18 share buyback offers leave D-St spoilt for choice

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NHPC scheme opens tomorrow, Cairn offer price dejects investors.

It is a season of buybacks: 18 share buyback offers are currently on; on top of this came this week’s announcements from Cairn India and NHPC.

On Tuesday Cairn India came up with a Rs 5,257 crore buyback plan that will begin in January. The buyback offer of NHPC, the public sector hydro-power firm, for Rs 2,368 crore will open on Friday.

On Wednesday, a small-cap firm, Circuit Systems, announced share buyback worth Rs 1.5 crore, which will open on December 9. Jindal Steel & Power, with a buyback target of Rs 1,000 crore and Crompton Greaves with a target of Rs 265.70 crore are among the 18 ongoing buybacks, which will continue till June. Aptech, Motilal Oswal, GE Shipping and eClerx Services are also buying back shares.

Buyback helps a firm with enough cash to reduce the number of shares in the market. This increases the proportion of shares promoters own. “While dividend payout is a short-term phenomenon, buyback reduces outstanding shares, which improves the ratios and financial parameters of a firm. It also helps a company to signal that its present market price is low,” said Gaurav Dua, research of head at Sharekhan.

According to Dua, if a firm with idle cash believes its share price has fallen below its intrinsic value, the chances of a buyback in the company increases.

The use of cash to buyback shares reduces assets in the balance sheet. Thus return on assets (RoA) and RoE increase as there are fewer outstanding shares. Cairn India is a case in point. The firm had Rs 18,319 crore of cash and equivalents at the end of the September quarter. After the buyback, the promoter stake will rise to 64.53 per cent from 58.76 per cent at present.

“We believe a successful Cairn India buyback will not only enhance the per-share value, but also allay the cash utilisation concerns to a certain extent,” brokerage Motilal Oswal said in a note.

However, investors gave a thumbs-down to the announcement, with the stock closing flat at Rs 323 after falling 2.20 per cent in early trade on Wednesday. The company’s board on Tuesday fixed the buyback price at Rs 335, a 3.4 per cent premium over Monday’s closing price. Analysts attributed the weak sentiment on the counter to a disappointing offer price.

NHPC had cash and equivalents worth Rs 7,955 crore at the end of March and its Rs 2,368 crore buyback programme is expected to aid its return on equity (RoE).

“We believe the buyback will improve NHPC’s RoE by nearly 90 basis points to 9.2 per cent and 9.6 per cent by March 2014 and March 2015, respectively,” Chirag Shah of ICICI Securities said in a note.

The buybacks, currently in progress, need to comply with the recently updated norms of Sebi for the purpose. “Earlier, some firms, in a bid to increase share prices, announced buybacks without any serious intent to purchase stocks worth the amounts announced. However, the tighter norms have plugged these loopholes,” said S P Tulsian of sptulsian.com.

In August, Sebi raised the compulsory buyback amount to 50 per cent of an offer size from 25 per cent earlier. It also halved the buyback timeframe to six months. In addition, companies have to keep 25 per cent of the buyback offer money in an escrow account. In case they fail to buy at least 50 per cent of the amount announced, 2.5 per cent of the offer money will be forfeited.

Capitaline data showed 20 firms bought back shares worth Rs 594 crore from the market between January and October.

To name a few, JBF Industries (Rs 73 crore), Sasken Communications (Rs 66.26 crore), Zee Entertainment (Rs 59.35 crore) and Allcargo Logistics (Rs 57.78 crore) were among the firms that bought back shares during this period.
 

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