Companies take buyback route due to falling valuations

[suguhopes]

MUMBAI: Does it make sense buying back shares in a bad market? Ask
companies that are currently implementing their buyback programmes and
you would definitely get an affirmative answer. Companies like
Reliance Infrastructure (formerly Reliance Energy), Mastek and Great
Offshore have successfully used the buyback route to take advantage of
falling valuations on the Indian bourses. A few other relatively
medium- and small-sized companies, including Patni Computer, SRF and
Goldiam International, have also been buying shares in the open
market. These six companies are estimated to have bought back shares
worth Rs 820 crore, or 66% of the combined size of their offers, over
the past four months. They have been successfully implementing buyback
programmes despite the fact that investor confidence is shaken badly
because of extremely negative global and domestic cues.

Leading the pack, Reliance Infrastructure is estimated to have bought
back shares worth nearly Rs 700 crore against the buyback size of Rs
800 crore in just four months of the opening of the offer. Mastek and
Great Offshore bought back shares worth Rs 63 crore and Rs 50 crore,
against their respective offer sizes of Rs 65 crore and Rs 55 crore.
While a few others such as Patni Computer and SRF have just begun
their programmes, analysts expect more companies to join the buyback
bandwagon, given several advantages of buying back shares in a bearish
market.

“Buyback of shares helps promoters hike their holdings at company’s
expenses,” said Prithvi Haldea, managing director, Prime Database, a
Delhi-based research firm. “It leads to improvement in earnings per
share (EPS) as the equity is reduced to the extent of shares bought
back. Buyback also helps keep investor morale high as it shows that
the concerned company is financially sound and has enough cash to buy
its own shares,” he added. While corporates are trying to benefit from
the current weak market, investors may not have gained much out of
buyback offers, say analysts. Even though the offers from the six
companies were at a premium to the prevailing market prices, the fact
remains that their respective shares have not witnessed any major
uptrend during the buyback period, thus benefiting the companies and
not investors, feel analysts.

For instance, Reliance Infrastructure has bought back a total of
61,60,000 shares through open market purchases on 23 days between
March 25 and July 2, 2008. Assuming that the purchases have been made
at a closing price on those days, the company is estimated to have
paid Rs 689 crore to buy these shares. The average acquisition price
works out to around Rs 1,200 against the buyback price of Rs 1,600 per
share, which is again much lower than the peak of Rs 2,631.7 recorded
on January 10, ‘08.

The BSE statistics shows that Reliance Infrastructure bought 16 lakh
shares on June 24, June 30 and July 2 when the market price was
significantly lower at Rs 911, Rs 784.8 and Rs 790.5 respectively. The
scrip closed flat at Rs 765.5 on Wednesday. IT company Mastek, whose
offer opened on May 20 ‘08, has purchased a total of 16,52,532 shares
till July 15. Based on daily closing prices during this period, the
value of shares amounted to Rs 63 crore. The daily average market
price works out to Rs 385.8 against the buyback price of Rs 750 per
share. The stock closed 0.4% down at Rs 348 on Wednesday.


N.Sukumar
Research Analyst