Sunday, June 22, 2008

Share buybacks may point to ‘bottoms’ being hit

ven as investors wait for clear signs of the elusive ‘bottom’ to the benchmark Sensex, select mid- and small-cap companies seem to think that their stock prices have reached their bottom!Many companies announced share buyback plans, as shares are now dime a dozen. The BSE benchmark indices for mid- and small-cap companies have given negative returns of 35-40 per cent during the year-to-date period.
Cheap value

Share prices of most companies that have announced intentions to buy back are trading 40-50 per cent off their highs, hit during the October 2007-January 2008 period. Companies probably feel that the time is ripe to buyback outstanding shares. These buybacks, when accomplished, will lead to the company reducing the number of shares on the market and consequently increase the earnings per share by a margin.

Easy pickings

Companies including Gujarat Fluorochemicals, Great Offshore and JB Chemicals have announced that they are either planning to buy or will be actually buying outstanding shares during this week. Some large cap companies have also embarked on buyback programmes. While Hindustan Unilever recently concluded a buyback, routed through the open market, Reliance Energy (REL) and Madras Cements have also announced buybacks. REL has kicked off its buyback, mopping up Rs 84 crore worth of shares in 3 days (10 per cent of the buyback amount). Madras Cements has completed over 96 per cent of its total buyback offer, amounting to Rs 64 crore, that began on February 18.

Fall stemmed

For shareholders of companies, the mere announcement of a buy back has meant a temporary arrest in the fall of the stock prices. Share prices of Gujarat Fluorochemicals have remained neutral while those of Great Offshore, JB Pharmaceuticals and Prithvi Infosolutions have gained from the day of such announcements.

However, the same logic hasn’t worked for large caps. The stock of Reliance Energy has suffered 15 per cent loss from the announcement date i.e. February 26. Prospective investors in the company do not seem to share the management’s view of the buy back being “a strong signal to the capital markets on the perceived under-valuation” of the company’s share price. REL’s current market price hovers around its 2008 lows.

The stock of IT major Patni Computers, yet to embark on its Rs 237 crore buyback programme, has also lost around 9 per cent, in line with its sector’s performance. On the other hand, Madras Cements, which bore the brunt of the mini crashes in February, is down only 7 per cent from the announcement date even as Sensex has fallen more than 11 per cent during the same period.

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