The Hindu Business Line : Buybacks on the rise at domestic, global markets

Latest is Eicher Motors, which has put before SEBI, its proposal for repurchase of shares worth 13.12 per cent of the voting rights of the company. The Eicher Motors stock finished 5 per cent up. Atlas Copco, which is scheduled to take a buyback decision, shed around 9 per cent today after sharply rising in the past few sessions.

Better valuation

Buyback provides benefits to the companies, as relative under-valuation is overcome at a lower cost, according to some officials of the companies currently involved in the buyback process.

However, if the promoter is buying back shares, then the positive comes in the form of reassurance that it believes in the future of the company. “While the promoter increases its stake, other shareholders and the market get a better valuation,” said Mr Gul Teckchandani, an investment strategist.

According to Mr Prithvi Haldea of Prime Database, it is a natural phenomenon that companies, with surplus cash, prefer to reduce equity capital, or the promoter group increases holding at a lower cost, when market is generally down. “If the company does not have any immediate cash utilisation plan to increase earnings, it is worth utilising for reduction in number of shares and make way for higher EPS and improvement in return,” said a CFO of a company, which has opened a buyback offer recently.

Capital efficiency

However, some market participants provide counter points too. “Making balance sheet leaner means you are decreasing the company’s capacity to leverage, which, in turn, reduces capital efficiency,” said an analyst with a foreign brokerage. In term of assessing future earnings multiple, analysts depend more on leveraging capacity.

“Instead of older reliance on debt-to-shareholders’ fund (equity plus reserves), the current thinking among the analysts is to look for debt-to-market capitalisation ratio,” she said.

But according to Mr Arun Kejriwal of KRIS, if a company is generating cash flow, whether balance sheet becomes a trifle leaner does not make much of a difference in terms of leveraging, compared to the benefits derived for growth in EPS through reduction in capital.

However, market players are unanimous that the impact of tender system on the price movement is more than the buyback from the market. In the case of Reliance Infrastructure (formerly Reliance Energy) buyback, price movement was marginal because of this, market observers point out.

Global scene

The trend is visible in other markets too.

Diamler AG has been planning a $9.3-billion buyback plan. Twelve Hong Kong companies recently closed their share repurchase exercises with a favourable effect on their stock prices. ArcelorMittal has also recently concluded its long-drawn buyback programme. Toyota Motors and BMW had also announced such an exercise earlier this year, as their stocks had declined sharply.