Plummeting equity indices may have wrecked havoc with NAVs but equity funds are latching on to the smallest of opportunities to earn some early respite. Thus, equity funds have made a beeline for buyback candidates of Castrol and Britannia Industries, which offered attractive bargains. For instance, as many as 19 funds owned investments in Castrol on September 30 with a cumulative share of Rs 14.5 crore against 10 funds on June 30 with a stake of only Rs 5.17 crore. Similarly, 33 funds have taken exposure to Britannia Industries with allocation valued at Rs 29 crore on September 30. Most buyback offers have come from multinational parents, aiming at 100% owned Indian subsidies and thus plan to delist the stock. With stocks being mercilessly hammered, some companies are also consolidating their holding at cheap valuations. Still, some buyback offers from cash-rich companies are simply meant to shore up the price and enhance valuation.
A Ray of Hope
The returns from buyback could be significant in the short-term and boost the net asset value. Consider a fund, which bought 20,000 shares of Castrol at an average price of Rs 200. Now, with the Castrol buyback at Rs 350 (excluding interest), the fund makes a neat profit of Rs 32 lakh by participating in the process. "While returns are not significant on a long term basis, they become significantly important in a bear phase like current one,'' says Nilesh Shah, Chief Investment Officer, Templeton India AMC.
Easier Said than Done
However, buyback has its own set of pitfalls and fund managers have to tread carefully or else, they could end up with losses. To start with, the fund should be lucky to own the stock of the company, which opts for buyback. While buyback is one of the considerations for investing in the stock, it is not the sole reason unless the fund is acting upon insider information.
"Buyback is like a bonus. We first invest on the basis of fundamental analysis. The company's intention and capability of buy back increases the comfort level but is not the driver for investment rational,'' points out Shah. Adds Bhupinder Sethi at Dundee Mutual Fund, "Its different if you have prior knowledge of a buyback. Else, it makes sense to buy into a company, which is committed to performance and could also go for a buyback.'' Sethi cites the example of Birla 3M, which is committed to Indian operations and is one of the two cases globally where the foreign parent does not own a 100% stake. "It is highly likely that the company will go for a buyback but you simply cannot buy the stock only on this basis.''
There are some other downsides as well. For instance, investing in a company after the announcement of buyback details may bring in only meagre returns since the price gain is sharp. On most occasions, liquidity also disappears in an attractively priced offer since very few investors are willing to sell at a significant discount to the buyback price. Last but not the least; it is important to know if the buyback is aimed at extinguishing only a part of the equity capital or for delisting. "For instance, Castrol is buying back only 20% of the equity capital. Thus, your gains may be curtailed if your entire lot is not accepted,'' quips a fund manager. While the buyback offer artificially props up the stock, the price falls dramatically once the buyback offer is complete. "The illiquidity can be real worrisome for the residual portion,'' says a fund manager.
Buyback Offers to Continue
With stocks languishing at abysmal levels, more buybacks could be in store. Apart from de-listing, some companies may even purchase their own stock to prevent any takeover attempts. "Corporate India is generating cash surplus, it is not going for projects or business expansion. Thus, they would like to shore up their holding,'' says Shah. For instance, Gujarat Ambuja recently announced its plans for a buyback. With equity markets in an abyss, buybacks (despite their perils) have given a ray of hope to the harried equity fund manager. After all, when the times are tough, even a single penny counts!