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Buybacks fail to enthuse investors
BS Reporter in Mumbai | March 19, 2009 09:04 IST
India Inc's attempts to buy back shares have failed to yield the desired results: most companies have seen continuous erosion in their share prices.
Companies traditionally announce buybacks if they think the current price of the stock does not justify the intrinsic value of the firm. A buyback helps reduce outstanding equity and shores up the earnings per share, return on asset and return on equity.
Availability of surplus cash and inadequate liquidity in the stock market are also some of the factors that prompt companies to consider buybacks.
However, almost all companies that have announced buyback of shares have seen their stocks decline, making the entire exercise futile.
The drop is also true in cases of companies that have completed the buyback of shares since their initial announcement in January last year. At least 10 companies, including Patni Computers, Great Offshore [Get Quote] and Distriparks are among those which have closed their share buyback plans but see their stocks are languishing.
"The idea of buybacks is not to provide supernatural returns to some shareholders as it could be detrimental to those who stay back. The trend is to effect buybacks through the stock market route at the market prices," said Gautam Gupte, a director with Ambit Corporate Finance.
Analysts are questioning the rationale for companies buying back shares at a time when stock markets are tumbling, which doesn't help investors' confidence. They are asking whether companies should have put their capital to better use like loan repayments, etc.
A case in example is DLF, which is struggling to complete projects on time and has been forced to hold back a quarter of its commercial projects. DLF shares slid about 9 per cent the day after the company announced its intention to buy back shares.
'In the current scenario of tight liquidity and cash crunch for most developers, we believe that DLF could put the capital to better use by investing in the business itself,' Unmesh Sharma, a Macquarie analyst, wrote in a note to his clients on July 3. The company, however, has bought back only a marginal number of shares so far.
Others feel that companies can do precious little if market sentiments continue to be negative.
Geodesic, a local information technology company, on March 6 announced plans to buy back shares.
"We would not like to comment on the success or failure of the past instances of buybacks. However, we have evaluated our options of a buyback after looking at the valuations of the company, cash in the company post acquisitions we have made/ intend making and reserve cash as may be required by the company for our future needs," said Kiran Kulkarni, a founder of Geodesic.
There are, however, a few exceptions to this. One of them happens to be Eicher Motors [Get Quote], which operates in one of the worst hit segment, automobiles. The company has seen its share price rising after announcing the buyback of shares. The probable explanation is that the commercial vehicle maker opted to buy back shares through a tender offer, or directly from shareholders, instead of buying it from the open market.Data compiled by BS Research.