R.Y. Narayanan

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Coimbatore, July 13

The announcement by the real estate giant DLF Ltd to buyback its shares up to a maximum price of Rs 600 per share (Friday NSE closing price Rs 452.70), involving a huge outgo of up to Rs 1,100 crore, has brought into sharp focus the dilemma faced by the investors as to whether they should cash in the buyback/open offer if the price is attractive and when the market is volatile, or shun it with a long term view.

Several blue chip companies that have either just completed the buyback process or have one running now or are likely to launch one in the near future, have witnessed huge value erosion in the past one year. Reliance Infrastructure Ltd’s share price has come down to Rs 800 + levels after hitting a year’s peak of Rs 2,641. DLF that came out with a public issue only in June 2007 at Rs 525/share (face value Rs 2) hit a high of Rs 1,225 before the real estate meltdown, home loan rate spike and a bearish market sent its shares on a downslide. Great Offshore share price that recorded a year’s high of Rs 1,145 now hovers near its year’s low. Madras Cements’ current share price of Rs 2,550 is just about 50 per cent of its year’s high of Rs 5,072 and this is after it completed buyback process recently.

Mr Satish Menon, Director-Operations, Geojit Financial Services Ltd, said companies which want to grab the opportunity offered by the current low share prices and to use the available resources ‘most productively’, opt for the share buyback. This created better value for long term investors who choose to remain invested. While the promoters would be aware of the real value of the company based on its future growth, the current market price may not reflect its intrinsic worth.

However, share buybacks do not result in spike in share prices benefiting investors immediately. Though the companies may fix a higher cap on the buyback price, the average price at which they buy the shares directly from the stock markets may be lower. For instance, Madras Cements had fixed a maximum cap of Rs 4,200 a share under its buyback offer. But the average price of acquisition was only Rs 3,592.16 a share.

Reliance Infrastructure had fixed a maximum acquisition price of Rs 1,600 per share and though its buy back offer is currently on, it did not prevent the share from slipping below Rs 800 in the NSE on Friday. Great Offshore had fixed a maximum purchase price of Rs 750/share but the share price closed at Rs 438.55 in the NSE on July 11. Ranbaxy will buy at a price of Rs 737 per share (face value Rs 5) which is being done to meet statutory open offer requirements after it was bought by a Japanese drug major. The share closed at Rs 532.15 in the NSE, though the process is still sometime away. Godrej Industries board is to meet later this month to decide on the buyback with the Godrej Group Chairman, Mr Adi Godrej quoted as saying that “the price is grossly undervalued”. The share is quoting around Rs 164 (share face value Re 1).

But which buyback process is more investor friendly? According to Mr Harendra Kumar, Head – Institutional Research, CentrumDirect Ltd, Mumbai, tendering process is more investor friendly as the investors would know how much of the holding would be bought back by the company. The price offered would also be considerably higher than the market price. In case of direct purchase, it would be at market price (which may be lower than the cap fixed by the company).

He said buyback announcement per se would not spike the stock price. The size and value of the buyback, any capex plans, and impact of buyback on future EPS etc., would have a bearing. With regard to Ranbaxy, he said if a new investor bought it to tender it in the open offer, the ‘arbitrage return would not be attractive to justify the effort’. But for those already holding it, ‘it is one of the best companies in a defensive sector available today’.

When pointed out that even after the buyback, share prices have slipped further down – Madras Cements is quoting cum- bonus at Rs 2,500 level (nearly Rs 1,000 less than the average buyback price), Mr Kumar said Madras Cements share price reflected the ‘negative market sentiment for the sector for the near term prospects’. The sentiment now has changed from the time of buyback. He said the arbitrage strategy is based on the investors’ assessment of what the post- buyback price might be. If it was likely to be closer to buy back price, ‘then it might be advisable to hold’.

On which was the most beneficial buyback route to the investors, Mr Menon said buyback tendering was the ‘most transparent’ as the price was fixed. But if the number of shares offered was more than what was sought to be bought back, then the investors would get pro rata acceptance of shares tendered. In direct purchase from the stock market, the companies announce a cap on buyback price above which they would not buy. Investors could sell their entire holding at the market price.

On whether the tendering process should be modified to enable more shares from small investors be accepted, he felt that the buyback process of pro rata acceptance tendered by all classes of non-promoters shareholders ‘is the most equitable method’.

While announcing the buyback, Reliance Infrastructure said its action would ‘send a strong signal to the capital markets on the perceived under-valuation of the company’s share price’ and ‘reiterate the confidence of management in future growth prospects of the company’.

But the dilemma the investors face today is whether or not they should take advantage of the buyback/open offer when the market is in a bear grip. The recent experience shows that buyback would not guarantee stability in share prices in a volatile market. For instance, the value of Reliance Infrastructure’s shares has fallen by about 50 per cent since the buyback process commenced and the share price of Madras Cements has also come down steeply after the buyback.

However, compared to their peak prices when the valuations appeared to be stretched, many shares are quoting at reasonable P/Es now. So, one could presume that when the stock markets bounce back, these shares may recover part of their lost ground and may be close to the maximum buyback price. So, it is for the individual investors to take a call on whether to cash in the offer or ride out the storm for long term growth.

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