Manufacturers are likely to conserve cash instead of spending money on share buybacks as input costs keep rising, putting pressure on their profit margins amid market uncertainty, analysts said.
So far in this financial year, as many as 16 companies including Bajaj Auto Ltd have announced Rs 6,227 crore of share buybacks.
Bajaj Auto’s Rs. 2,500 crore buyback will mean extinguishing 2.16% of equity at the peak price of Rs 4,600, which will augment its return ratio by 100-200 basis points. One basis point is one-hundredth of a percentage point.
Reliance Securities expects Bajaj Auto’s Return on Capital Employed (ROCE) and Return on Equity (ROE) ratios to improve. The two-wheeler manufacturer’s ROCE for FY23 and FY24 will be 17.6% and 20.3%; ROE in the two years will be 17.9% and 20.9%. Currently its ROCE and ROE was at 16.6% and 16.8%.
Some analysts said that given Bajaj Auto’s large cash reserve of nearly Rs 20,000 crore, the buyback was too small to make a significant impact.
Tightening liquidity
Yet, such conservatism, under the present uncertain circumstances, may not be misplaced, analysts said.
Inflation measured by the consumer price index eased to 7.04 percent in May from April's near-eight-year high of 7.79 percent thanks to a favourable base effect, but stayed above the 6 percent upper limit of the Reserve Bank of India’s comfort zone for a fifth straight month.
"In view of rapidly tightening financial conditions as a result of many central banks like the US Fed raising interest rates rapidly and compelling central banks in emerging markets like RBI to follow suit, corporates are understandably wary and circumspect in their use of cash reserves," said Ajay Bodke, an independent market analyst.
"Corporates would rather wait it out to assess the likely trajectory of emerging liquidity conditions and cost of funds before deploying cash to buy back their shares although the recent correction from 52-week highs has pushed some companies' share prices below their intrinsic or fair values. Buyback activity is likely to remain subdued till this cloud of uncertainty recedes," Bodke added.
Deepak Jasani, Head of Retail Research, HDFC Securities expect Indian corporates to wait for the markets to settle before committing money to share buybacks. They may be conserving cash to fund working capital needs or potential acquisitions.
According to Prime Database, in FY22, a total of 40 companies announced around Rs 31,316 crore of buybacks; in FY21, 61 firms bought back shares worth Rs 39,295 crore. In FY20, 52 companies announced buybacks worth Rs 20,000 crore and in FY19, 63 firms spent Rs55.000 crore repurchasing their shares.
In FY18 and FY17, a total of 49 and 59 firms announced buybacks worth Rs 53,000 crore and Rs 35,000 crore, respectively.
Buybacks to reward shareholders
Since FY17, information technology (IT) firms and public sector companies have been actively buying back their shares.
The IT firms include Infosys, Tata Consultancy Services, HCL Technologies, Tech Mahindra and Wipro. The public sector units include Coal India, NHPC, NLC India, National Aluminium Company (NALCO), NMDC, MOIL, Oil India, Engineers India, Indian Oil, ONGC, NTPC and GAIL India.
Since FY17, Wipro and TCS have done four buybacks which include three buybacks worth Rs 16,000 crore each and one Rs 18,000 crore. Infosys has done three buybacks out of which two were worth Rs 9.000 crore each and one Rs 13,000 crore. HCL Tech did two buybacks worth Rs 4,000 crore each while Tech Mahindra did one worth Rs2000 crore.
Among PSU stocks, MOIL has done four buybacks while NMDC and NALCO did three each. Coal India, Bharat Electronics and NHPC did two each.
Post these buybacks, TCS, Infosys, Wipro, Tech Mahindra and HCL Tech shares have surged 180-200% between FY17 and FY22. PSU stocks advanced by 15-200% while Coal India declined over 37% during this period.
"Since the last 4-5 years, buybacks have been dominated by IT firms and PSU. Cash rich IT firms have been using buybacks as a means of rewarding their shareholders. Buybacks are also a more tax-efficient way of returning money to shareholders than dividends,” said Pranav Haldea, Managing Director of PRIME Database.
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