SRF | 380.0 | 90.0 | 316.0 | 340.1 | 7.6 | 7.1 |
| FDC | 135.0 | 50.0 | 102.5 | 103.5 | 1.0 | 2.9 |
| Infinite Computer | 230.0 | 27.0 | 169.2 | 161.9 | -4.3 | -0.1 |
| *Date of announcement | ||||||