Feb 27

Daily Market Commentary – 27 February 2015

Indian equity market surged post economic survey report which pegged the economy to grow at over 8% in FY16 indicatig announcement of  big bang reforms tomorrow. Sensex zooms over 470 points to recliams its important level of 29,000, and ended the day at 29,220.12 while Nifty ended over 8,800 up by 160 points at 8,844.60.

The survey see space for policy easing on the basis of lower inflation. Growth in 2014-15 which could be in and around 8% next year will be largely driven by domestic demand.

Survey emphasised on revitalising the PPP model, which has so far seen poor response from the private players on account of higher risks involved in the initial stage of projects.

Government expects fiscal deficit target of 4.1% for FY15 and CAD to be 1% of the GDP.

Meanwhile USDINR pair ended the day at 61.89 up by 14 paisa.

Among the Sectorial indices of NSE CNX Realty (4.46%), CNX PSU Bank  (4.09%) and CNX Metal (3.03%) were the top performer. On the other side CNX FMCG was the only loser of the day, plunging -0.03%.

Out of the 50 stocks of Nifty 47 stocks were advanced while 3 were declined.

Top 5 Nifty gainers: BOB (5.98%), Tata Power (5.32%), L&T (5.04%), Ultra Cement (4.96%) and Grasim (4.87%).

Top 5 Nifty losers: Gail (-0.88%), ITC (-0.67%) and BPCL (-0.24%).

Jan 14

Daily Market Commentary – 14 Jan 2015

Witnessing the wide movement Indian equity market ended the day in negative territory led by declines in ITC on worries the government may ban sale of loose cigarettes, while metal stocks slumped, tracking falls in commodities on global growth concerns. The broad-based index Nifty slumped by 21.85 points and closed at 8,277.55 down 0.26%, while Sensex, loosing 78 points wrapped up the session at 27,346.82 mark down 0.29%.

Jet Airways shares tanked after the carrier said its promoter chairman Naresh Goyal has pledged his entire (51 per cent) shareholding, valued at over Rs 2,600 crore.with state-run Punjab National Bank.

The government reported Wholesale Price Index (WPI) inflation data for the month of December which rose marginally to 0.11% versus 0% in November.

Infosys CEO Vishal Sikka met Prime Minister Narendra Modi and disclosed that his company will spend $250 million (over Rs 1,500 crore) to fund innovations in software and services in India.

Among the sectoral indices CNX Metal was the worst performer plunging -3.49% while CNX IT surged almost 1% after the PM MOdi and Infy chief Vishal Sikka Meeting.

Meanwhile USDINR Pair gained after 5 days downward momentum and ended the day at 62.18 surged by 1.15% or 0.035 paisa.

Market Breath remained negative for the day with 730 shares ended in red, 441 in green and 12 remain unchanged.

Out of 50 stocks of Nifty 20 stocks advanced, 29 declined and 1 remained same as previous close.

Top 5 Nifty Gainers: BHEL (5.17%), HUL (5.16%), ULTRA CEMENT (3.21%), ACC (2.93%) and INFOSYS (1.92%)

Top 5 Nifty Losers: SESA STERLITE (-8.63%), HINDALCO (-6.36%), TATA STEEL (-3.97%), ITC (-3.24%), and BPCL (-2.53%)

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Apr 11

Buying Back the Shares

Share buyback means a company buying back its shares from shareholders other than promoters. Company does it to increase the shares’ prices or delist, and this is done by either buying in the stock market directly, or asking shareholders to tender their shares.

A buyback offer is when a company buys some of its shares from its shareholders and extinguishes them. This is usually done from shareholders other than the promoters themselves, and is most often a testament from the management and promoters on the strength of the company, and their commitment to increase the returns for the shareholders. Market experts say it usually shows the confidence of promoters in the future of the company.

There are a number of reasons companies go for buybacks. The intentions could be to reward investors, improve financial ratios (such as price to earnings, return on assets and return on equity), increase promoter holding, reduce public float and check the falling stock price, reduce volatility and build investor confidence.

The following are the 6 main reasons why company offers share buyback:

  1. To stop the fall in stock price.
  2. In some situation company may want to bring down the public holding and increase promoters holding.
  3. If the company sees there is no better opportunity to deploy its cash reserves then it may decide to buy back its shares.
  4. The buyback may improve companies return ratios. If they reduce the total number of outstanding shares then the EPS (Earnings per Share) increases because EPS is PAT (Profit after Tax) divided by total outstanding shares. If the EPS increases then the P/E multiple decreases, and when P/E decreases, the share price increases to bring the P/E back to the higher levels. Other ratios like Return on Equity and Return on Networth also improve due to this.
  5. When a company thinks its share price is undervalued.
  6. In case of eventual delisting, some companies, especially foreign owned companies get into buybacks because they want to eventually delist from the Indian stock exchange. Usually, they don’t buy their entire outstanding shares at one go, but conduct these buybacks over a period of time and buy in tranches of 5% or 10%.

First of all a buyback is proposed in general meeting of the company which is then voted on and approved by the board of directors. Then they announce the buyback in a newspaper with all the details. There are two types of common buyback routes companies take, open market purchase and tender offer, i.e. one is done through open market purchase from the stock exchanges, and the second is done through a tender form.

