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Market rally could hamper buyback plans of companies

Market rally could hamper buyback plans of companies

Share prices of many companies that are in the midst of a buyback have risen above the buyback offer price     

Market rally might spoil buyback plans of companies Market rally might spoil buyback plans of companies

The recent rally in the stock markets is expected to impact some of the ongoing buyback offers as the prevailing market price has come quite close to the buyback offer price, which can deter investors from tendering their shares in the buyback offerings.

Take the case of Infosys, whose buyback offer began in June and will be open till December. The software major had announced a buyback offer price of Rs 1,750 but the current market price is hovering around Rs 1,737 levels. 

On Wednesday, the share price moved above the buyback offer price to touch a new 52-week high of Rs 1,755. Infosys shares have gained over 12 per cent in the last one month and more than 37 per cent in the last six months. 

Incidentally, when the Infosys buyback offer price was announced, it was nearly 29 per cent higher than the then prevailing market price. The benchmark Sensex has risen over 6 per cent in the last one month while gaining 11.45 per cent in the last six months.  

Similarly in the case of Nava Bharat Ventures and Navneet Education, the current market price is higher than their respective buyback offer price – both fixed their buyback offer price at Rs 100.

Shares of Nava Bharat Ventures are currently trading at Rs 104 while Navneet Education is around Rs 102. Navneet Education has gained over 20 per cent in the last six months, while Nava Bharat Ventures surged nearly 80 per cent in the same period though it fell a little over 8 per cent in the last one month.

This is not the case with all ongoing buyback offers, though. Shares of Balrampur Chini Mills and Tanla Platforms are still trading lower than their respective buyback offer prices.

Buyback refers to a process wherein the company buys back its own shares. This can be done in two ways – open market route wherein the shares are purchased from the secondary markets and tender offer route wherein shareholders can tender their shares.

Buybacks typically improve the company financials as the shares that are bought back are extinguished thereby reducing the total number of outstanding shares. This, in turn, enhances financial ratios like earnings per share, return on capital and return on net worth among other parameters.

According to data from Prime Database, a total of 30 buyback offers were launched in the current calendar year till July with their cumulative offer size pegged at Rs 13,328 crore. This is higher than the first six months of the previous year when 28 buyback offers were launched with a total size of Rs 5,791 crore.

There have been periods earlier, though, when the first six months saw a higher quantum of buyback offers. In 2019 and 2017, the first six months saw buyback offers with a cumulative size of Rs 28,514.26 crore and Rs 30,524.46 crore, respectively.

The current calendar year, however, is slated to see at least 10 more buyback offers in the near future with the boards of companies like Eclerx Services, Gandhi Special Tubes, Kaveri Seed Company, R Systems International, Shriram Pistons & Rings, Softsol India and Star Cement having already approved their buyback offers.

The total size of these buyback offers is expected to be in excess of Rs 700 crore.

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