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  • 4 things to know about the buyback plan of HCL Technologies

    Publish Date: 18th July, 2018

    India’s third largest IT company HCL Technologies recently announced a share buyback plan of Rs 4,000 crore. Here are all the details you need to know regarding the buyback plan.


    What does a buyback mean?

    A buyback offer allows existing shareholders an exit route at a price higher than the prevailing market price. Companies make buyback offers to return money to shareholders as they do not foresee major equity expansion.

    Cash-rich, profit-making companies make such an offer if they consider that the share price is undervalued. It is a sign for other investors to know that the company is worth much more than the current market price.


    Details of the buyback offer

    The board of HCL Technologies approved a share buyback of Rs 4,000 crore. The plan involves a buyback of up to 3.63 crore shares at Rs 1,100 per share. This represents 2.61% of the total paid-up equity shares of the company.


    Second buyback in a year

    This is the second buyback offer in just a year. The company completed a Rs 3,500 crore offer last year. This time the buyback was announced nearly a month after another IT biggie TCS’s buyback announcement. This means IT companies are under pressure to return their excess capital.


    What happens to the price of equities?

    The Earning per Share (EPS) ratio automatically increases as the denominator is reduced. Similarly, the Return on Equity (ROE) figures gets a leg up if shareholder’s equity is minimized while profits remain the same. Read more about ROE here. Thus, one would benefit from the buyback in the short run. However, when the company voluntarily returns its equity capital, it may be an indication that the company has no viable expansion projects to invest in. The money spent on the buyback offer is usually surplus cash.


    The bottom line

    This buyback plan by HCL Technologies comes on the heels of another buyback plan of $3.5 billion announced earlier this year by competitor Cognizant. This is an indication of a sluggish growth prospect for IT companies.


    What our research team says

    Many traders and investors usually look to buy a stock at a price lower than the buyback offer price. They then sell the stock during the buyback at the higher price. This is why acceptance ratio and the breakeven price is important. You can read about these in our full report here.


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