Generally, it is a positive sign when a company buys back its equity share from its shareholders. This means the company believes its stock is undervalued and is confident about its future earnings. In recent years, buybacks have become increasingly popular. With many companies buying back shares, how are these companies faring? A study reveals that these companies are cash rich and faring quite well. A company can choose to return value to shareholders in a number of ways—it can pay out dividends, reinvest in the business or buy back its shares. Traditionally, over the years, paying out dividends has been the dominant method to return a company’s excess cash, while in a share repurchase, the company reduces its outstanding shares through an open market buy back or tender offer. The total amount of buybacks by Indian companies has jumped significantly in the last few years. There have been major companies like Wipro, Tech Mahindra, Mind Tree, Balrampur Chini, etc., who have announced share buyback offers in the last one month. Wipro has announced buyback of Rs 10,500 crore worth of its shares at Rs 325 per share, while Tech Mahindra plans to buy back Rs 1,956 crore worth of its equity shares at Rs 950 a share. Both Wipro and Tech Mahindra are quoted at Rs 285 and Rs 800 respectively on the Indian bourses. In the PSU space, there have been reports that the government is planning to buy back shares of loss making public sector companies and delist them as they would be unable to comply with the minimum shareholding norms prescribed by the market regulator, SEBI. Initially, the market regulator had given time until August 2017 to state owned entities to bring down the government stake in these listed PSUs below 75%, but with the government unable to meet the deadline, the market regulator had extended the timeline to October 2020. According to official data, there are around 89 PSUs listed on the stock exchanges and out of these 37 companies have not complied with the public shareholding norms as of 31 December 2018. Two PSU entities which come to mind whose share prices have been battered in recent years are HMT and MMTC. For instance, HMT share price has fallen from their peak of Rs 104 in 2008 to Rs 19 currently. The government owns 94% stake in the company and there are around 18,000 retail investors who have exposure to the stock. Similarly, investors have seen bulk of their wealth erode in Metals and Minerals Trading Corporation (MMTC), whose shares have fallen from a high of Rs 1,175 in 2010 to Rs 28 at present. While the government owns 90% stake in MMTC, there are around one lakh investors who hold MMTC shares. Hence, the move by the government planning to buy back its share and then delist them is a relief to several retail investors who have been stuck with such investments. Returning the topic back to Wipro shares, we feel that the stock currently quoting at Rs 282 is a good buy with a one-year investment perspective for a 25% price appreciation. There is a good possibility that the Wipro buyback offer price of Rs 325 per share will become an average market price in the next one year time frame. Buybacks also throw some good arbitrage opportunities at given points of time which one has to keep searching for.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.