Companies on buyback rush to boost share price

MUMBAI: A growing number of companies have been opting for a buyback of shares to support the price in the current phase of market volatility. While the trend is mostly evident among small- and medium-sized companies, the market also expects large-sized companies to join the buyback bandwagon, after FMCG major Hindustan Unilever (HUL) announced a similar move last week.

Apart from HUL, a few other companies such as Geodesic, Manaksia, FDC, Binani Cement, Jindal Poly, ARO Granite and Bright Brothers have either announced or are planning to consider share buyback. Analysts expect more companies to follow this route due to several advantages.

According to Angel Broking CMD Dinesh Thakkar, many companies may want to buyback their shares, but shareholders’ response remains a major concern. “Many companies are quoting much below intrinsic value of their shares and so any buyback offer at the current levels may not receive good response from the shareholders. They will not be able to realise true value from selling shares,” said Mr Thakkar.

Last week HUL said that it would consider buying back the shares from the market, at its board meeting on June 11. Buyback of shares helps raise promoters’ stake using company funds and the reduced equity base improves its earnings-per-share (EPS) in the subsequent years. All these factors keep shareholders confidence high in the company. However, many companies, in the past, could not purchase even a single share, as the market price rose beyond the maximum buyback price soon after they started the buyback.

For instance, Delhi-based Apollo Tyres had planned to buy back equity shares worth Rs 122 crore from the open market at a maximum price of Rs 25 a piece. However, it could not buy back any shares, because of the spurt in the market price immediately after the commencement of the buyback programme.

Other larger companies that have closed their buyback in the past few months include Provogue and Merck, among others. Provogue, which had announced Rs 50-crore buyback, utilised almost 25% of the offer buying close to 20 lakh shares. Merck, which came out with a Rs 45-crore offer, utilised almost 23% of the buyback limit or bought close to 2.6 lakh shares.

When a company buys back shares, it sends out a signal that the company has enough surplus cash to pay back to its shareholders at what it thinks is the true worth of the shares. There were many companies that had announced buyback last year, after share prices crashed more than 80% in most cases.

However, many stocks rose above the buyback price with a sharp recovery in the market, resulting in many companies discontinuing or deferring their plans.

Analysts say that a buyback does not result in much of the benefits for investors despite the offers being at a premium to the prevailing market price. For instance, in the case of Geodesic and Manaksia, the current market price is way below the maximum buyback price. Geodesic is trading at Rs 101, while the company has announced its maximum buyback price of Rs 150. Similarly, Manaksia is currently trading at Rs 110, while maximum buyback price at Rs 200.

The market has so far not taken the buyback offer very seriously, as the stock price continues to trade at a significant discount to the maximum buyback price. The end date for both of them is almost one year from hereon.

Sensex jumps 14.1% on week; best in 17 years

MUMBAI: The BSE Sensex rose 1.1 per cent on Friday and took gains for the week to 14.1 per cent, its most in 17 years, buoyed by hopes for pro-market reforms after the ruling coalition won general election last weekend.

Manmohan Singh was sworn in as the prime minister for a second term, along with his new cabinet and the outlook for the market would depend on how quickly they are able to push asset sales in state firms, ease rules for foreign investment and boost sagging growth.

Some analysts believe the market is overbought after it leapt more than 17 per cent at the start of the week following the unexpectedly easy election win. The BSE index has risen 73 per cent from a 2009 low in early March and has climbed for 11 weeks in a row in the longest winning streak in four years.

"Valuations have become high, but people are buying because they may be left out otherwise," D.D. Sharma, vice president at Anand Rathi Securities, said.

The BSE index ended up 150.61 points at 13,887.15, with gainers and losers evenly matched. Trading was choppy with the index falling 0.9 per cent at one stage.

Brokerages and investment houses polled by Reuters expected the benchmark to reach 15,750 by the end of December, gaining another 13 per cent.

"There are so many desperate buyers because nobody is betting on the market going down. You will see people buying at every dip from now," Sharma said.

Energy giant Reliance Industries, private-sector lender ICICI Bank and infrastructure firm Larsen & Toubro led the market higher after a lower start.

Reliance, which has the biggest weight in the main index, rose 3.1 per cent to 2,183.10 rupees, while private-sector lender ICICI gained 4.5 per cent to 702.80 rupees.

Larsen & Toubro climbed 4.7 per cent to 1,301.40 rupees

The market has largely been powered by foreign funds, which have pumped about $5 billion into the market in the past two months, including more than $1 billion in this week.

Outsourcers Tata Consultancy and Wipro, which get most of their revenue from overseas, fell about 2 per cent as the rupee climbed past 47 to a dollar to its highest since December.

Asian shares eased after a drop on Wall Street overnight on fears the United States, with its increasing budget deficit and weakened economy could lose its AAA rating.

Japan's Nikkei dropped 0.4 per cent, while MSCI's measure of other Asian markets edged down 0.02 per cent.

European shares were higher after falling more than 2 per cent in the previous session. The FTSEurofirst 300 index of top European shares was up 0.4 per cent at 1117 GMT.