New Delhi: Ayear after it went public, India’s biggest real estate developer by market value, DLF Ltd, announced that its board has approved a buy-back of shares that could cost as much as Rs1,100 crore, in an attempt to boost investor sentiment in a stock that has lost 57.21% between 1 January and 10 July.
The cap set on the buy-back price of Rs600 is 14.28% higher than the Rs525 at which the company sold shares to the public in a July 2007 issue that raised Rs9,187 crore. The company’s shares closed at Rs458.35 on the Bombay Stock Exchange (BSE) on Thursday, 1.79% up from its previous close of Rs450.30.
The company’s board has allowed it to buy back as many as 22 million shares. If DLF buys this number of shares, the shareholding of the promoters in the company will increase from 88.1% to 89.3%, still below the 90% limit as mandated by the country’s stock market laws. If a company’s public shareholding drops below 10%, then it has to buy back all its shares from the public and delist from the stock exchanges.
Utilizing surplus cash: DLF’s chief financial officer Ramesh Sanka says the move will send a signal to the shareholders that the money the company is earning is being utilized for them. (Photo: Madhu Kapparath/Mint)
The buy-back needs to be approved by stock market regulator Securities and Exchange Board of India, and will be valid for 12 months, like all such offers are.
Companies typically announce buy-backs to send out a message to investors and prevent the stock from falling further. Not all such offers succeed in doing this.
On 5 March Reliance Energy Ltd announced an offer to buy back shares worth up to Rs2,000 crore at a price of Rs1,600 per share. The offer is still on, but the company’s shares are now trading at Rs855.10 each, down 40.92% since the buy-back was announced.
Companies also announce buy-backs to make their shares more valuable. The shares bought back by a company have to be destroyed. This means the stake of the non-public shareholders, that is the promoters and their associates, goes up.
It also means the earnings per share of the company increases (because there are fewer shares now) making the company more valuable in the eyes of investors.
However, in DLF’s case, said Manoj Jain, an analyst with Asit C Mehta Intermediaries Ltd, a brokerage, the number of shares being bought back is very low and “will not have a significant impact on the earnings per share”.
The cap on the share buy-back price approved by a company’s board (Rs600 in DLF’s case) is the maximum price the company can pay for the shares. All transactions, however, happen through the open market and at market rates—if DLF’s shares continue to trade at the Rs450-480 levels at which they currently do, the company will only have to pay that much.
“DLF’s issue price was Rs525 and so if they do the buy-back at Rs450-480 levels, which is the current share price of the stock, it will still be below the issue price,” Jain said. “It does not make sense for investors to sell to DLF at a lower price than the issue price.”
BSE’s benchmark index, the Sensex, has lost 31.4% between 1 January and 10 July, largely on global and domestic macro-economic concerns. Foreign institutional investors, the main drivers of the market sold around $6.56 billion (Rs28,339 crore today) worth of Indian equities up to 9 July (from 1 January), net of purchases. In 2007, these investors bought $16.95 billion worth of Indian stocks net of sales.
BSE’s Realty index, in which DLF is a significant constituent, has lost 62% since 1 January. Real estate firms have been hit by rising costs and lower demand, a result of tight credit conditions and high interest rates that is making at least some buyers defer purchases.
DLF has allocated Rs1,100 crore for the buy-back, which will be funded through what are called “internal accruals”, or money generated by the company in the course of its operations.
“We see the buy-back decision as a highly attractive opportunity for our shareholders. This decision will be value accretive for the shareholders,” Rajiv Singh, vice-chairman of DLF said in a company statement. “While we respect the market, we believe that our current share prices do not reflect the intrinsic strength and future growth potential of DLF,” he added.
The buy-back is also a way of utilizing the company’s surplus cash well.
“Most of our land bank is already paid for,” Ramesh Sanka, group chief financial officer at DLF, said. “In the past, the surplus cash was spent in acquiring land. This is one of the best ways to utilize our surplus cash flow and to give a signal to shareholders that the money the company is earning is being put to the use of the shareholders,” he added.
Jain, however, said this doesn’t make sense.
“If you look at it from a businessman’s perspective, it makes no sense to do the buy-back,” he said. “In a tight credit market with interest cost going up, if they have excess cash, they should be diverting it into the many projects that they have announced.”
The maximum price fixed for the buy-back is at a premium of 33.24% over the last average closing price of the company’s shares on BSE and the National Stock Exchange as of 9 July, according to a company statement.
The company has appointed JM Financial Consultant Pvt. Ltd and DSP Merrill Lynch Ltd as the merchant bankers for the buy-back.
DLF reported a net profit of Rs7,812.03 crore for the fiscal year ended March from Rs1,933.65 crore a year ago. The company’s revenue for the year rose to Rs14,683.91 crore from Rs4,053.3 crore in 2006-07.