New Delhi: Hindustan Unilever Ltd (HUL), India’s largest consumer products firm, is considering a buyback of shares in a move that two analysts described as an attempt to reward shareholders and improve investor sentiment.
The company, once the darling of investors, has seen its stock price fall in recent times. On Friday, the HUL share closed at Rs194.25, down 1.8% on the Bombay Stock Exchange (BSE), and well off its 52-week high of Rs262.5 registered in September 2006.
The stock has also underperformed BSE’s fast-moving consumer goods index by around 4.5 percentage points since January. In a release to BSE, HUL said its board would meet on 29 July to seek an in-principle approval for the share buyback and also decide on interim dividend for the year ending December.
HUL did not disclose details on the size of the proposed buyback. According to Indian laws, the amount of money companies can spend on buying back their shares is capped at 25% of their net worth.
HUL had surplus cash (cash and cash equivalents) of over Rs2,600 crore as on 31 December 2006.
The company would have generated Rs720 crore more as free cash flow in the six months to 30 June. Securities and Exchange Board of India guidelines say a company can buy back shares up to 25% of its net worth. HUL’s net worth was Rs2,723 crore on 31 December 2006, which means that it can spend a maximum of Rs680 crore on the buyback.
At HUL’s current market price, the company will be able to buy 35 million, or 1.59%, of its total outstanding shares. If the company is successful in buying back all these shares, the holding of parent Unilever Plc. will increase from 51.42% to 52.25%.
However, HUL has not decided on the price at which the shares will be bought back. Companies usually buy their shares back at a premium to reward shareholders. Buybacks also usually lead to a rise in the stock price, said Anand Shah, an analyst at Angel Broking Ltd.
Ambareesh Baliga, vice-president, Karvy Stock Broking Ltd, said that the buyback indicated that HUL did not have any significant capital expenditure planned.
“The company seems to be making an effort to improve the seniment around its shares,” he added.
For the quarter ended March, HUL’s revenue grew 13.8% to Rs 3,184 crore, while its net profit declined 11.2% to Rs392.8 crore.
Mint’s Ashwin Ramarathinam and Bloomberg’s Subramaniam Sharma also conrtibuted to this story.