  •  When a company carries out buy back from the open market through stock exchange, there is nothing that you have to do except hope for a probable gain in stock’s market price. Company decides to acquire the certaisn number of shares to be bought back and fixes a price cap and can buy for any price up to that.
  • When company makes an offer to buy shares through the tender route, it has to declare the number of shares and the specific price, at which shares have to be bought back directly from shareholders. Company sends a tender form to all its shareholders with instructions on how to fill the form and where they can mail or drop the form. This route ensures all shareholders are treated equally, however small they are.

Most companies prefer the open market route. Out of 19 buybacks offers received in 2011, 14 were made through open market mode and 5 were made through tender offer mode. The biggest difference between the two is that the price in the tender route is fixed.

A buyback usually improves the confidence of investors in the company because it sends signal to the market that the company believes the stock is trading below its intrinsic value and therefore its stock price rises.

However, past data reveal the stock can move in either direction after the buyback announcement, though it helps stocks in most cases.
Below mentioned are the few points, in what ways an investor can be benefitted from the buyback of shares:

  1. Buy back at good premium may increase the stock price in share market.
  2. As buy back of shares reduces outstanding shares, the EPS (EPS is calculated by dividing net profit by outstanding shares) may look good.
  3. The ROA (Return on Asset) and ROE (Return on Equity) may improve by fall in outstanding shares and assets (in this scenario, excess cash).

Generally shares react positively to such announcements because buyback reduces the number of shares outstanding, which increases investors’ claims on dividends and earnings of the company and as these claims increases, so do stock prices.

Hereunder are a few instances of buyback announcement and its impact on the market prices:

  • When this year in January, SEBI approved changes in rules to allow public sector units (PSUs) to buyback shares, as a result, shares of few PSUs soared 30-50% in the first 5 trading sessions.
  • On January 20th, Reliance Industries Limited approved buyback of up to 120 million shares at a price not exceeding Rs. 870 per share from open market. The stock has risen 4% since despite the fact that company had reported poor numbers for the 3rd quarter. It was at Rs. 830 at the commencement of the buyback on February 1st.
  • But the case is always not the same, Indiabulls Real Estate started moving southwards after the buyback announcement. The company announced a buyback on December 15th 2011, after which the stock fell 3% to Rs. 48.25 till 7 January 2012.

The price trend depends on various factors such as the market situation, the mode of the offer, i.e. tender or market purchase, the size of the offer, the difference between the offer price and the market price of the stock and the market’s confidence in the management’s intention to carry out the offer. The movement of a stock after the buyback announcement depends on valuations and the result can differ from company to company.

If you plan to invest in any such company which is going to buyback its shares, there are some guidelines and the few words of caution to be followed:

  • You should not buy shares just because the company is working out a buyback plan. In some scarce cases, buybacks are announced to trigger certain favourable movements in stock price.
  • It is important to consider the size of the buyback, buyback price and the duration of the offer, because if the buyback size is too small compared with the overall market capitalization of the company, the impact on the stock could be very small.
  • Equally important to know what buyback route the company will follow, because if they will buyback the shares from the stock market, then the share buyback price is irrelevant to you.
  • If the company is buying back from the shareholders then you have to look at offer size of the buyback, how much time is left for the buyback to take place, and what is the difference between the current market price and the offer price.
  • Generally, companies only buyback a certain percentage of outstanding shares from the public and to know this fact is really important; because a few people who are not familiar with the process end up buying shares with the hope of sure-shot profit and later stuck-up with the remaining shares as only a part of their holding has been bought back.

Whatever decision you take largely depends on these variables, and they can be entirely different with every single case. Generalization of these variables in context of buyback offers would certainly lead to a blunder; you will have to evaluate each offer on its merit only.

Consider the example of Monnet Ispat Limited; announced the buyback of equity shares on Dec. 22nd 2011 with the maximum offer price of Rs. 500, and the prevailing market price of the share was around Rs. 358.

What do you think of this offer? Is it an opportunity with entirely the win-win situation?

Monnet Ispat Limited will be buying the shares from the open market and not from the shareholders, and the price of Rs. 500 is only the maximum price at which they can buyback their shares. This is the upper limit beyond which the company can’t buy their shares from the share market.

So, when Monnet Ispat Limited has set up a maximum price of Rs. 500, it only means that they can’t buy shares at a price over Rs. 500, instead they can buy the shares at any price below Rs. 500, and can certainly buy it at the Rs. 358 or so at which it’s currently trading.

Had it been the offer where the company had opted to buy its shares back from the investors directly, the 500 number had more importance, but then they would not have even chosen such a high number.

Monnet Ispat Limited announced that buyback offer is for shares not exceeding Rs. 100 crores being maximum offer size representing 4.97% of the total paid-up equity capital and free reserves. At the time of announcement, maximum offer price was at 40% premium.

Now is it possible that someone buys the shares at lowest possible level and then sells them back at Rs. 500 in a few days, pocketing around 40% returns?

This simply won’t happen because usually there are more shares offered for a buyback than the company actually wants to buy. Therefore, in this case they buy back the shares in the proportion of the over subscription. So one will only get a part of his/her shares bought back, and if the price comes down below purchase price after buyback fiesta then for disposing of the remaining shares he/she might have to wait for long.