As valuations take a hit, bankers pitch buyback idea to promoters

With the stock markets having fallen significantly, firms with significant cash on their books are looking to buy back shares to restore investor confidence, reward investors, and improve their financial ratios.

Investment bankers, for their part, are urging cash-rich companies to buy back shares.

BSE’s benchmark Sensex has fallen almost 20.7% from its high of 30,024.74 points seen in March last year till Monday.

On 17 February, Dr Reddy’s Laboratories announced a buyback worth up to ₹ 1,569.4 crore, at a price not exceeding ₹ 3,500 per share. On Monday, the firm’s stock closed at ₹ 3,100.9.

On 5 February, IT services firm OnMobile Global Ltd told the stock exchanges it would buy back shares worth as much as ₹ 70 crore. On 15 February, local information search provider Just Dial Ltd announced it would launch its ₹ 164 crore buyback programme on 25 February.

The stock prices of the three firms have fallen 30%, 24% and 62%, respectively, from their 52-week highs. As on 30 September, these firms had cash and cash equivalents worth ₹ 2,462.8 crore, ₹ 289.6 crore and ₹ 878.5 crore, respectively, on their balance sheets, according to data from Bloomberg.

“We are having several conversations with firms. Valuations have taken a hit, and there are several firms out there which are cash rich. This is a good option for firms, if they have sufficient cash and they don’t have significant capital expenditure plans,” said a senior investment banker, requesting anonymity as he is not authorized to speak to reporters. This person said bankers were also pitching the idea to promoters, in which case the motivation would be a cost-effective way to up their stake in the company.

Additionally, as companies have to announce final dividend in the next quarter, we are advising them to look at buyback for distributing surplus cash instead of dividends, as it is a more tax-efficient route, the banker said.

According to data from Prime Database, 12 buyback offers worth ₹ 1,418 crore were recorded between 1 April 2015 and 31 January this fiscal, compared with 10 offers worth ₹ 605 crore in the year-ago period. Bayer Cropscience Ltd’s ₹ 506 crore buyback offer in October was the biggest offering this fiscal.

The Dr Reddy’s, OnMobile, and JustDial buybacks have all been announced since.

“Buybacks help to prop up the stock price. It is also a signal of the promoter’s or management’s confidence that the price is unrealistic right now and that the price should go up,” said Haldea.

Since JustDial received the go-ahead from Sebi for its buyback offer on 15 February, the firm’s stock has risen by almost 31% to ₹ 555.35.

Historically, too, buybacks have typically been announced when the markets are depressed, Haldea added. “In depressed markets, investors are also looking for an exit. And rather than selling in the market, they will tender shares in a buyback, because in most cases the buyback price is higher than the market price.”

Buybacks also help improve financial performance of the company as they improve financial ratios such as return on capital employed (RoCE) and earnings per share (EPS), by utilizing the unused cash lying on the balance sheet.

“When companies have large amounts of cash on their balance sheets, their RoCE comes down. So, as and when they get the opportunity to deploy that cash, they would like to do so and that’s why we are seeing many of these buyback offers,” said Deven Choksey, group managing director and chief executive officer of KR Choksey Shares and Securities Pvt. Ltd.

The move also provides long-term benefit for promoters, say bankers. It is a good opportunity for promoters to increase their shareholding, which can be leveraged later for raising funds.

“Promoters are seeing this as an opportunity they have to increase their shareholding before the next bull-run,” said Munish Aggarwal, director at investment bank Equirus Capital, adding that in a lot of cases share prices have fallen irrationally.

Experts say that more buybacks will be announced if stock markets continue their downward trend. “It is too early to say how many buybacks we will see this year, but companies are definitely looking at doing buybacks. Market prices have to stay at these levels. Most decisions will happen after the budget,” said Girish Nadkarni, managing director at Motilal Oswal Investment Advisors Pvt. Ltd.