Buyback offers and what do they mean for investors, explained
Infosys said it will buy back shares worth Rs 9,200 crore at a maximum price of Rs 1,750 per share. What is a buyback offer, what is it in for companies, and what does it mean for investors? All the key questions answered below.
Technology company Infosys said it will buy back shares worth Rs 9,200 crore at a maximum price of Rs 1,750 per share. That is nearly 30 percent higher than the current market price. If you are wondering what is this fuss about a buyback offer and how does it benefit investors and companies, here is an explainer.
What is a buyback offer?
In simple terms, buyback refers to the practice of a company buying back its own shares from the market. It can do so in two ways – open market route where the shares are purchased from the secondary markets or tender offer route wherein shareholders can tender their shares in the offer.
Buybacks are looked upon as a way to reward shareholders or improve the company financials as typically a buyback offer improves the financial ratios of the company and leads to better valuations. It is also considered a sign of increased confidence from the promoters whose stake in the company rises post a buyback as the shares that are tendered or bought are extinguished i.e., the total number of outstanding equity shares fall.
How do investors gain from a buyback offer?
Stock markets generally view buyback offers in a positive manner. As mentioned, it is believed that promoters who have confidence or are positive about the long-term prospects of the company opt for buybacks. There is empirical evidence that shows that stock prices have moved up post a buyback offer. In terms of valuations as well, buybacks lead to an improvement as important ratios like earnings per share (EPS), return on capital and return on net worth improve post a buyback.
More importantly, shareholders stand to gain irrespective of whether the company opts for tender route or open market purchase. Also, since buybacks are made at a price higher than the market price, the offer price becomes the benchmark in many ways. In the case of Infosys, the buyback offer price is nearly 29 percent higher than its current market price.
How do companies gain from buyback?
Promoters are able to strengthen their hold on the company as the total number of outstanding shares dip post a buyback. This assumes significance, especially, if the company faces a hostile takeover bid. It also makes the company more popular among the investor community as buyback is a more tax-efficient manner of rewarding shareholders when compared to dividends that are taxed at three levels.
Buyback is also a quick and easy way to reduce the capital of the company, which in ordinary course of business requires an approval from the National Company Law Tribunal (NCLT). Companies can also use a buyback offer to support the stock price during bearish or extremely volatile market conditions.
Why do markets look at buyback as a positive development?
Apart from some of the reasons mentioned above that improve the company’s financials while rewarding shareholders, buybacks are a way to utilise surplus cash of the firm. Shareholder funds are treated as a liability and any reduction in the fund only lowers the overall liabilities of the listed entity while making its balance sheet stronger.
This becomes all the more important during times when there are no acquisition opportunities or a better way to utilise the surplus funds. Not surprisingly, more than 10 buyback offers are currently on including that of HPCL, Jagran Prakashan, NIIT, Rane Braking, Aarti Drugs and Gujarat Apollo Industries, according to data from Prime Database.
Its popularity can be further gauged from the fact that 2020-21 saw a total of 61 buyback offers cumulatively worth nearly Rs 35,000 crore, which was nearly double that of the previous fiscal. Further, the first three months of the current calendar year has already seen 16 offers worth over Rs 2,000 crore.
How will Infosys shareholders gain from the buyback offer?
Infosys has opted for the open market route and would be buying a maximum of nearly 5.3 crore equity shares that constitute 1.23 percent of the paid-up capital of the company. In other words, existing shareholders cannot directly tender their shares in the offer in which the company would buy shares at a maximum price of Rs 1,750.
But shareholders will be the indirect beneficiary of the offer as there is a likelihood of a buyer – Infosys - in the market who is ready to offer up to Rs 1,750 for each share of the company. These sentiments typically push up the stock prices, which, in turn, benefit the shareholders.
The ‘Buyback Committee’ of the company would decide on the manner and frequency at which the shares have to be bought back from the market. The price at which the company buys the shares would fluctuate depending on the market price and demand-supply gap among other things. Incidentally, details regarding the total number of shares bought etc are made available on the stock exchange website.
