Share buybacks in India touch a record $1.1 billion

MUMBAI: Notwithstanding the global credit concerns and high interest rates and growing inflationary pressures back home, share buyback deals in India are at record highs.

Share buybacks totalled $1.1 billion from nine deals so far this year. Of the nine only that of Madras Cements has been completed (March 5, 2008).

The other buybacks that have been initiated but are yet to be completed include that of Reliance Energy, Great Offshore, Mastek, Patni Computer, Gujarat Flurochemicals, JB Chemicals and Pharma, Sasken Communication and Goldiam International.
Says Prime Database MD Prithvi Haldea, "The current depressed mar-ket conditions provide ideal opportunity for companies sitting on cash to increase promoter holding."

Adds investment strategy Gul Tekchandani, "It's a good practice that allows an exit to minority shareholders as long as it is not forced on them."

As per Thomson data, India is the 15th most active in share buybacks globally. With Reliance Energy's $885.9 million buyback, India has also recorded the biggest share buyback in Asia so far this year.

Share buyback involves the buying back of outstanding shares (repur-chase) by a company in order to reduce the number of shares in the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. Buybacks re-duce the number of shares outstanding on the market which increases the proportion of shares the company owns.

Analysts maintain that share buybacks improve earnings per share, re-turn on equity, return on capital employed, and intrinsic value.

A buyback is a method for a company to invest in itself since they can't own themselves.

A company may go for share buyback when its core businesses gener-ate huge cash surpluses that are way above the future capital invest-ment requirements. Share buybacks also help a company maintain EPS-based compensation targets.

However, a section of market participants believe a company's fixation on buybacks might come at the cost of investments in the long-term. Their perception is that the EPS may go up but the intrinsic value re-mains flat.

"Share buybacks can boost the share price of a company particularly in the near term. However, at the end of the day, it still boils down to the company's fundamentals," said a merchant banker.

According to him, share buybacks are good when the shares are com-paratively undervalued as against their fundamentals (large reserves and cashflow). Then share buyback would be perceived as a good move by the management, prompting buying interest in the stock, he added.