Presented ByPushan Sharma

Ruchi GuptaSashank Shah

Stock Buyback

EFFECTS OF BUYBACKEffects On The CompanyShareholding Pattern Changes Improvement in the Financial ratios of

the company

Effects on the ShareholderTax BenefitsHigher Share Price

CASE OF SUCCESSFUL BUYBACK

GLAXOSMITHKLINE Consumer Healthcare Ltd.

Sellers of Horlicks, Boost, Crocin, Iodex and many others

Made an open offer to buyback during March 2005

Offered to buy 3.3 MnAt Rs 370/Share, not exceeding 123 Cr in

valueRepresented 23.24% of free reserves

REASONS FOR BUYBACKPromoters holding would increase from

39.99% to 43.16%Had excess reserves with no major

expansion plansWanted to use its reserves instead of

keeping it idleFelt share was undervaluedFMCG industry in that period had limited

growth plansThus Britannia, Godrej and HUL all came

with buyback plans

SUCCESS OF BUYBACKReceived more than double the required

offers (7.8 Mn)Bought back using proportional

acceptance method

Pre Buy back Dec 04 Post Buy back Dec 05

Net Worth(Rs Lacs) 599,35.17 47511.18

Return on Net Worth 13.82% 22.55%

Earning Per share(Rs) 16.12 25.48

Book value Per share(Rs) 116.65 96.62

P/E 20.50 24

CASE OF UNSUCCESSFUL BUYBACK

INDIAN RAYONIs into the garment business, it is an AV

Birla Group CompanyAnnounced buyback in 1999Buyback of 25% equity share capitalPrice offered was in the range Rs 75-85Intended cash outflow Rs 127-144 Cr

REASONS FOR BUYBACKTo increase promoters stake from 21.5%

to 28.7%Working at below capacity and no major

Capex plannedWanted to add value to share holders

by returning capital to themCement business was hived off to

GrasimBuyback would give investors an exit

route

LIMITED SUCCESS OF BUYBACKCould purchase only 11% of its

outstanding shares as against the 25% offered

Hiked the price on offer to Rs. 85Market cap fell from 1397 Cr in 1999 to

455 Cr, 5 years laterShare price plunged from Rs. 207 to Rs.

67Launched at wrong time- Co. was not

doing well and markets were crashing

EFFECTS OF BUYBACK – KAMA HOLDINGS (Dec 2006)

-30

-20

-10

0

10

20

30

40

EPS OF KAMA

EPS

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

ROE OF KAMA

ROE OF KAMA

-0.1

-0.05

0

0.05

0.1

0.15

0.2

ROA OF KAMA

ROA OF KAMA

200120022003200420052006200720082009

-10

-5

0

5

10

15

20

25

30

35

P/E KAMA

P/E

KEY FINDINGS- KAMA HOLDINGSSince the P/E multiple in 2005 reached a very high level

of 28.68 compared to industry, company decided to buyback shares worth Rs. 3.39 crores at Rs. 21 in Dec 2006

This buyback did result in increase in EPS, ROE, ROA and decrease in P/E in 2007

However company could not leverage on this benefit as in 2008 it reported loss due to increase in raw material and other manufacturing expenses

In 2009, company is done extremely well as its EPS, ROE and ROA has increased significantly and also its P/E multiple is in check

Also there was a major increase in promoters’ shareholding from 67% to around 74%

This buyback was successful

EFFECTS OF BUYBACK – PRIME SECURITIES (Mar 2006)

200120022003200420052006200720082009

-15

-10

-5

0

5

10

15

P/E PRIME SEC

P/E

-10

-5

0

5

10

15

EPS Prime Sec

EPS

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

ROE Prime Sec

ROE

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

ROA Prime Sec

ROA

KEY FINDINGS – PRIME SECURITIESThe buyback of shares took place in 2006.