Why Gold prices have got low and is it expected to fall lower? Should people be looking to invest in it?
NS Ramaswamy, Head of Commodities, Ventura Securities says that value of the world’s raw materials is propelled higher due to the “Yield” factor. Passive investors have been tempted on the “returns” in commodities. The positive returns on Crude Oil, Copper and a host of base metals were on account of interest rates being feeble, bond yields remaining historically depressed and rolling positions along the commodities futures curve.
The logic is simple. When markets are tight, nearby futures contracts are more expensive than later ones. That means investors can buy contracts today and when they have to roll them to later months, they get the same exposure at a cheaper price (backwardation). This positive carry market is a significant driver of returns and a really important component of how an investor performs going forward.
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That’s not the case with regards to Gold prices. Gold prices are continuing to slide.
There are multiple triggers causing this subdued performance:
U.S 10 Year treasury yield gathering momentum and indicative of a recovery in the economy. It has reached 1.38% breaking the psychological levels of 1.30%. This is inversely proportional to Gold prices.
INR (Rupee) appreciation against the USD (Dollar) – So far Rupee has appreciated by 3.5 % approximately since the first week of Aug 2020 mainly due to higher FII/FPI money inflows. Also India’s disinvestment programs have signalled positive for the INR currency
Higher ETF outflows seen in the Q4 of the current year
Speculators reducing their bullish bets - Large speculators continue to shed their bullish bets and increase their bearish outlook, according to the latest trading data from the Commodity Futures Trading Commission (CFTC)
Dollar Index continues to remain strong and continues to remain in the range of $90 - $91 with support seen at the $88 mark
Many Central Banks withdrew their Gold investments.
Gold prices in rupee terms were also subdued due to the reduction in the import duty announced in India’s financial budget
The US Federal Reserve (Fed) comments that the inflation and employment remains well below Fed goals set. This indicates easy monetary policy is likely to stay in place. There are no breaks on the US fiscal and monetary policies and that’s on full acceleration.
Short & Medium term Trend Downside of $1750 / 1700 / ounce will provide strong support levels. Similarly MCX Gold Support levels of Rs 45500 / Rs 44600 (10 gram)
Considering these factors and taking a cue on the technical support levels as above, one should start looking out to invest in Gold. The price had peaked at the Rs 54000 range ($2089).
Now is the time to look out for an opportunity to do fresh investment and if further any U.S $1.9 trillion stimulus package were to be passed and progresses we could see pressure on USD currency ($) which would support Gold prices. Locally we could also witness festive reactions to buying spree in Gold. This was lacking so far due to higher prices.
From the present bearish levels of Rs 46700 ($1805), Markets could expect a price recovery to Rs 48800. The bearish trend continues and only on a certainty of break-out above a closing price levels of $1832 or Rs 47600 there could be a bullish trend change in Gold to levels of Rs 48800 ($1880).
Gainers & Losers: 10 stocks that moved the most on March 16
Benchmark indices ended on a flat note on March 16 amid high volatility after selling in the second half erased the early gains. At close, the Sensex was down 31.12 points or 0.06% at 50,363.96, while Nifty settled 19 points or 0.13% lower at 14,910.50 levels. Among sectors, Nifty Bank, PSU Bank and Metal indices shed 0.8-1 percent, while FMCG and IT index added 0.9-1.2 percent each. The BSE Midcap and Smallcap indices ended in the green. On the BSE, IT index rose 1 percent and FMCG Index added 0.9 percent, while Realty, Metal, Oil & Gas and Capital Goods indices ended in the red. The Nifty formed a bearish candle on the daily scale and continued its weakness for the third consecutive session.
Shipping Corporation of India | CMP: Rs 120 | The stock was down over 2 percent after Life Insurance Corporation of India sold 2.01 percent stake in the state-owned Shipping Corporation of India through open market transaction. The life insurance major reduced stake in the company to 8.04 percent from 10.05 percent earlier. SCI’s consolidated net profit fell 55.4 percent to Rs 131.57 crore on a 30.9 percent decline in net sales at Rs 841.23 crore in Q3 FY21 over Q3 FY20.
