While the Sensex now trades at a price to earnings (P/E) multiple of 16.5 times one-year estimated forward earnings — higher than the long-term average of 15 times — several stocks are trading at more reasonable valuations prompting managements with surplus cash to buy back shares. Typically, managements buy back shares to enhance their value; since the shares bought back are extinguished, the earnings per share (eps) gets a boost.
According to Prime Database, announcements have been made for buying back shares worth `2,220 crore in 2016 so far. In FY15, the total value of shares bought back was `650 crore.
The Securities and Exchange Board of India (Sebi) amended the buyback rules in 2013 specifying that the minimum amount that a company is required to buy back should be 50% of the offer size, against the earlier practice of 25%. Sebi also limited the buyback period to six months, from the time the approval has been sought from the board or shareholders, because it found that companies typically did not utiilise the entire period of one year to complete the buy back.
Earlier this year, Just Dial, Borosil Glass, Himalaya Granites, Technocraft Industries, Tips Industries successfully completed buying back shares worth `550 crore from investors. While companies like Dr. Reddy’s, OnMobile Global, Excel Industries and ECE Industries currently have their buyback offers ongoing. Dr Reddy’s has offered to buyback shares worth `1,569 crore, and the offer if completed, will bring up promoter holding in the company to 26.3%.
Pharma company, Novartis , announced last week that it will buyback shares worth 290 crore, acquiring close to 38 lakh shares at a price of `760 apiece, a 11% premium to the three-month weighted average share price of the stock. Currently, the promoter of pharmaceutical company, Novartis holds 75% of outstanding equity in the Indian subsidiary. As per Sebi’s listing guidelines, a company must have a minimum free float of 25%; which means Novartis will need to tender shares in the buyback should it want its Indian subsidiary to stay listed.
Recently, National Aluminium Company also announced a buyback of shares amounting to `2,834 crore which also accounts to 25% of the paid-up capital from public shareholders. The share buyback will help the government raise funds for meeting its divestment target for FY17. Nalco has fixed the buyback price at `44 per share and they government may garner atleast `2,294 crore as it is expected to sell close to 25% of its holding.
Bharat Heavy Electricals and Coal India will be the next in line to announce buybacks among public sector companies. BHEL has cash reserves worth `10,198 crore end of FY16. Coal India is likely to buyback 5% of the government stake in the company, according to media reports.