Thursday, September 23, 2010

Bull Market Mania is back

I have written about good and bad buy-backs in the past. Recently there were some more announcements that didn't make sense to me:
  1. Lakshmi Machine Works announced to buy-back shares at a maximum price of INR 2045 per share aggregating an amount not exceeding INR 226.71 Crore. 
  2. CRISIL announced to buy-back shares at a maximum price of INR 6500 at an aggregate amount not exceeding INR 80 Crore
According to me, both these buy-backs do not make sense since they are at a much higher P/B ratio at around 3 times for LMW and 12 times for CRISIL, much higher P/E ratio, i.e. more than 20 times for both the companies and much lower dividend yield, less than 2% for both. If buy-backs happen at or around book-value, the book-value of the rest of the shares increase or remain same which is positive for the company over long term. CRISIL's share price is hovering near life-time high and that of LMW is also not that cheap. These are not the times to buy-back shares. Investor wealth is seriously getting damaged here. A dividend distribution would have made more sense for both the companies even after DDT.
Principle for the untrained security buyer: Do no put money in a low-grade enterprise on any terms.
Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another. - Benjamin Graham
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2 comments:

Mahesh said...

Wonderfull analysis. I didn't knew this one about buyback strategy instead of giving dividend to shareholders.

THanks for bringing to public :)

ragsk3 said...

crisils buyback is really a sham since it allows them to buy only 1.7% of the company's share capital. I suspect this is to equalise the dilution of S&P stake due to ESOPs. No share purchase announcements have been made yet. Will the buy back be time limited?

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