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Buyback famine

Only a handful of buybacks this year may mean stretched valuations and a bleak economic outlook

Buyback of shares means purchase of a company's shares by itself. Buybacks are financed from the company's reserves. Companies buy their stock back when they think that their shares are undervalued or they are very optimistic about their future prospects. Buyback is a kind of financial engineering done to reduce the number of shares outstanding, thus increasing the earnings per share and the market valuation per share. Managements sometimes intentionally buy back stocks to send out a positive signal to the market that they are confident about the future of their companies.

Historically, we have seen that more buyback offers are made when market valuations are attractive. Therefore, in the current year companies have stayed away from buybacks. In the first eight months of this year the market has witnessed only three buyback offers, a record low in the last eight years. Year 2015 has so far seen buybacks worth only ₹157 crore.

This could mean that companies themselves feel that their market valuations are stretched or the future is gloomy. The price-to-earnings ratio of the Sensex is also on the higher side and is hovering above 20. Such high valuations also retard buybacks. Last time it was 2010 when buybacks had dried up. At that time the Sensex's P/E had crossed 21. In 2007 the Sensex's P/E was around 22 and the buyback activity was tepid.

Lacking lustre

Calender yearNo. of
Value of buybacks (₹cr)Average Sensex P/E
Source: www.bseindia.com

Buybacks in 2015

CompanyStart dateEnd dateOffer price (₹)Shares bought back*Value (₹cr)
Infinite Computer Solutions06/07/201505/01/2016220145000032
R Systems International06/01/201523/04/20151006781557
*As on October 19, 2015