DLF, the country's largest property developer, announced a buyback of its shares on Wednesday, a move aimed at boosting investor confidence after the company's stock fell 70 per cent over the past six months.
The board of the Delhi-based company will meet on July 10 to consider the proposal, DLF Ltd said in a statement to the Bombay Stock Exchange on Wednesday.
The share price of DLF Ltd. on Wednesday rose by 15 per cent to close at Rs 423. But going by the track record of such buybacks, some analysts doubt whether the move would have the desired effect.
A key indicator of this trend could be the plummeting shares of Reliance Infrastructure, Goldiam International, Great Offshore, ICI India, Mastek and SRF, the prices of which are on a constant downward mode even while companies are buying huge quantity of shares through open market.
Anil Ambani-promoted Reliance Infrastructure, which had announced its buyback offer a couple of months ago, has purchased over 5 million shares worth Rs 600 crore from the markets. The maximum price at which the company would be acquiring the shares is Rs 1,600 crore. The stock, however, traded at half the buyback price at Rs 790 on Wednesday.
Investment advisor S P Tulsian said buybacks send a positive signal to investors if the motive of the promoters is to utilise surplus cash by purchasing their own shares.
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"But Reliance Infra, which had an interest burden of over Rs 400 crore for FY 08, had also issued 43 million warrants to the promoters of the company in the past to be convertible at Rs 1,822 per share. This means, the company has been in need of funds and also had borrowings in its books. Yet, it went ahead and earmarked Rs 2,000 crore for share buyback. So investors are confused."
On DLF, Deven Choksey, managing director at KR Choksey Shares and Securities, said: "The rationale for the buyback of DLF is very clear. The price to earnings at which the company is quoting now is 6 or 7. If the company makes a profit of Rs 7500 to Rs 10,000 crore, then it has sufficient amount of money, which is not getting reflected in the company's current stock price. The company will use the buyback to give confidence to investors that they are not cash strapped."
Both Tulsian and Choksey believe that DLF's move is a positive signal for the stock price as retail investors hold not more than 4 per cent of DLF shares. If the buyback goes through, then DLF would end up purchasing at least 2 per cent from retailers for nearly Rs 1,500 crore.
"The company's stock price will find some stability and it would be trading at a PE of around 8.5 even at that price, if they buy the shares back at between Rs 420-430," said Choksey.