Four Indian companies implementing big buyback plans

In the letter, Buffett provides a detailed note about the benefits of share buybacks. He shows how a share buyback can increase a shareholder’s claim on the underlying profits of the business.

The Oracle of Omaha also noted that a share buyback by Apple last year increased Berkshire’s ownership in the company to 5.55% from 5.39% a year earlier.

Now here is where it gets interesting. While the minimum percentage increase may sound like a ‘small potato’ from a first reading, each 0.1% of Apple’s 2021 earnings stood at US$100 million.

Buffett also discussed buybacks in his 2020 letter. He added that the math of buybacks wears out slowly, but it can be ‘powerful over time’.

Buybacks can help investors own a growing portion of a business without having to buy any more shares.

Buffett’s optimism about buybacks should signal a renewed optimism for Indian companies to repurchase their own shares.

But are there any Indian companies that have consistently bought back shares and shown confidence in themselves?

In September 2021, we had listed five Indian companies to do so. You can view the article here: 5 Indian companies that are buying back shares big time.

In this article, we list another group of companies that are constantly buying back their shares.

These are the companies that have been buying shares year after year and have reduced the number of outstanding shares.

#1 FDC

Pharma company FDC has done a total of four buybacks so far.

While many companies opt for buybacks at regular intervals, such as two or three years, FDCs have done all four of their buybacks in the past five years, starting in 2018.

FDC’s first buyback is in February 2018, where its board approved buyback of 3.4 lakh equity shares 350 per share. the buyback was sized 1.2 billion

Later next year in June 2019, the company came up with its second buyback offer of the same buyback size and price as it was conducted in 2018.

Then in August 2020, the board of the FDC opted for a buyback of 1 billion at a share price of 450 per share. This time, the quantity was 2.1 lakh shares, which was 6.3% of the total outstanding shares.

In the most recent announcement last month, the FDC’s board approved the buyback of 1.4 billion while the buyback value is fixed at 475 per share. FDC aims to grow and increase earnings per share return ratio and also distribute surplus cash to shareholders.

The board of the company met and approved this buyback through tender offer on 9 February.

In a tender offer, shareholders have the option to deposit (or tender) a part or all of their shares within a specified time frame and at a premium to the current market price.

With the four buybacks, the company has reduced its outstanding shares from 182.9 billion to 168.8 million.

The company’s shares have risen in recent days, in line with the declines seen in the broader markets. With share prices hitting new lows in a weak market, companies like FDCs come out to buy back their shares.

FDC, short for Fairdeal Corporation, is one of India’s leading fully integrated pharma companies and a leader in manufacturing of specialty formulations. It is one of the world’s leading manufacturers and marketers of Oral Rehydration Salts (ORS).

Some of the major brands of FDCs in India include Zifi, Electral, Enerzal, Vitcofol, Pyrimon, Zocon, Zathrin, Zipod, Cotaryl and Mycoderm in the domestic and international markets.

#2 NHPC

NHPC, a Mini Ratna PSU, and the flagship hydropower generation company of the Government of India, has made a total of three buybacks.

The company is primarily involved in the production and sale of bulk electricity to various power utilities. Its other businesses include project management, construction contracting, consultancy assignment services and electricity trading.

NHPC’s buyback history dates back to November 2013. At the time, NHPC had bought back 10% of the total shares, 1.23 billion to be exact. 19.25 each. With that, it’s spent 23.7 billion on buybacks.

Under the buyback mode, the government can raise money by selling its equity in the company to PSUs only.

Later in February 2017, NHPC introduced yet another big bang buyback offer 26.2 billion This time around, the company bought back 811.3 million shares, representing 7.33% of the total outstanding shares. 32.25

The last buyback done by it was in November 2018. It bought back about 214 million shares in total. 6 billion buyback price was 28 per equity share.

NHPC was listed on the stock exchanges in 2009 after the government sold its 5% stake. It has also issued 10% fresh equity.

Since then, it has been sluggish in the stock markets and is currently trading below its IPO price.

Public Sector Undertaking (PSU) stocks are often considered to be value destroyers in the long run. If you come across government-owned entities that tend to perform poorly for years or decades, even in a bull market. NHPC is a classic example of this.

But now, the company is turning the tables and making efforts to join the renewable energy trend. Most recently, it incorporated a wholly owned subsidiary for the clean energy business, which also includes Green Hydrogen.

Major energy and power companies are making serious changes as they keep track of the government’s focus on renewable energy and a target of 500 GW of clean energy by 2030.

Last month, the government unveiled the first part of the much-awaited National Hydrogen Policy, allowing free inter-state wheeling of renewable energy used in its production. green hydrogen and ammonia, among other things.

