The offer could boost sentiment and price in the short run and also create a base price for the company.
The second buyback of Hindustan Unilever Ltd (HUL) would be a welcome move for the share price and get some cheer for the investors. There would be gains to be made in the short term, as the buyback price is expected to be Rs 285 to Rs 290. (The share did rise by 1.74 per cent today, to Rs 251.50, spurred by the buyback buzz).
The reasoning is based on what the company did in July 2007, when it offered to buy back shares. It had then offered to do so at Rs 230 a share, a 17 per cent premium to the market price. This entailed an outflow of Rs 630 crore and the company managed to buy back 30.2 million shares worth Rs 626.3 crore, at an average price of Rs 207.
According to the Securities & Exchange Board of India (Sebi), the company can spend around 25 per cent of its net worth to buy back shares. Given its current net worth of Rs 2,400 crore, HUL can buy back up to Rs 600-650 crore worth, and this forms around 1.2 per cent of the Rs 53,500-crore market capitalisation. Analysts estimate the management would be able to reduce the number of shares by 1.1 to 1.3 per cent. However, a 25 per cent reduction in the net worth would expand the return on equity substantially.
Operationally, not much would change with the company, except provide investors a good exit platform. It also creates a base for the share price in the long run. Since its previous buyback, the share price has been below the announced Rs 230 per share offer only for a brief period, in May 2008. Overall, the sentiment in HUL remains poor, as net earnings and operating profit dropped by 12 per cent and 90 basis points, respectively, in the March quarter.
Increased competition and market share pressure is expected to keep a lid on margin growth. Analysts seem to prefer Colgate Palmolive over HUL among the multinational FMCG group, as the former had managed a 42 per cent jump in net earnings in the March quarter over the same period of the previous year. Its operating profit margins expanded 640 percent, despite a 70-basis point increase in the ad-spend to sales ration. Moreover, it is expected to see revenue grow at 14-17 percent in the next two years.