Tata Communications | CMP: Rs 1,204 | The scrip fell 7 percent as the offer for sale (OFS) of the Government of India’s equity in Tata Communications Ltd (TCL) opened on March 16. The central government would divest 10 percent shares in TCL, along with an “additional 6.12 percent as Green Shoe Option”, said the official Twitter handle of Secretary, Department of Investment and Public Asset Management (DIPAM). The offer for sale would be available only for non-retail investors on March 16. The retail investors would be allowed to bid for the government stake on March 17, which is the second day of the sale. Currently, the government holds 26.12 percent stake in TCL, while 34.8 percent stake is held by Panatone Finvest Ltd, and 14.07 percent is owned by Tata Sons.
AU Small Finance Bank | CMP: Rs 1,229 | The stock added over 3 percent after the company raised Rs 625.50 crore through sale of shares to institutional investors. “The board approved allotment of 50,00,000 equity shares of face value of Rs 10 each to eligible qualified institutional buyers at the issue price of Rs 1,251 per equity share, i.e., at a premium of Rs 1,241 per equity share aggregating to Rs 625,50,00,000,” the company said in a BSE release. The issue was opened on March 9 with a floor price of Rs 1,181.06 and closed on March 15.
Aarti Drugs | CMP: Rs 688.30 | The share price gained over 3 percent as the company said it will consider share buyback on March 19. A meeting of board of directors of the company is scheduled to be held on March 19, 2021, to consider the proposal of buyback of the fully paid-up equity shares of the company including matters related/incidental thereto, the company said in the press release. The share price jumped 183 percent in last 9 months, while rose more than 400 percent in last one year.
Bharat Electronics | CMP: Rs 137.50 | The stock ended in the green on March 16. The Board of Directors of the Company at its meeting held on March 16, 2021 has declared second interim dividend of Rs 1.40 per equity share of Re 1 each fully paid-up (140 percent) for the financial year 2020-21. The record date for the payment of the dividend on equity shares for the financial year 2020-21 would be March 24, 2021.
Sarda Energy | CMP: Rs 417.30 | The stock jumped over 5 percent after the company received environment nod to raise the capacity. The Chhattisgarh Environment Conservation Board, Raipur has granted to the company the “Consent to Operate” the enhanced capacity of its iron ore pellet plant from existing 6,00,000 MTs p.a. to 8,00,000 MTs p.a. with immediate effect. It is one of the lowest cost producers of steel (sponge iron, billets, ingots, TMT bars) and one of the largest manufacturers and exporters of ferro alloys in India. The company also engaged in the business of Steel, Power and Ferro.
Gland Pharma | CMP: Rs 2,665 | The share price gained over 4 percent after the company has entered into an agreement to supply up to 252 million doses of RDIF’s Sputnik V COVID-19 vaccine. This is the first of multiple partnerships being explored by Gland Pharma to leverage its manufacturing capacity and capabilities to support global supply of COVID-19 vaccine, as per the company filing.
IIFL Finance | CMP: Rs 332.25 | The scrip jumped 5 percent after Fitch Ratings affirmed IIFL Finance Ltd’s Long-Term Issuer Default Rating (IDR) at ‘B+’, easing downside risk to the company’s credit profile due to less adverse economic and funding conditions. The ratings agency also removed the rating from Rating Watch Negative (RWN). The outlook is stable. The ratings were placed on RWN in March 2020 and maintained on RWN at the last review in September 2020.
Adani Ports | CMP: Rs 715.50 | The share price ended in the red on March 16. The company received a Letter of Intent (LOI) from the Sri Lankan government to develop and operate the west container terminal (WCT) of Colombo Port in Sri Lanka. “Adani Ports will partner with Sri Lanka’s largest diversified conglomerate John Keells Holdings and with the Sri Lanka Ports Authority (SLPA) as a part of the consortium awarded this mandate,” the company said in a filing to exchanges. Global research firm Citi has a buy on the stock with the target of Rs 935 per share. The preferential issue at Rs 800 per share cements the valuation, reported CNBC-TV18.