The company could achieve increase in EPS, ROA and ROE for only one year

After 2007, there has been fall in EPS, ROA and ROE ever since

The company could not achieve what it desired through the buyback

Also not much change has been observed in shareholding pattern

Thus the buyback was unsuccessful

EFFECTS OF BUYBACK – SRF (Sep 2006)

01 02 03 04 05 06 07 08 09 100

10

20

30

40

50

60

EPS SRF

EPS

01 02 03 04 05 06 07 08 09 100

0.05

0.1

0.15

0.2

0.25

0.3

0.35

ROE SRF

ROE

01 02 03 04 05 06 07 08 09 100

0.020.040.060.080.1

0.120.140.160.18

ROA SRF

ROA

2001 2002 2003 2004 2005 2006 2007 2008 20090

5

10

15

20

25

P/E SRF

P/E

KEY FINDINGS – SRF The P/E multiple in 2006 reached a very

high level in comparison to industry. Thus the company decided to buyback shares worth Rs. 35 crores at Rs. 250 in June 2006

This buyback was completed in Sep 2006. After this EPS, ROE, ROA increased in 2007, but again fell in 2008

The benefits could not be sustained. Hence the buyback can be called unsuccessful.

EFFECTS OF BUYBACK – REVATHI EQUIPMENTS (Jun 2007)

20012002200320042005200620072008200902468

101214161820

P/E REVATHI

P/E

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

ROE REVATHI

ROE

0

0.05

0.1

0.15

0.2

0.25

ROA REVATHI

ROA

0

20

40

60

80

100

120

EPS OF REVATHI

EPS OF REVATHI

KEY FINDINGS – REVATHI EQUIPMENTSBuyback was successful as the EPS, ROA,

ROE increased and P/E multiple fell Also the promoters’ shareholding in the

company increased marginally

EFFECTS OF BUYBACK – RIL (Aug 2005)

02468

1012141618

P/E OF RIL

P/E OF RIL

01 02 03 04 05 06 07 08 09 100

20

40

60

80

100

120

140

160

EPS RIL

EPS

01 02 03 04 05 06 07 08 09 100

0.05

0.1

0.15

0.2

0.25

0.3

ROE RIL

ROE

01 02 03 04 05 06 07 08 09 100

0.02

0.04

0.06

0.08

0.1

0.12

0.14

ROA RIL

ROA

KEY FINDINGS - RILThe main rationale for buyback was to

increase the promoters’ shareholding in the company from 48% to 51%

As can be seen, there has been no significant impact of the this buyback on the company’s performance

EFFECTS OF BUYBACK – NATCO PHARMA (Jul 2007)

2001200220032004200520062007200820090

50

100

150

200

250

P/E NATCO

P/E

-10

-5

0

5

10

15

20

EPS Natco

EPS

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

ROE Natco

ROE

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

ROA Natco

ROA

KEY FINDINGS – NATCO PHARMAThe buyback was successful for NATCO as

its EPS, ROA, ROE increased after the buyback

EFFECTS OF BUYBACK – RELIANCE INFRASTRUCTURE (Jun 05)

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

102030405060708090

100

P/E Of REL INFRA

PE

20002001200220032004200520062007200820090

10

20

30

40

50

60

EPS REL INFRA

EPS

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

ROE REL INFRA

ROE

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

ROA REL INFRA

ROA

KEY FINDINGS – RELIANCE INFRASTRUCTURESince the P/E multiple of the company had

increased significantly, the company went for buyback

This helped in reducing P/E along with increase in EPS, ROA and ROE

Also there was a significant increase in promoters’ shareholding from around 50% to 53%

Thus the buyback was Successful

EFFECTS OF BUYBACK – POLARIS SOFTWARE (Nov 05)

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

102030405060708090

100

P/E Of POLARIS

P/E

200120022003200420052006200720082009201002468

101214161820

EPS POLARIS

EPS

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

ROE POLARIS

ROE

0

0.05

0.1

0.15

0.2

0.25

0.3

ROA POLARIS

ROA

KEY FINDINGS – POLARIS SOFTWAREThe buyback resulted in not much

significant increase in EPS, ROA or ROE. Just the P/E reduced significantlyHowever promoters’ shareholding

increased from around 24% to 28%

CONCLUSIONNot all buybacks are successfulCompanies mainly use buybacks to change the

shareholding pattern, improve financial ratios or/and increase price of the share

The timing of the buyback is very crucial. If company is not doing well then the buyback might not succeed

It is a means of returning excess funds to the shareholders

Gives the market a signal that promoters believe in the company

The demand supply dynamics go in favour of the company

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