#3 JB Chemicals & Pharma

JB Chemicals & Pharma, established in 1976, is one of the leading pharma companies in India.

It was originally established as JB Modi Chemicals & Pharmaceuticals for manufacturing of APIs and Formulations. The company manufactures a wide range of Pharma Formulation Specialties, Radio-diagnostics, APIs and Intermediates.

In 2017, the company’s board approved its first buyback of 1,250,000 equity shares for a total amount of up to Rs. 500 m buyback, price 400 per share, translated to 3.85% of the equity share capital of the company.

Then in September 2018, the board again bought back 3,333,333 fully paid-up equity shares of the company (representing a 3.99% shareholding of total equity) of the company. 390.

Since the company’s shares underperformed at that time, the promoters saw this as an opportunity and opted for buybacks to arrest the fall in the stock.

Continuing its trend for the third year in a row, JB Chemicals bought back 2,954,545 fully paid-up shares (representing 3.68% share of the total equity). 440 in 2019

Through share buybacks, JB Chemicals has reduced its total outstanding shares to 77.3 million.

Note that JB Chemicals has an established market position and a diverse revenue profile. The company achieved 43% and 57% of consolidated revenue for FY21 from India and the international market.

Its three brands – Rantac (anti-peptic ulcerant), Cilacar (calcium channel blocker), and Metrogyl (amoebicides), are among the top 200 brands in India, and account for over 75% of domestic formulations revenue.

Two weeks ago, the company reported its quarterly earnings, where demand in international business, including the CMO, gradually improved.

The company’s margins were beaten for the quarter, reflecting a significant increase in raw material costs and persistent supply chain-related challenges. Margins are unlikely to improve in the next two-three quarters as raw material prices are unlikely to ease in the near future.

#4 Dhanuka Agritech

Dhanuka Agritech manufactures a wide range of agrochemicals such as herbicides, insecticides, fungicides, plant growth regulators in a variety of liquids, dusts, powders and granules.

The company has a pan India presence with a strong distribution network.

The company has done three buybacks so far, with the most recent buyback in September 2020. The 2020 buyback was for shares 1 billion with 1 million shares being offered at a final buyback price of 1,000 per share.

This was done because Dhanuka saw an increase in net cash flow and cash from operating activity and profit growth in the two quarters.

From a total of 50m equity shares outstanding in 2017, the company currently has 46.6m equity shares outstanding.

Note that as companies catch up with the new trends, Dhanuka Agritech is not lagging behind. The agrochemical company is making major investments to promote the use of drone technology in the agriculture sector as part of its efforts to boost crop production.

Dhanuka is banking on drones along with other modern farming technologies including artificial intelligence (AI) and robotics. The use of drones in spraying pesticides will help in optimum use of crop protection molecules, reduce water requirement, and reduce the time required for application.

A leading agrochemical company, Dhanuka has a strong pipeline of products, long-standing tie-ups with global innovators, strong R&D, as well as upcoming capacity expansion for growth and backward integration. All this augurs well for the company.

Here is where it gets more interesting. Despite being a working capital intensive business and requiring significant marketing and branding expenses, Dhanuka Agritech has been maintaining a nearly debt free balance sheet.

Take a look at the chart below, which shows the performance of the company on important financial parameters over the years.

No wonder the company’s stock performance looks solid when we prepare the three-year chart.

Other companies that are buying back shares

In addition to the above, companies such as NMDC, NALCO, Sasken Technologies, and Quick Heal Technologies have consistently bought back shares.

Here are the recent 2022 buyback offers.

Why do companies opt for buybacks?

One of the primary reasons companies opt for buybacks is a lot of cash and low investments on its books. Usually, IT companies are sitting on huge amounts of cash and they reward shareholders by buybacks.

Another reason to buyback is to improve valuation. When a company buys back shares, it results in a reduction in the number of outstanding shares. As a result, it improves earnings per share (EPS) and return on equity.

Another reason is that buybacks are a more tax-effective form of reward to shareholders rather than dividends.

Companies also give strong signals through buybacks. Since the buyback price is higher than the current price of the stock, people believe that management has confidence in its growth prospects, which is why it has set the price higher than the current price.

Finally, as a shareholder in cash-rich companies, you shouldn’t only be wary of costly buybacks. But if possible use it to rake in some cash to your advantage.

According to Rahul Shah, Co-Head of Research, market participants should not assume that buybacks are always good. Here’s an excerpt from what he wrote in a version of The 5 Minute Wrapup:

The reasons for the buyback should be investigated. At the end of the day, earnings growth should be a function of the underlying strength of the business, as that’s what will help it grow at a healthy pace.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

(This article is syndicated from) equitymaster.com,