HUL plans 2nd buyback in 3 years

Hindustan Unilever Ltd said its board would consider a buyback of shares at a meeting on June 11. If approved, this would be the company?s second buyback in less than three years.

Hindustan Unilever Ltd (HUL) said on Thursday its board would consider a buyback of shares at a meeting on June 11. If approved, this would be the company?s second buyback in less than three years. The FMCG major had announced a buyback in July 2007, eventually buying 30.2 million shares for Rs 626.27 crore at an average price of Rs 207.13. At the time, it had announced a cap of Rs 230 per share for the buyback.

This time around, analysts expect the price up to which the company will buy back shares, to be around 10% higher than the current share price.

The HUL scrip closed 4% higher at Rs 247 on Thursday, on a day when the benchmark Sensex closed up 1.68%. The HUL stock has underperformed the Sensex over the past year, remaining more or less flat, while the Sensex has gained 13%.

Typically, buybacks are undertaken by companies which have surplus cash and wish to support their share price. HUL has an estimated Rs 2,000 crore on its balance sheet in the form of cash and liquid investments. Buybacks lead to a smaller equity base for the company, since the shares bought back are extinguished. As such, they are considered a shareholder-friendly exercise, since a smaller capital base drives up earnings per share.

Analysts point out that HUL has not been able to grow its profits meaningfully given the competitive environment, as a result of which earnings growth has been muted. The buyback would, to some extent, help support the share price.

According to Sebi rules, a company can spend a maximum of 25% of its total net worth (equity plus reserves) on a buyback in a year. According to Bloomberg data, HUL?s net worth as of March 2009 was Rs 2,679 crore, indicating that it can spend approximately Rs 670 crore this time. At an average price of around Rs 250, therefore, the company could buy back around 27 million of the outstanding 2,179.8 million shares or roughly 1.2 % of the equity. Over the past five years, around 112 companies have bought back shares including Crompton Greaves, Reliance Infrastructure, GlaxoSmithKline Pharma and Bosch.