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Monday, December 8, 2008

INVESTORS GAIN LITTLE IN BUYBACKS

If stock prices movements are an indicator, then investors are not happy with buybacks or share repurchase programmes initiated by companies. While the consensus view is that buybacks are positive as they are usually an indication that the company's management thinks the shares are undervalued, shares of none of the 11 companies whose share buybacks are open have gone up after the initiative was started, data shows- Stocks of Reliance Infrastructure, SRF, Rain Commodities and DLF have fallen by as much 35-60% from the day the buyback was open and most companies have seen their stock value erode by an average 40% in the same period. All the buybacks are to be done through open market purchase. Though on the day of announcement, stocks might have usually reacted positively, stock prices of the same companies have mostly fallen by as much as 10-50% in the period between the buyback intention was first announced and when it actually started. "What's in it for the ordinary investors, if the company is buying back at the prevailing price? Only the promoters appear to benefit from this peculiar situation as they are indirectly increasing their stake (since bought back shares will be extinguished) and that too without using their own funds. Companies such as Amrutanjan, Godrej Consumer, EID Parry and Ipca Labs announced buyback plans in the last two days alone. While its true that shares of most companies are available at steep discounts (40%-80%) vis-a-vis their January peaks, since most of the purchases are done through open market, nonpromoter entities hardly stand to benefit from the scheme of things. "Certainly, its a good time from a valuation perspective. But whether investors are appreciating (buybacks) or not, is a judgement on individual companies which is again dependent on many factors . The maximum buyback price in cases such as Reliance Infrastructure (Rs 1600), DLF (Rs 1100), SRF (Rs 160) or HEG (Rs 350), practically becomes a non-benifical

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