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How Market PE affects Buybacks

An analysis of buybacks shows that they were increased when the average PE of the Sensex was low

The process of buyback involves buying of outstanding shares by promoters. Companies exercise this option to reduce the number of outstanding shares in the market. However, companies offer a buyback at times when it thinks its stocks are undervalued. Buybacks can also be viewed as the confidence that the promoters have in their business and sometimes it could also result in gains for the company in the future.

On analysing buybacks since FY08, it was evident that the number of buybacks soared when the average PE of the Sensex was low. In both FY08 and FY14, the PE was low and the number of buybacks were 46 and 32 respectively. On the contrary, when the average market PE was high in FY10 and FY11; the number of buybacks were negligible.

Strangely, in the past three years, buybacks raised more money than IPOs and more than 50 per cent buyback offers were exercised, which means, companies returned money to investors.

Buy back offers opened

FYNo. of offersOffer amount (₹cr)Acquired amount (₹cr)Acquired (%)Average PE
2008-0946421816623915.66
2009-10208243284020.13
2010-1120429541499721.6
2011-12311376548533518.5
2012-1321169411076517.09
2013-14321138042673717.38

Buyback closedIPOs/FPOs
FYNo. of offersOffer amount (₹cr)Acquired amount (₹cr)No. of offersAmount Raised (₹cr
2011-121925821152325480
2012-1326125324746186212
2013-143157044426228314
Total7620818103247220006
Source: Prime Database