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Among Nifty stocks, buybacks were dominated by IT companies. Their cash rich and free cash flow-positive status meant IT companies continued with buybacks at regular intervals. The only other company in the Nifty 50, besides those from the IT sector, to announce a buyback was Reliance Industries, which announced a Rs 10,440 crore buyback in 2012. It is, therefore, a pleasant surprise to see infrastructure and engineering giant L&T announce a Rs 10,000 crore buyback.
L&T also joins the list of a handful of Indian companies to announce buybacks worth Rs 10,000 crore and more. TCS with Rs 18,000 crore tops the list which is followed by Infosys at Rs 13,000 crore and Wipro at Rs 12,000 crore. TCS has till date announced buybacks of Rs 66,000 crore between 2017 and 2022.
Buybacks are in vogue because they reward shareholders by providing support to the share price and adding to earnings per share (EPS) as the shares bought are extinguished which causes a reduction in share capital. But it also serves the promoter’s interest by increasing their stake in the company as they, generally speaking, do not participate in buybacks.
A buyback also is a pointer to strong financial health of the company announcing it. Many fund managers put stocks that have announced a buyback on their radar.
In 2019, L&T had announced a buyback worth Rs 9,000 crore, but this was rejected by SEBI on the ground of its high debt position at the consolidated level. Since then, the company has improved its financials, reduced its debt-to-equity ratio and exited non-core businesses.
L&T’s buyback sends a message that not only IT companies but other firms in the manufacturing sector are also enjoying strong cash flow generation. Besides L&T, there are 33 smaller companies that have closed their buybacks in 2023 and they have spent Rs 18,102.5 crore in buying back their shares from the open market.
The year 2023 is likely to exceed the buybacks announced in 2022 when 43 companies announced buybacks worth Rs 38,997 crore.
Ever since Warren Buffett strongly advocated buybacks as a mode of rewarding shareholders, they are increasingly becoming common. Earlier, companies used buybacks as a means of propping up the share price by announcing a buyback but not actually buying shares. Ever since SEBI came up with stricter guidelines, genuine buybacks are being announced benefiting both shareholders and promoters.
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