India: Does a buyback flurry point to bottoming of markets?

A man looks up at an electronic ticker board that indicates stock figures at the Bombay Stock Exchange (BSE) in Mumbai, India, on Friday, Jan. 27, 2017. Photographer: Dhiraj Singh/Bloomberg

With the Nifty 500 index falling by nearly 30% in the past two months, an oft-asked question in investors’ minds is whether the markets have bottomed out. There appears to be some support for this theory, going by an increase in the number of buyback announcements by companies, as well as share purchases by promoters in their companies.

In less than three months, about 17 companies have announced buyback of shares. Companies such as Sun Pharmaceuticals Ltd, Dalmia Bharat Ltd, Thomas Cook Ltd, Emami Ltd and Granules India Ltd have announced buybacks at a 15-72% premium to their prevailing market price.

That’s not all. Promoters of around 200 companies from the Nifty 500 index have lapped up shares from the open market to increase stakes in their companies. Tata Sons Ltd raised its stake across a host of group companies. Family groups such as Bajaj and Godrej, too, hiked stakes in group companies. Market experts reckon that the trend may strengthen if markets continue to fall.

With all the uncertainty post the spread of Covid-19, investors are struggling to figure out where things will settle in terms of impact on earnings and return ratios. To that extent, the positivity being displayed by some promoter groups and companies is welcome.

Since most buybacks have been announced very recently, it’s early yet to ascertain whether investor sentiment has improved for the stocks that announced buybacks. According to Nilesh Shah, managing director of Kotak Mahindra AMC Ltd, “Promoters and company managements are taking cognisance of the fall in their company stock prices. Buybacks during times of market meltdown are a sign that the shares are trading below their fair value.”

Michael Mauboussin, a Wall Street investment strategist who is considered an expert on buybacks, has pointed out in his research, “As a general rule, a company should only repurchase its shares when they are trading below expected value and when no other better investment opportunities are available.” When a company buys back shares that are undervalued, shareholders who remain with the firm benefit, he adds.

Also, in general, research by Mauboussin shows that buybacks tend to decrease in bear markets and increase when share prices are rising.

“Companies tend to buy back stock when the market is up and refrain when the market is down,” Mauboussin pointed out in his research on data from the time of the global financial crisis. He found that buybacks (in the US markets) dropped more than 75% from 2007 to 2009, whereas dividends—another form of returning cash to shareholders—declined only 20% from 2007 to 2009.

Nevertheless, it’s fair to say that investors can take some comfort in stocks where companies and promoters are buying shares at this point. They are clearly a bid by promoters to help restore investor faith in the company.

“The drop in stock prices (now) is solely linked to COVID-19 and not directly linked to intrinsic business fundamentals. Companies are confident that valuations would improve once clouds of gloom clear up,” says Pranav Haldea, managing director of PRIME Database group. During the global financial crisis, the strong pull-back in Nifty, which soared 72% in 2009 as the Lehman issue was resolved, underscored this.

This article was first published on livemint.com.

Singapore Reporter/s

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Following vacancies can be applied for (only in Singapore).   

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  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.