Buyback bonanza

It’s a common practice among listed companies to go in for share buyback when the chips are down. Such a move will obviously bolster shareholders’ confidence in the company as it will reduce the number of the company’s shares outstanding in the stock market, thereby increasing earnings per share.

The other obvious benefit from such an exercise is that it will enhance share value. But one key element here is that a company should have enough reserves to opt for a share buyback – and that’s a luxury for many a listed company.

Last year, Hyderabad-based Dr Reddy’s Laboratories went for share buyback and spent Rs 1,569 crore to repurchase nearly 51 lakh shares. The drug maker’s buyback proposal came to fore when it received adverse observations from the US Food and Drug Administration (USFDA) with regard to violations in manufacturing practices at three of its plants in Telangana and its stock took a gradual hit. Post the buyback move, Dr Reddy’s share value climbed to a seven-month high, rewarding its shareholders handsomely.

On Monday, Tata Consultancy Services (TCS), the country’s largest software exporter, announced that it would repurchase shares worth up to Rs 16,000 crore. This is the biggest share buyback proposal in the Indian stock market history, but the timing is crucial as Tata group has been facing a sort of crisis in the recent past.

In October last, Tata Sons, the holding entity of Tata companies, sacked Cyrus Mistry as its chairman and replaced him with the group’s patriarch Ratan Naval Tata as interim chairman. As Tata Sons chairman is the de facto chief of Tata group, Mistry’s sacking has impacted the entire group in one way or the other. Moreover, Mistry is no outsider to the salt-to-software group as his family is the single largest individual shareholder in Tata Sons.

In the ensuing corporate battle that lasted for several months, Tata group’s image took a beating as Mistry raised a banner of revolt against it as well as Ratan Tata. His family also knocked on the doors of National Company Law Tribunal to question the sacking even as Tata group zeroed in on N Chandrasekaran, the CEO of TCS, and anointed him as Tata Sons chief. A long termer at TCS, Chandrasekaran played a key role in the growth of group’s crown jewel that accounts for 85 per cent of the group’s margins.

Interestingly, the buyback proposal of TCS was announced a day before Chadrasekaran assumed charge as the Chairman of Tata Sons. Perhaps, with this move, the diversified conglomerate wants to reassure not only the shareholders of TCS, but also the shareholders of other group companies, about the group’s prospects. Whatever may be the reason, this is a good move that will reward shareholders as TCS sits on total reserves of Rs 43,169 crore.

Besides, the software major’s buyback decision will put pressure on its domestic peers. Foremost among them is Infosys which has a cash pile of Rs 35,697 crore on its books and is also facing corporate tussle now. So, buyback bonanza seems certain for Indian stock market investors!