Portfolio

Tenuous link with cash

Parvatha Vardhini C | Updated on January 15, 2018

PO20_cash

Fancy buying the stock of a company with high cash reserves in the hope that it will join the buyback party?

Well, if the company does come up with a buyback offer, you can take the plunge if you find it beneficial.

But things need not always play out by the rule book. High cash (read as cash and cash equivalents) in the Balance Sheet does not always imply a buyback. Low cash doesn’t rule out a buyback either.

As of March 2016, TCS was sitting on a cash pile of about ₹30,000 crore. By end December 2016, the pile grew bigger to about ₹38,800 crore. At the same time, headwinds for the Indian software industry led to sluggish acquisition/expansion plans and so, TCS found it best to return the cash to its shareholders.

This year, many cash-rich public sector undertakings such as National Aluminium, Coal India, NMDC, MOIL and Bharat Electronics routed their disinvestment through buyback offers too. On the other hand, take Tata Motors, for instance. As of end March 2016, the company held a whopping ₹52,093 crore in cash.

But a loss-making domestic passenger car and commercial vehicles business and the requirement for continuous investments in the marquee Jaguar Land Rover brand does not give the company much room to part with its cash.

In contrast, companies with lower cash holdings — Sun Pharma ( cash of ₹14,704 crore as of March 2016 ) eClerx, Bosch and Mphasis (cash of ₹500-2,500 crore as of March 2016 ) came out with buyback offers in 2016-17. What’s more, leveraged buybacks — where the company doesn’t use surplus funds but borrows to pay investors who give up their shares — do exist too.

In the end, a buyback call is ultimately taken by the company based on the opportunity for capex or the need to reward shareholders or the need to simply support the stock price.

Predicting this is not everyone’s cup of tea.

Also read: 3 things to know about buybacks

Dividends out, buybacks in

Published on March 18, 2017

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