Buyback of shares by a host of domestic companies nearly doubled in value terms during the first half (H1) of the current calendar at Rs 24,827 crore compared to the entire CY21 when the amount stood at Rs 13,241 crore. The CY22, H1 figure includes buyback proposals of up to Rs 2,500 crore by Bajaj Auto and another Rs 120 crore by Route Mobile.
During the period, 14 companies, including state-owned natural gas explorer GAIL repurchased shares, while IT major Tata Consultancy Services (TCS) topped the charts with 72.5% of total buyback.
In CY20, companies had bought back shares worth Rs 37,069 crore, according to data sourced from Capitaline.
The companies, both private sector and state-owned, had spent Rs 29,566 crore in CY19 for extinguishing of the shares.
In the last 10 years, calendar year 2017 recorded the highest buyback of Rs 53,264 crore, while for 2018 the amount was Rs 51,374 crore.
Buyback of shares had emerged as the most tax-efficient tool after the government slapped additional tax on dividend and distribution of shares in the Union Budget 2016-17.
“Over the last two years, despite the pandemic-induced challenges and weak economic recovery, India’s earnings cycle has seen a turnaround after almost a decade. The corporate earnings have grown at a fast pace of 48% year-on-year (for Nifty-500 universe) in FY22, resulting in strong cash generation for companies. The corporates are thus sitting on huge cash, which is getting utilised for buybacks of shares in the current volatile market,” Hemang Jani, head equity strategy, broking and distribution at Motilal Oswal Financial Services said.
“However, over the past more than six months, market has been nothing less than a rollercoaster ride for investors with many stock prices getting halved. So, to instill confidence in investors and return value to them along with making wise usage of cash, managements are opting for buybacks. This phenomenon is not limited to large companies, but even many mid and small companies are also participating in buybacks,” Jani added.
In H1, TCS bought back shares worth Rs 18,000 crore, agrochemical major UPL worth Rs 1,100 crore and GAIL worth Rs 1,082.72 crore.
“One of the main reasons for the rise in buybacks is the increase in liquidity as firms stayed away from making new investments or expansion plans during the past two years that were ravaged by the pandemic. Further, for companies this is the best time to improve valuations of their stocks and set valuation benchmarks,” Mahesh Singhi, founder and managing director at global investment banking firm Singhi Advisors said.
Companies prefer buybacks as they increase earnings per share, and compared with dividends, they provide one-off returns on capital. Further, buybacks are treated as capital gains instead of income, and investors don’t have to pay tax, while companies pay tax on the difference between market price and issue price.
Will the pace of buyback continue in the second half of this year?
“Generally, buybacks can be done once in a year based on last audited accounts and firms can buy back shares to the extent of 25% of its networth. With the additional surcharge removed in the current Budget, the cost of buybacks is down by almost 5% and with the results of FY22 being audited now and liquidity being available with many companies, the pace of buybacks is expected to continue in the second half of this calendar year too,” Singhi added.
“The pace of buybacks continuing in H2 would be largely dependent on the market. My sense is that you may see a deeper correction and Nifty might fall down to around 15,500 or even 15,000. So, if there is a further correction, certain companies will continue to correct further and management will continue to announce buybacks,” Shivam Bajaj, founder and chief executive officer at private equity and M&A advisory firm Avener Capital, said.
“There has been a correction in the broader markets predominantly on account of concerns relating to inflation and rising interest rates, which has led to a good amount of correction in the share price for a lot of these companies. Further, companies are sitting on a lot of cash,” Bajaj added.