New Delhi: Amid an unrelenting bear market and falling stock valuations, at least 18 companies plan to buy back a record $1 billion (Rs4,220 crore) worth of shares from their investors.
This is unprecedented in the country’s equities market, which during a similar phase in 2002-03 saw some 31 firms buying back Rs2,154 crore worth of shares. The buy-back offers in the fiscal year to March 2005, which totalled Rs3,600 crore from 11 deals, was the highest so far during a fiscal year.
The current downturn at the bourses has led to what investment bankers typically refer to as “consolidation products” that include share buy-backs, creeping acquisitions, open offers and stock de-listing, among others.
“Consolidation products are in demand as the market continues to look uncertain,” said Vikram Sheth, head of equity capital market (ECM) products at ICICI Securities Ltd, the investment banking arm of ICICI Bank Ltd, India’s largest private sector lender.
Many investment bankers share Sheth’s view.
Although not many companies have announced buy-backs in the current fiscal year, analysts are surprised by the sheer size of the offerings.
Prithvi Haldea, managing director of New Delhi-based primary markets data provider Prime Database, said the money a firm spends, or the size of the stake it plans to buy back is more important than the number of firms announcing buy-backs. “Small buy-back offerings do not really impact a company’s capital structure, or its stock value,” he said.
In the current fiscal year that began on 1 April, just three firms—India’s biggest realtor DLF Ltd, Anil Ambani’s Reliance Infrastructure Ltd and media firm TV Today Network Ltd—have announced buy-backs worth Rs2,193.12 crore.
DLF’s buy-back offer of Rs1,100 crore announced on 10 July is the highest ever, after paper maker Ballarpur Industries Ltd’s Rs940 crore issue announced on 2 January.
DLF’s stock price hit a 52-week low on 2 July at Rs350 a share. This was much lower than the Rs525 at which the firm issued its shares in June 2007. The day DLF announced a board meeting to consider a buy-back, its stock price rose more than 15%.
On 10 July, DLF informed the Bombay Stock Exchange it will buy back 22 million shares from the market at a maximum of Rs600 per share. Since then, DLF’s share price has risen more than 19%, from Rs458.35 to Rs548.45 on Friday.
DLF vice-chairman Rajiv Singh had told the media that the company believes its share price did not reflect its intrinsic strength and growth potential. Its chief financial officer Ramesh Sanka had said the stakeholders would benefit even if they decided to hold onto the stocks, as the earnings per share (EPS) would go up, commenting on the buy-back announcement.
Rahul Chattopadhyay, associate director of capital markets at audit and consultancy firm PricewaterhouseCoopers (PwC), agreed with DLF’s logic. “Buy-backs can be done to boost investor sentiment and reflect the business’ confidence in itself,” he said.
By buying back its shares, a company can revamp its capital structure, increasing EPS. Its debt to equity ratio also gets better, enabling it to borrow more from the market for expansion.
“It can show investors that it is not cash-strapped,” Chattopadhyay said.
Yet another example of the same logic is technology services firm Mastek Ltd that has seen its share price rise since 20 May when it began its buy-back plan. The company had announced a Rs65 crore buyback at Rs750 per share on 17 April. The debt-free, cash-rich firm is using its surplus cash to buy stock from the market.
P.N. Vijay of New Delhi-based capital market advisory PN Vijay Capital Services said buy-back is a good way of rewarding investors and building loyalty. “If a company has surplus cash, it makes sense for it to go for a buy-back,” he said.
Analysts say investors tend to stick with a stock even during rough times if the company has a history of announcing buy-backs. Going by this view, buy-backs also help in brand building.
Vijay said buy-backs are better than distributing the money as dividends to shareholders, as it leads to inflated expectations for such rewards among them in the future.
PwC’s Chattopadhyay said share buy-backs also help companies ward off threats of hostile takeovers because it brings down the number of floating shares.
However, there are many who say buy-back is a mechanism for promoters to increase their shareholding at the cost of the company.
“It obviously makes more sense for companies to buy back shares when the markets are trading low,” Prime Database’s Haldea pointed out.
So, is it fair to expect more buy-backs this fiscal year?
Haldea said that if markets continue to trade low, then there is a strong possibility of more such deals. His view is echoed by Vijay, who pointed out that the markets saw the maximum number of buy-backs in 2002-03 when the benchmark Sensex index traded in a narrow range of 3,246.15 to 3,382.64 points.
After rising more than 45% in two successive years, the Sensex has lost more than 25% so far this year to close at 15,167.82 points, up 50.57 points on Friday. It began the year at 20,300.71 points, but after a meltdown dropped to a 15-month low of 12,575 points on 16 July.
“If we touch such lows again, one may see more and more companies announcing buybacks,” Vijay said.
With prices of crude oil holding the key whether Indian markets move up or down, promoters as well as traders seem to think it is a good time to go bargain hunting.