Share buybacks may rise despite raging bull market

The recent share buybacks by IT companies including Cognizant and Tata Consultancy Services (TCS) have raised hopes that the trend of companies buying their shares from the public is here to stay.

Saddled with mounting cash, lower growth and no acquisition opportunities, IT companies are forced to buy back their stocks. Industry experts see the likelihood of blue-chips like Infosys and Wipro following the trend. Even the government could choose to take the buyback route to meet its disinvestment target Rs 72,500 crore, experts said.

The Rs 16,000 crore buyback of TCS, if successful, would be the largest in India. The current earnings per share (EPS) of TCS is Rs 2,850. HCL's EPS as of now is Rs 1,000. Companies with open buyback offers are Bharti Airtel (EPS Rs 400), Engineers India (EPS Rs 500), Oil India (EPS Rs 340), Kaveri SeedCo (EPS Rs 675), KPR Mill (EPS Rs 667.8), Jagran Prakashan (EPS Rs 195), among others.

"Recently, many companies have announced buyback of shares to show confidence and value for their business, thus utilising idle cash from the balance sheet, which will improve their financial ratios," said Yogesh Mehta, vice-president-equity advisory, Motilal Oswal Securities.

However, dividend payouts could rise this year with the IT companies not announcing buybacks. This year, pharma company Natco has already announced an interim dividend of Rs 6 to reward its shareholders.

While the public sector units have announced buybacks to help the government meet its disinvestment target, experts say frontline private players are opting for buybacks over higher dividends in order to evade increase in tax in the Union Budget 2016.

Buybacks are common during a bear market which provides attractive valuations, prompting companies to buy shares at throwaway prices.

But why a flurry of buybacks when the market is on an upswing?

"Firstly, companies will get to dodge dividend tax on share repurchase which was announced in the Budget 2016. Secondly, the market cap of companies has swelled, and to maintain that they could buy back shares to get feel good factor about their market cap. The trend is likely to continue and many companies are eager to maintain their market capitalisation," G Chokkalingam, founder and managing director, Equinomics Research and Advisory, told DNA Money.

While it is not clear which companies will go for buybacks, information about the amount of net cash a company holds can provide an estimate on such plans.

"If the company has minimum 5-10% net cash, the possibility of a buyback are quite strong. Also, the companies whose market capitalisation is at a high at this time could be seen buying back shares in order to maintain their position in the market," Chokkalingam said.

"For companies which are not on very high growth path buybacks from the open market is a good option to explore. However, when the promoter too wants to participate in a buyback, tender offer is a better option. This trend is likely to continue going forward as long as businesses do not feel the need to ramp up their capex plans," Deepak Jasani, head - retail research, HDFC Securities, told DNA Money.

However, looking at the current bull rampage in Dalal Street, some experts see the buyback season soon heading to a close.

"Since we are currently in a roaring bull market, buybacks will disappear soon. Currently, IT and pharma are at reasonable-to-below average valuations. Hence, there is a rush in IT companies to buy back the shares. But going forward, such will not be the case once the valuation starts rising in these sectors also," Jimeet Modi, CEO, SAMCO Securities, said.