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    • How to evaluate a buyback offer

    Publish date: 23rd August, 2018

    A share buyback is a concept where a company buys back shares from the public using its own cash. Think of it as something opposite to an Initial Public Offering (IPO) where the public buys shares from the company. In a buyback, the shares get re-absorbed into the company and do not exist anymore. Buybacks have been quite popular among Indian companies recently with Larsen & Toubro (L&T) being the latest company considering it.

    Click here to find out about L&T Infotech Q1 earnings

    Why do companies conduct a buyback?

    There is no single reason why companies consider a buyback. Excess money in balance sheets and undervaluation of share price are a couple of common reasons why companies go for a share buyback. When the number of shares in the market reduces, there is an improvement in Earnings per Share (EPS) for the remaining shareholders.

    Also read: 4 things to know about Return on Equity

    How to evaluate a buyback?

    As an investor, the important question is: Should you sell your shares or not? This is not an easy decision to make. Buybacks can be a fantastic opportunity to sell your shares at a premium and get good returns but on the other hand, you could stand to lose out on the future growth of the company.

    a)   Offer price
    One of the most important factors in a buyback is the offer price. Is the buyback offer price significantly higher than the current market price of the stock? If the answer is no, you may not benefit a great deal from the buyback. Also remember that if you have held the shares for less than a year, you would also have to pay a short term capital gains tax of 15%.

    b)   Is the company using excess money for buyback
    Surplus cash on a company’s balance sheet does not look very good. It indicates that the company is inefficient in utilising its assets. And if a company does not have many viable projects for the near future, it may consider utilising the cash to buy back shares from shareholders. If a company does not have future growth potential, it may be better to participate in the buyback and sell your shares.

    c)   Future potential growth
    If the company has solid fundamentals and you are looking for long term growth, it may be best to hold onto the stock and ignore the buyback offers. In this case, future potential growth may be better than the returns you earn in the short term.

    Also read: 3 important ratios to use while analysing your portfolio

      • Read what our research team has to say about L&T buyback   Read more

      • Three things to know about buybacks    Read here

    • Rs 16,000 crore

      IT giant Tata Consultancy Services (TCS) has approved a proposal to buy back up to 7.61 crore shares according to a report by Livemint. This is equal to 1.99% of the company’s total paid-up equity capital and the total value of the share buyback comes up to Rs 16,000 crore. Many other companies like L&T are lined up for share buybacks in the near future.