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Betting on buybacks

Several small companies in struggling sectors or with governance issues are still quoting below the offer price

Most investors greet the news of a buyback of shares by a company or promoters enthusiastically as they believe it clearly underscores the bright future of the company. Apart from the promoter's confidence in the fundamentals of the company, a buyback of shares also reveals that the stock is reasonably priced at that time. At least, the promoter believes so. Also, a buyback automatically reduces the number of outstanding shares in the market and improves the earnings per share (EPS) of the stock. Obviously, these factors would drive the stock further up, right?

Not always. If we consider all the buybacks in the last three years, it is clear that some promoters were extremely confident about the fortunes of their businesses. Out of 70 companies that came up with buyback offers, 30 companies failed to deliver the goods in the last three years. Despite a buoyant stock market that has risen to new highs, these 30 stocks have fallen by a wide margin below the offer price for buyback of shares. However, if we exclude the tiny and small-cap companies and focus on mid- and large-cap companies in the list, the picture is not that bleak. Only four out of 18 mid- and large-cap companies have seen their stock prices fall below the offered buyback price. It is also extremely instructive to note that the biggest losers were either in struggling sectors or had large corporate governance issues. Simply put, investors should not look at every buyback offer as a win-win situation.

Top 10 highest value buybacks in the last three years

Company NameStart DateEnd DateOffer Price (₹)Buyback ValueLatest PriceSimple return
Deccan Chronicle Holdings16/05/201103/01/20121806392.26-98.74
Jindal Steel & Power16/09/201315/03/2014261520149.2-42.84
Reliance Infrastructure11/04/201113/02/20127251174495.55-31.65
Cairn India23/01/201422/07/20143351230241.75-27.84
Jindal Poly Films25/11/201130/10/2012350317276.05-21.13
Indiabulls Real Estate30/04/201214/12/20127537568.7-8.4
Reliance Industries07/02/201219/01/201387042738892.18
UPL09/01/201409/07/2014220721334.351.95
SRF06/04/201125/02/2012380376860.25126.38
Zee Entertainment23/04/201203/04/2013140323376.8169.14