The roller-coaster continues. After Tuesday’s 500-point drop in the Bombay Stock Exchange Sensex, Wednesday saw the index take off vertically.
MUMBAI: The roller-coaster continues. After Tuesday’s 500-point drop in the Bombay Stock Exchange Sensex, Wednesday saw the index take off vertically. A 703-point rally brought the index back above 13k, closing at 13,665.
Three reasons why. One, marketmen got a whiff of promoter action, with realty company DLF announcing a plan to buy back shares from the market. Two, punters who had oversold in the past bought heavily to cover their open positions. And three, there are expectations of a moderation in crude oil speculation, with the New York Mercantile Exchange making it more expensive to trade in oil futures.
Share buybacks were the talk of the day. Experts said that more companies could follow DLF to protect themselves from the onslaught of bears. “Certain companies with deep pockets might be considering it (buying back their own shares). For example, valuations of some cement companies have fallen below their replacement costs. This means the company is not even worth the sum it will take to build the cement plant today.
This mindless hammering of stocks cannot continue. At some point, you have to ensure that short-sellers don’t take the company for a ride,” says A Balasubramanian, chief investment officer of Birla SunLife Mutual fund.
He adds that a number of US companies have resorted to this in the recent past. “Shares are off their highs in the US and available at very attractive valuations. Many companies see sense in buying back stock,” he says.
Other experts, however, doubt whether buybacks are a universal option. Buybacks can improve investor sentiments, but the business may take a hit, especially if it needs a lot of capital investment.
Buybacks are carrots offered by promoters of companies to keep fleeing shareholders interested in their stock. They also serve as effective sticks to keep short-sellers at bay. The possibility of the company offering a higher price than the prevailing market price often makes shareholders postpone their decision to exit the stock. It also lures new ones to enter. DLF shares rose 15.08% to Rs423.95 due to the buyback announcement.
The sentiment spilled over to other real estate stocks and the broader market, inspiring the biggest rise in the Sensex since March. DLF had lost two-thirds, or Rs1.2 lakh crore, of its market value in the last six months. The stock had plunged to an all-time low of Rs352 on Wednesday before the announcement.
Realty stocks surged in late trades on bargain hunting at lower levels. The BSE Realty index surged 12.22% to 4,731.19. From a recent high of 6,099.19 hit on June 17, 2008, the BSE Realty index had slumped 30.87% to 4,215.93 on July 1, 2008
The DLF buyback move has helped turn the sentiment, but its longevity is in some doubt. Says Dinesh Thakkar, chairman and managing director, Angel Broking: “The company is still not clear about the terms of the buyback. If the buyback price is above the (DLF IPO) issue price of Rs525, sentiments will stay buoyant. But the fundamentals of real estate stocks have not changed and they continue to look bad. It would be premature to take a call based on today’s bounce as they might fall again.”
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