The Hindu Business Line : Buybacks offer little protection to stock prices

BL Research Bureau While more and more listed companies are taking the buyback route to signal that their stocks are undervalued, buybacks completed over the last six months suggest that the strategy has done little to protect stock prices from their incessant decline.

The eight companies which completed buybacks through the open market over the last six months have seen their stock prices drop by 8-80 per cent, from the opening day of the respective buybacks, till date.

Share prices plummet

Companies such as EID Parry India, Reliance Infrastructure, Supreme Industries and Surana Telecom which recently closed their buyback offers and extinguished shares have witnessed sharp decline in stock prices during and after the offer period. That the market did not take a cue from the buybacks is evident from the low average prices at which the shares were mopped up.

All the companies have bought back shares at an average price much lower than the maximum price indicated for the offer. Rain Commodities for instance bought back shares at an average price of Rs 150 as against the stated maximum price of Rs 307. Surana Telecom bought back its shares at half of the maximum price of Rs 50 a share.

The open market route adopted by most companies have been much less effective than the alternative “tender offer route” in boosting market sentiment in these stocks. Open market offers seldom provide an opportunity for retail investors to participate equitably in the offer, as shares are sold in the open market at the prevailing price.

The number of shares extinguished in the eight offers that closed range between 2 and 8 per cent of the issued number of shares pre-buyback — perhaps a proportion too small to enhance per-share profits.

Source of funds

At a time when companies are finding it difficult to manage even their working capital requirements, where did the funds come from? Normally, companies with huge cash surplus choose to buyback shares.

However, given the plummeting share prices, companies with limited cash in hand too have on this occasion resorted to buybacks. Supreme Industries and Surana Telecom could have liquidated their investment books given that their cash positions as of March 31, 2008, were lower than the amount deployed in the buyback. Companies such as Patni Computer, which had over Rs 1,000 crore in mutual funds alone in its December 2007 balance sheet, may not have found it difficult to meet its Rs 237-crore buyback programme.

The BSE has currently listed about 29 companies which have a buyback programme on through the open market route. Even in this list, about 16 have witnessed declines in share prices after the opening of the buyback offer. DLF’s stock for instance has fallen 41 per cent between October 17, 2008 (when its buyback offer opened) and now.

Companies such as Jindal Poly Films and HEG have, however, seen prices trend higher during the buyback. With prices not showing signs of revival companies such as Reliance Infrastructure have announced yet another tranche of massive buybacks, while the board of Rain Commodities will meet soon to decide on a similar plan.

Related Stories:
Read the ‘buyback’ signal right
When a buyback isn’t investor friendly
Buyback, open offer stocks sizzle amidst fizzle
The share buyback dilemma