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Bull market flipside: Buyback sellers lose gains in every second offer this year

If you are amongst those who sold your shares in buyback tender offers that have been completed so far in 2017, you may have missed out on new gains in nearly 50% of companies

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The raging bull-market that has lifted benchmark indices to new highs and everybody is laughing their way to the banks. But not everybody may be happy especially if they sold shares cheap. If you are amongst those who sold your shares in buyback tender offers that have been completed so far in 2017, you may have missed out on new gains in nearly 50% of companies.

A DNA Money analysis of buyback tender offers completed in 2017 shows that in 13 out 26 cases the stock's latest price (as on July 31) is higher than the price at which that company executed the buyback. This means if you had said 'no' to the buyback and held on to those shares, you could be theoretically sitting on much higher stock price. You can now go and sell the stock in the open market and earn a bigger profit. As you be aware, a buyback allows companies to invest in themselves, by cutting the number of shares outstanding on the market. A company may feel its shares are undervalued and buy them back, thereby giving an exit route to shareholders who want to sell.

Consider this example: Welspun Enterprises bought back 26,987,479 equity shares in its buyback offer which ended on March 19, 2017, at price of Rs 62 per share. The stock on Monday closed at Rs 135.75 per share, about 119% more than the buyback price. Welspun Enterprises is not alone. In the case of Gujarat Ambuja Exports, the buyback offer price was Rs 95 per share but the current market price (as on Monday closing) is over Rs 119, translating into a gap of about 25%. In the case of Navneet Education, the buyback price was Rs 125 per share and the current stock price on BSE is nearly Rs 165, indicating a gap of over 31%.

"One has to participate in buybacks on the basis of value investing concept. Effectively, you are selling in a buyback. Before participating in a buyback one should see if the buyback price is above or below the conservative estimate of intrinsic value. If it below, typically one should not tender the shares. That way one has increased his or her stake in the company because of other people exiting through the buyback," said Vikas V Gupta, CEO & chief investment strategist, Omniscience Capital.

Recent examples can be seen in Marathon Nextgen Realty, and SKF India where the current share price is trading Rs 40-50 per share higher than the respective buyback price. Other stocks where current stock price is higher than respective buyback price include Kaveri Seed Co, India Gelatine Chemicals, and NLC India. In cases of Apar Industries, Sasken, KPR Mill and Vardhaman Textiles, the gap between current stock price and buyback price is between Rs 70 per share to Rs 130 per share, indicating the valuation mismatch between what investors think the company is worth and what shareholders who sold shares in buyback perceived it to be.

In most of the buyback tender offers completed in the first 45 days of this calendar year, shareholders should have waited for a better price. The bull-run picked up pace thereafter.

"In recent cases of buybacks, some company managements disclosed a depressed buyback price, which is at a hefty discount to current rates or real value of the company. In these cases, we did not tender shares. The acceptance ratio is also important because not all shares tendered by you may get bought back if a large number of shareholders want to exit. It has happened in many cases. The company only buys up to its limit," said the chief investment officer of a mutual fund company.

A good example of the stock market price being much lower to buyback price can be seen in Wipro. In the third week of July, Wipro announced the buyback of shares worth Rs 11,000 crore. The buyback price was Rs 320 and the prevailing market price was Rs 270-280 levels. Wipro stock currently trades nearly at Rs 290, and the buyback price is expected to provide support, according to analysts. Infosys has also announced the intention of a buyback of shares, but more details are awaited on the exact timing of offer.

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