Monday, February 2, 2009

When buy-back makes more sense?

There are a lot of companies announcing buy-back these days. I would like to put here some points which helps investors differentiate between good and bad buy-backs. According to SEBI rules, a company can buy-back shares upto 10% of its networth without any EGM. To buy-back shares upto 25% of networth, the company needs to get shareholder permission in an EGM which most companies avoid. Let's take four examples two of which I consider good and two of which I consider improper:

Good Ones:

1. Blue Star in 2002-2003: The company bought back 23,35,606 shares at an average price of INR 65.4 for an aggregate amount of 15.27 Cr. This reduced the equity capital of the company from INR 20.3228 Cr to INR 17.9872 Cr, a reduction by 11.5%. Thus by utilizing just 10% of the networth of the company, the equity capital was reduced by 11.5%. This was one of the greatest buyback in the history of Indian Stock Market.

2. Britannia in 2001-2004: The company bought back 38,60,287 shares between June 2001 and September 2004 for a consideration of INR 225 Crore an average price of INR 582, at which the market cap of the company would be around INR 1500 Crore. The networth of the company was around 500 Crore. Thus the company used 45% of its networth to buyback 14.2% of its equity capital, not a great buyback but I would consider a good buyback.

Improper Ones:
1. I have already discussed one of the recent improper buybacks Here

2. The other buyback I consider improper is that of Reliance Infrastructure. The company bought back 87,60,000 Shares for a consideration of INR 795.53 Crore at an average price of INR 908. The company's net worth is around INR 11.7K Crore and debt of 5K Crore which leads to a net book value of 6.7K Crore. The company spent 11.8% of the net book value to reduce the equity by 3.7%, a meager proportion.

To me, among the latest buyback announcements, only FDC makes sense, but since it is part of my portfolio, I would avoid commenting more on it.
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